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During Wednesday’s AOL earnings call, which just finished, CEO Tim Armstrong dropped the strongest hint yet that Google (NASDAQ:GOOG) is the front-runner in negotiations for who will power search across AOL properties. Google is AOL’s current partner, as it has been for nearly a decade, but the partnership is up for renewal. Needless to say, snatching the search partnership away would be a coup for Microsoft’s Bing search engine. Bing wants the search deal, which would help it increase its total volume of searches by a couple percentage points since AOL on its own has the fifth largest search share in the U.S.

But during the call, Armstrong emphasized that “distribution is almost as important to us as money, we will look for distribution as much as money in the deal.” AOL is a content company and it gets a lot of its traffic from Google. The sheer volume of referral traffic Google sends to AOL sites is something Bing cannot yet compete against, and to the extent that Google can find ways to send more traffic to AOL as part of its search deal, that makes it a more attractive partner than Bing. Microsoft (NASDAQ:MSFT) can throw all the money it wants at AOL on the search side, it probably won’t make a difference. Here is Armstrong’s relevant reply to an analyst’s question on the topic from my notes:

On search deal, we have had a great partnership with Google, we continue to be close to them. What we are expecting to get out of search deal is longer-term partnership where we are both aligned. We have a long partnership with Google. Marketplace is more competitive. First and foremost if you are looking for us to squeeze more dollars or pennies out every quarter, you are going to be disappointed. Looking for a deal that helps our strategy, a reasonable deal for us and the partner. We are a content focussed company, distribution is almost as important to us as money, we will look for distribution as much as money in the deal.

So he is not ruling out Bing entirely, but if you read between the lines it is clear that he values Google almost as much as a distribution partner as he does as a search partner. Add in the fact that he still seems to be on good terms with his former boss Eric Schmidt, and it is clear that he is leaning heavily towards sticking with Google.

Oh, by the way, this also means that he’s fine with Google being a huge news aggregator, because those links are extremely valuable and he understands that better than the CEOs of most other media companies. Google’s unique position as a source of traffic to Websites is one of its great strengths in any negotiation involving another Web company. I’ve heard this before from other Web CEOs who let Google get away with a better deal than they would otherwise because they fear reprisals in the form of lower search traffic. Google, of course, needs to keep up appearances that it delivers the best search results no matter what, but there are other ways Google can help juice a site’s traffic.

As I was writing this post, Tim Armstrong called me. He emphasized that “Overall, we do feel distribution is important, we also like revenue. We will balance those things.” It all “comes down to what the actual distribution deal is.” In other words, he is still negotiating.

But he did shed some light on how a distribution deal could work. “You can’t really affect the index in partnership deals,” he explains, but there are lots of other things AOL and Google coudl do. On AOL’s end, it could change the way pages are set up and how much advertising is on each page to make them appear in results better. On Google’s end, there are opportunities to get more traffic “through Oneboxes and other types of integration like on the News property.” (The Onebox is Google’s unified results at the top of organic search which pulls from different sources). Another possibility is to include search advertising inventory into the deal. So Armstrong is definitely thinking creatively about how to get the most out of his next search deal.

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Source: Will Aol Renew Its Search Deal with Google?