On Tuesday, Google and Time Warner announced that Google will purchase a 5 percent share in Time Warner's America Online (AOL) business for $1 billion. In return, AOL will continue to use Google's Web search technology and share in revenues generated by AOL customers clicking on ads. This deal cuts Microsoft, which had been trying to align itself with AOL, out of the picture.

Google has been supplying AOL's search technology since 2002, but the new deal will change their relationship a bit. First, AOL will sell search-based ads directly to advertisers; second, AOL will receive preferential placement on the Google search results page; and third, Google will provide AOL with a $300 million credit to be used to purchase ads from Google.

An unexpected part of the deal is that AOL and Google will work to make AOL Instant Messenger (AIM) and Google Talk compatible. Google launched its bare-bones Google Talk IM client earlier this year and pledged that one day Google Talk will be compatible with all major IM services. Also, Google and AOL will collaborate on future initiatives centered around video and search technology. Although the companies didn't offer any specifics on these initiatives, they did hint at a possible move related to Time Warner's vast media holdings. "This is more than just a Google/AOL deal," Time Warner CEO Richard Parsons said. "We began to see this as affecting all of Time Warner."

For erstwhile partner Microsoft, AOL's deal with Google is a disaster of sorts. Microsoft hoped to link AOL with MSN Search, which would have placed the search engine in a solid two-way tie for second place with Yahoo!. Now, Microsoft's search technology is still a distant third behind Google and Yahoo!, and both those search engines are driven by companies whose businesses exist solely on the Web.

On Monday, I opined that Google had sold its corporate soul in order to get the AOL deal. On the flip side, one might argue that Microsoft has shown an interesting bit of fortitude by not offering too much to link with AOL. In the past, Microsoft has made amazing concessions to partner with strategic companies. For example, in 1995, Microsoft deemphasized its MSN client software to facilitate getting AOL on the Windows 95 desktop. According to reports, Microsoft was not interested in giving AOL access to its latest Internet products and services, including Microsoft Windows Live Mail and Microsoft Windows Live Messenger.

Does Microsoft's unwillingness to make concessions to formalize the potential deal represent a sign of maturity from the software giant? Or is the company so confident in its Windows Live strategy--which encompasses products and services related to Windows, Office, and  Xbox--that it felt comfortable ceding the AOL business to Google?