Google and AP Shake Hands

Google Inc. (GOOG) and news provider, The Associated Press (“AP”) have announced an agreement that would allow Google to continue displaying complete AP news stories on Google sites.

While officials from both companies were rather tight-lipped about the details of the transaction, we tend to think that Google has had to give away more than it planned for. It could have agreed to provide information regarding usage patterns of AP content, or it could have agreed to part with a share of advertising dollars, in addition to the upfront payment for AP content agreed upon.

The two companies have been at loggerheads for some time now, as news providers all over the country raised their voice against online news aggregators that were picking up significant advertising revenue, while their own offline channels continued to see business shrink.

Rupert Murdoch, CEO of News Corporation (NWS) was one of the most vociferous opposers to the online news aggregators, such as Google, even threatening to work out more beneficial agreements with competitors, such as Microsoft Corporation (MSFT). However, these threats fell a bit flat, since it soon became apparent that users were loath to pay for news online, especially when they were used to getting it free.

In AP’s case, Google was protected until January this year under a license granted in 2006. Since then, Google has been operating under a temporary license, as the details of the new agreement were worked out by the two. An agreement became particularly important after AP successfully negotiated an agreement with Yahoo Inc. (YHOO).

AP contended that providing Google a license to its content enabled unauthorized users to access the data and publish it on their sites, thereby taking away advertising dollars that should have rightfully accrued to AP. Google maintained that all its efforts were targeted at providing users access to the most relevant data at any given time, depending on the search queries presented.

Google has been working on initiatives, such as Living Stories, Fast Flip and Editors’ Picks that could help increase revenues for news providers, thereby enlisting their support for Google sites.

We view the AP agreement as a big positive for Google, demonstrating the company’s ability to overcome significant obstacles to its success. Note that the China issue was also resolved earlier this year, although it initially looked like it would carry on for some time.

We are also positive about Google’s Android strategy, which is positioning it very strongly in the emerging mobile devices market.

However, Google’s second quarter earnings missed Zacks Consensus expectations and the outlook for the rest of the year remains clouded by concerns in Europe.

Consequently, we are reiterating our Neutral recommendation on the shares. Our short term recommendation is also Hold (as signified by the Zacks Rank of #3), since we do not expect much movement in the shares over the next 1-3 months.

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