The $1 billion investment Google made in AOL could lead to an IPO in 2008. If Time Warner doesn’t want to pursue an IPO then, it could buy back Google’s 5% stake based on a fair market appraisal.

Based on the Google investment, AOL’s market value stands at $20 billion. Google’s market value has increased from about $23 billion at the time of its IPO to $125 billion today.

Under the new 5-year deal announced this week, AOL will receive a $300 million credit to advertise its content and services through Google’s marketing network. I hope that a large portion of that goes into AdSense.

Google is also using AOL to sell more graphical ads to diversify beyond text-based ads. I think this is a bad move. Text has better information (thus more inline with Google’s mission). Graphical ads instead are filled with hype and are designed to grab your attention, despite being utterly useless.

AOL’s instant messaging service will become compatible with the 4-month-old Google Talk next year, but Google users will have to register with AOL to gain access to the expanded network.

Further, a provision of the deal requires Google to help AOL make its material easier to index. This is akin to giving AOL preferential treatment in the Google search engine. Of course, Marissa Mayer, Google’s VP of search products and user content, says, “Business partnerships will never compromise the integrity or objectivity of our search results.”

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