This Washington Post article reports that Google has acquired a 5% stake in AOL for 1 billion USD, beating out MSFT in the war for AOL. Plenty of people talking about this, obviously, and probably more to come, but here are some good discussions on the topic: Threadwatch; Michael Parekh; Fred Wilson; Business 2.0 blog; Nick Carr.

So. What does this mean? A few things:

1. To some extent, Google is interested in pursuing a portal strategy in which it is not just the place by which you find content (i.e. search), but also the place where you consume content.

2. Content creation requires a fundamentally narrower approach than content search. In search, you want the biggest index possible; if you're a media company that produces content, a narrower approach helps ensure that your message is on target with your audience. This would suggest that Google is now preparing to target smaller markets (aka vertical markets).

3. This means that companies that produce content in vertical markets are at an increased chance of facing Google as more of a direct competitor.

So. How to compete?

1. Google will probably go after more lucrative vertical markets first, like travel and finance. As a result, media companies may wish to aim for as small of a focus as possible. Once some momentum is obtained, expansion outward will become more feasible. This is in line with disruptive theory: the market incumbent is often defeated by a specialist who starts out as very much a niche player (as Google disrupted the online portal market by establishing itself as a portal to the web that focused exclusively on search).

2. Bottom line: to beat Google, firms need to think about taking the opposite road: conquer the markets that are too small to appear on Google's radar, and cultivate network value to build up strength and eventually take on Google in bigger markets.

For Internet entrepreneurs, it seems as though we're getting to a rather murky but highly interesting point, as Google is entering a state where it is both your ally and your enemy: an ally in its ability to give you cost-efficient, highly relevant traffic, free web analytics, and revenue via adsense; an enemy in that it now competes with you on a more regular basis -- and will probably do so using information and content that you generated.

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