Google has been catching some criticism for its deal to pay $1 billion for a 5% stake in AOL, but I can see several reasons why it may make sense, at least for them.

First of all, the deal is a defensive move, in multiple ways. Google can afford the billion but doesn’t want to lose a substantial portion of its revenues and cash flow. As any experienced entrepreneur knows, managing cash is Job 1. Maybe Google is so big it could afford to be a bit sloppy in this area, but it’s good they are being disciplined about this and defending their revenue and cash flow first before worrying about maximizing return on investment.

Of course, it’s also defensive in that it locks Microsoft out, thereby sustaining Google’s online ad momentum while restraining Microsoft’s. Though some seem to view things differently, I think Google’s brand, on the net, is still way more valuable than Microsoft’s, and the brand must be defended.

Second, AOL’s valuation seems to be nearly completely a function of the perspective from which it is viewed. At the time of the merger (with Time-Warner), it was viewed as a top internet property/portal/brand that was key to driving traffic, and was given a sky-high valuation. Today it is viewed as just a dial-up ISP going the way of the dinosaurs.

A couple of weeks ago, I got another AOL disk in the mail (what does that make - about one a month for a decade?). This one, however, was different, and got me thinking. Instead of just trying to sign me up for AOL, the cover says, “Get Your Business Online”. This was such an obvious growth direction for AOL that I’m surprised I hadn’t thought of it before.

It seems to me that AOL’s members align pretty well with Sams Club shoppers, i.e. upper middle-class folks who often own their own businesses. Of course, these are all switching to broadband and AOL is no longer viewed as the premium ISP. As someone noted the other day, however, AOL’s core competency may really lie in getting newbies (or now their businesses) on the web.

Of course, AOL has a lot of work to do if it wants to make this really profitable, but considering that the local web is something that really hasn’t happened yet, at least most places, there’s still a lot of growth potential there for helping small business owners. Those who have been AOL customers and used to the web are likely smart enough to know there’s more their business could do online, if it was simple enough to implement.

Consequently, a third reason Google’s deal may make sense is that it solidifies its relationship with AOL, which has already proved to be a strong partner in generating ad revenue. Google hasn’t really tried to be a portal like Yahoo, Excite, or the others, but AOL could provide that part while Google drives development of new online services.

One opportunity I keep waiting for Google to tackle is local classifieds, which would capitalize on their compelling brand and near 100% user base. A single, strong brand for local classifieds seems so obvious (and needed), I don’t know why they haven’t been more aggressive about it. Maybe they’re just trying to be merciful to the print newspapers.

I enjoy reading about how Google is turning the business/venture capital world on its head. I use Google every day, and haven’t paid them a dime, yet they’re making billions. It’s interesting … fascinating!