Updated: Google has demanded that Time Warner (NYSE: TWX) either spin off AOL as a separate public company or buy Google’s 5 percent stake at fair-market value, Time Warner CFO John Martin told analysts and investors during the company’s earnings call. (Editor’s note: An earlier version attributed the announcement incorrectly to CEO Jeff Bewkes, who also addressed the issue during the call.) Google, which recently wrote down its AOL investment by nearly $750 million, has the right to make such demands according to the agreement the two companies entered into when Google purchased its stake in late 2005.

Martin said the company is exploring its options, but it’s pretty clear the company either needs to take AOL public (very unlikely) or pay Google (NSDQ: GOOG). Another option is to get Google to agree to withdraw its right as part of a separate larger agreement, but that, too, is unlikely. From the transcript (via Seeking Alpha): “We’re reviewing what we received and we’re evaluating our options. Those options include proceeding with the request, delaying the decision for some time or we can move ahead to potentially buy back Google’s stake at an appraised value, which would obviously be well below the value that was placed on it at the time of the original investment.”

Staci adds: Google invested $1 billion for 5 percent of AOL as part of a bidding war with Microsoft (NSDQ: MSFT) for AOL’s search business. The price helped AOL set a $20 billion value back then, something Time Warner wanted desperately at the time. The value of the investment post-writedown would be $274 million, putting Google’s value of AOL at about $5.4 billion. How this factors into determining the fair-market value remains to be seen.

Some speculation was raised that this is a part of a negotiating ploy on Google’s part but during the call Martin said the two issues are not linked. Bewkes followed up: “The search deal continues aside from their rights at a given point and this point they’ve taken to trigger that right. So we don’t link it. And as to what we may do with our search business, we reserve all options on that.”

Google’s statement: “AOL remains an extremely valued partner, and we’ll continue to work closely together to provide their users with the best search experience possible.  After careful consideration, we made the decision that we needed to exercise our rights now so we could be in a position to sell our interest when the timing made sense for us.”