Top executives at America Online and Netscape have been in preliminary talks since the summer, and in higher-level negotiations during the past few months. But nothing is cut in stone, the source said.
The source added that preliminary brainstorming sessions outlined a number of possible scenarios to promote Netscape on the online service aside from an outright replacement of browsers.
Ideas for the potential partnership, first reported by the Wall Street Journal this morning, include enabling AOL users to sign up for the Navigator browser on AOL's welcome screen; allowing members to choose between Navigator or IE as their default browser; promoting Netscape software on online subsidiary CompuServe; and increasing the visibility of Netscape's Netcenter Web portal on the site.
Both companies declined to comment on the discussions.
Any deal that would have AOL featuring Navigator could dramatically alter the Internet access landscape, giving Netscape prime access to AOL's 13 million subscribers. It also could loosen Microsoft's grip on the browser market, as the software giant competes with both AOL and Netscape.
AOL made Microsoft's Internet Explorer browser its default in 1996, giving Microsoft what many saw as a huge edge in the battle for browser market share. That contract is up January 1, 1999. The AOL-Microsoft deal forbids the No. 1 online service from distributing or promoting Netscape's Navigator, and gives AOL's service prime placement on Microsoft's Windows operating system.
Speculation about a deal surfaced last month during the government's antitrust lawsuit against Microsoft. An AOL executive had testified that AOL chose Internet Explorer over Netscape's Navigator in order to secure a spot on the desktop through the Microsoft operating system.
But Microsoft attorneys took issue with criticism of the deal, stating that AOL already had obtained placement on Windows before it signed onto the deal, and that Microsoft didn't strongarm the company into featuring its browser.
During the past year, Netscape and AOL have taken steps to bridge the rift between them, which was created in 1996. A year ago, Netscape began promoting AOL Instant Messenger as a button on its browsers. In August, the two companies teamed up to feature AOL local city guide Digital City to power Netcenter's Local Channel for two years.
Further expansion of the relationship between Netscape and AOL would not be surprising, according to analysts. Hambrecht & Quist's Danny Rimer said he expected that, over time, the two companies would get closer to forging a commercial relationship.
He cautioned, however, that extending promotion into an equity investment would not make sense. "I think it's not very logical," he said about rumors circulating that AOL would make an equity investment in Netscape.
News.com's Courtney Macavinta contributed to this report