Microsoft said to be in talks on linking with AOL

Microsoft and Time Warner have explored a variety of possible combinations of the MSN Internet portal with America Online.

Microsoft and Time Warner have explored a variety of possible combinations of the former's MSN Internet portal with the latter's America Online operations, including a merger of the two into a new company that would be jointly owned, according to several people involved in the talks.

The discussions were initiated by Microsoft, which has Google, its new archrival, clearly in its sights. Microsoft is trying to focus its Internet operations on its developing Web-search product rather than its Web portal and Internet access business, which it no longer sees as strategically important.

Microsoft offered to sell its MSN Internet portal and dial-up subscriber business both to America Online and to Yahoo, according to several people with knowledge of the talks. While Yahoo considered and quickly rejected the proposal, Time Warner, the parent of America Online, expressed interest.

Top executives at the companies discussed a variety of potential transactions as recently as three weeks ago. Those talks, however, are in suspension as Microsoft considers its strategic position, people involved in the discussions said.

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Representatives of Time Warner, Microsoft and Yahoo declined to comment.

The most elaborate proposal being discussed would involve combining America Online with the MSN Internet portal and dial-up Internet business, creating the world's largest Internet company. The venture's Web search would be provided by Microsoft. That combination would be a significant blow to Google, which provides the Web search on AOL's services. This year, 11 percent of Google revenue came from advertising it placed on AOL sites.

A combination of AOL and MSN would have 18 percent of the search market in the United States, according to Nielsen NetRatings, making it third after Google, with 46 percent, and Yahoo, with 23 percent.

Indeed, much of Microsoft's motivation to do such a deal is to head off a threat it sees from Google. Microsoft's worry is not so much Google's Web search business.

Microsoft sees in Google the potential to offer a variety of Internet services, using Google's vast network of servers, making it less necessary for people to buy Microsoft software or even computers with the Microsoft Windows operating system. Moreover, Google could offer free desktop software as well, supported by its network of advertisers.

"Ultimately Microsoft knows that the software landscape will shift from the desktop to the hybrid of the Internet and the desktop," said Gene Munster, an analyst with Piper Jaffray. "Google has thrown out warning shots that they will be players in many of the significant areas of software."

Time Warner, meanwhile, has been trying to figure out if AOL fits into its amalgamation of companies, especially because AOL's core dial-up Internet access business, while profitable, is shrinking as customers shift to high-speed service provided by telephone and cable companies.

AOL has been trying to build a free, advertiser-supported portal business. Combining that effort with Microsoft's large MSN portal, along with Microsoft's popular Hotmail e-mail service, could accelerate AOL's progress toward its goals.

The merged company would leap past Yahoo as the biggest

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