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Report: Microsoft-AOL close to deal
Alliance would switch AOL to Microsoft search tool, allow both to sell more ads, newspaper says.
December 7, 2005: 8:34 AM EST

NEW YORK (CNNMoney.com) - Time Warner and Microsoft are reportedly close to hammering out an online advertising alliance to challenge search engines such as Google and Yahoo!, according to a published report.

The Wall Street Journal reported Wednesday that under the deal now being discussed, Time Warner's (Research) America Online unit would switch to using Microsoft's (Research) search engine, and the two companies would set up a joint venture to sell online advertising across both AOL and Microsoft's MSN portal.

The newspaper reports that Google (Research) is still involved in talks about the possibility of its own alliance with AOL, although a person familiar with the talks told the newspaper a sticking point so far has been Google's reluctance to guarantee Time Warner a minimum amount of revenue, which Microsoft had agreed to do.

The newspaper reports that AOL currently keeps about 80 percent of the ad revenue generated by searches conducted by its users using Google, under an agreement that reaped the company about $300 million in revenue last year. The deal expires in 2006, the newspaper reports.

While the AOL-Google deal, which went into effect in 2002, played a major role in Google's growth, today Google's commissions from selling ads on AOL are a small fraction of its revenue, the newspaper reports. Still, analysts told the newspaper that the loss of the AOL business would be a setback for the fast-growing Google.

"Suddenly the competitive landscape looks a lot less favorable to Google for next year at this time compared to last year at this time," Scott Kessler, an analyst at Standard & Poor's, told the newspaper. "It would be a mounting threat to Yahoo! (Research)" as well, he added.

A Google spokeswoman declined to comment beyond telling the newspaper, "AOL is a valued partner, and we look forward to continuing to work with them."

The newspaper reports that under the plans being discussed between AOL and Microsoft, both services will be able to sell ads that reach far more readers, even as they retain control of their own ad sales services.

Quoting figures from comScore Media Metrix, an online market-research firm, the newspaper reports that the AOL-Microsoft alliance would be able to reach as many as 140 million Americans each month -- or about 80 percent of all U.S. Internet users, compared with roughly 122 million recent monthly users of Yahoo and 86 million for Google.

Time Warner at one point had reportedly held talks about possibly selling a stake in AOL, but the Journal said that is no longer being discussed.

Financier Carl Icahn, who is leading a group of investors looking to replace members of the Time Warner board, has warned he'll hold the board "personally responsible" if AOL is sold for too low a price.

At a news conference Tuesday, Time Warner Chairman Richard Parsons said the company is in discussions with "multiple parties" about partnerships with AOL, the newspaper reported.

Time Warner is the parent company of CNNMoney.com.

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For a closer look at the growing interest in AOL, click here.

For a look at calls to break up Time Warner, click here.  Top of page

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