• by Shankar Gupta , September 16, 2005

Time Warner is in "advanced discussions" to sell off a stake in America Online to Microsoft, combining it with Microsoft's Web portal, MSN, according to a report in Thursday's New York Post.

If such a deal goes through, some industry watchers see a potential shakeout of the online advertising world--particularly in the search space. Currently, market leader Google powers AOL's search engine. Google's latest quarterly SEC filing put the amount of money generated by the search giant's partnership with AOL at between 11 and 12 percent of revenues. In its stock filing, Google stated that the loss of partners like AOL could "adversely affect our business."

Forrester Research Analyst Charlene Li speculated on her blog that the deal likely stemmed from discussions about partnering on search. She also wrote that the combination of advertising sales between MSN and AOL could give MSN an edge in competing with the likes of Google and Yahoo! in the portal space. "If there was to be a purchase of AOL by any of the three portals, MSN would make a great deal more sense than either Yahoo! or Google," she wrote.

Merrill Lynch research analyst Jessica Reif Cohen indicated in a research note that an MSN-AOL partnership could prove advantageous to both companies, by increasing traffic to MSN and freeing AOL from its reliance on Google for search. "The combination of AOL and MSN would create a clear leader in web traffic among all sites, pushing AOL well past Yahoo! in terms of unique monthly users and page views." she wrote. "Just as importantly, it would neatly resolve AOL's lack of proprietary search." But, she added, it's not clear that a deal can go through, given AOL's arrangement with Google.

Microsoft and Time Warner declined to comment for this article.