AOL, Microsoft in Talks

The world’s largest software maker Microsoft and media
titan Time Warner are exploring the possibility of
merging the MSN Internet portal with the America Online unit of Time Warner,
according to a source familiar with the talks.

Redmond, which is said to have initiated the talks earlier this year, is
interested in buying a big stake of the struggling online business, possibly
leaving the two companies equal partners in a venture that would make for
the world’s largest Internet company.

However, they appear to be discussing numerous possibilities, including
combining their respective Internet search businesses, instant messaging and
online advertising.

The move would likely allow the software-giant to focus its Internet
operations on developing Web search products, rather than its Web portal and
Internet access business, say analysts.

“Microsoft has been trying for some time to deliver beyond its core
markets,” Laura DiDio, a research fellow with Yankee Group, said of the
move. “So far it has not so completely dominated the way it has in the past.”

Representatives of Time Warner and Microsoft declined to comment.

Analysts seem to agree that a collaboration would be a positive move for
both companies.

“We believe that the Time Warner discussions with Microsoft do make sense,”
Kenneth Marlin, a managing partner with Marlin & Associates, said.
“Although that doesn’t mean the deal will happen. We also believe that a
similar venture approach with another technology company could also work
well for both sides.”

The potential alliance between the two companies could spawn a significant
challenge to Google and Yahoo , both
of which would likely see their lead in search technology and online
advertising shrink, DiDio said.

The move would also hold several significant benefits for Microsoft, the
first being it could strike a blow to Google, which Microsoft considers a growing threat to its core business. The search firm has the potential to
offer a variety of Internet services that could take a bite out of Redmond’s
business, said DiDio.

Currently Google provides the Web search on AOL’s services and 11 percent of
Google’s revenue came from advertising on AOL sites. It is more than likely
Microsoft would not renew those contracts once they expire.

“It serves notice,” DiDio said. “Any time Microsoft shows up into [a market], participants in that space have to be concerned.”

At the same time, Time Warner has been struggling with AOL, and a cash
infusion could lessen that drain on resources, says DiDio.

In recent years AOL has been the focus of numerous merger rumors — including one nearly two years ago that had Microsoft involved — especially as its net user base has taken a loss of several million dollars in recent years.

And for Microsoft, it is probably viewing the potential deal as a way to
gain instant market share and strengthen its position without bearing the
total burden, DiDio said.

However, she was also quick to point out that the
strength of Google made it likely the search firm would not be backing down
from the fight, although she predicts some of the lesser players might be in
for a rough time.

“When the elephants in the room begin to rumble, mice get trampled,” she
said.

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