New York Post Online Edition: business

According to two sources familiar with the matter, Time Warner is in talks with Microsoft about selling the stake in AOL and then combining it with Microsoft's Web unit MSN.

Under the plan being considered, Microsoft would pay some money to Time Warner for the AOL stake, leaving the two companies approximately equal partners in the venture.

While AOL began testing the [free] portal in June and has won plaudits for the quality of its videos and other features, the company has yet to make a big marketing push, even though it promised one by the end of August, noted Rich Greenfield, an analyst at Fulcrum.

Greenfield, who said it's too early to judge whether the portal strategy is a success, believes Time Warner should wait before making a decision on the future of AOL.

"I think it's too early for it to be sold or spun out," he said.

AOL has seen the number of subscribers decline from 26 million in 2003 to fewer than 22 million now, as users fled AOL's dial-up service for broadband.

Its portal strategy — a reversal of its prior focus of offering exclusive content — puts AOL in direct competition with Yahoo!, MSN and Google.

The main reason this sounds vaguely plausible to me isn't mentioned anywhere in the story: that with this move Microsoft can just about double the distribution of their nascent search advertising business, simultaneously advancing MSN Search while hurting Google.

AOL is the only top online destination (out of AOL, Google, Yahoo!, and MSN) that doesn't own 100% of their search revenue. Seeing as how search-based advertising has extended itself into display and brand advertising (it's not just text ads anymore), a play for search distribution is a play for ultimate online, interactive advertising dominance (why else do you think old-line online ad players like DoubleClick, advertising.com, and my old employer 24/7 Real Media are nowhere to be found when people discuss the future of online advertising?). This means AOL hasn't got a clear path to long-term success in a market where they compete with companies who do recognize 100% of the revenue from the search engine ads on their sites. In other words, AOL was entirely dependent on generating traffic to their own properties, where Yahoo!, Google, and (eventually) MSN will also have revenue from syndicated advertising. AOL was a sitting duck.