Microsoft has emerged as the front-runner in the talks surrounding the potential sale of a stake in America Online, two people involved in the negotiations said. But despite a flurry of interest in AOL from Microsoft, Google and others, finding a deal has been harder than Time Warner may have hoped.
Behind the scenes, a number of questions remain that could hold up or even derail a potential transaction.
One is whether such an alliance would represent yet another new and unproven partnership for Time Warner, a company that has spent much of its energy in recent years trying to simplify its business.
Another is whether, five rocky years after the AOL-Time Warner merger, bringing in a new partner at AOL would help Time Warner's wide-ranging media businesses navigate the digital world.
Were Microsoft to prevail, it would do so with an investment and partnership that includes folding its MSN Internet service into a venture with AOL. But Google remains interested in a deal that may also involve Comcast, while Yahoo and the News Corporation are in the wings.
While the AOL sweepstakes is predicated on newfangled concepts like developing new models for advertising and melding software applications with entertainment products, what is afoot is roughly the cyberspace equivalent of two of the Big Four broadcast television networks trying to merge to dominate prime time.
According to comScore Media Metrix, Time Warner's sites attracted 119 million users in September, with most viewing AOL and related Web sites. That made Time Warner the second-most-visited Internet destination in the United States, after Yahoo sites with 123 million.
MSN and other Microsoft sites attracted 114 million unique users, while Google attracted 87.6 million. An AOL-MSN deal would catapult the resulting venture into the No. 1 spot, and thus make it especially attractive to advertisers seeking broad audiences.
Microsoft approached AOL several months ago to discuss joint ventures, but any agreement is believed to still be weeks away. Last week Time Warner's chairman and chief executive, Richard D. Parsons, for the first time acknowledged the talks but tried to dampen expectations.
"Because the discussions are fluid, we don't know if they will result in any transaction or what form any transaction will take," Mr. Parsons said.
At the very least, an investment could help place a higher value on AOL's business than investors have been giving it credit for within Time Warner over all - something that might help it appease cranky investors, particularly Carl C. Icahn, who has built a 2.9 percent stake in Time Warner with three hedge funds and has sharply criticized its management and board for its stagnant stock performance.
AOL, despite its large but declining dial-up Internet access business, has become suddenly coveted because of the expanding market for online advertising and the fact that both its AOL service for subscribers only and its revamped AOL.com free Web portal attract millions of consumers each day.
A chief sticking point in a potential Microsoft deal is how it would be governed, and thus far Time Warner has taken the position that, barring a very rich offer, it will not cede control.
Microsoft's chairman, Bill Gates, said in a meeting with reporters and editors at The New York Times last week that his interest in AOL was about playing a greater role in the future of advertising. A combination with AOL would potentially resuscitate the languishing MSN Internet portal and find broader distribution for its new Internet search service.
Aligning with MSN would also bolster AOL's Web presence abroad, in markets like Japan and Canada, where MSN has a much stronger market position than AOL.
Also, allowing people on AOL's AIM instant messaging service to communicate with MSN and Yahoo's messaging services - it was recently announced that those will become interoperable - can lay the groundwork for a vast communications network for both text and free voice products.
Three people involved in the talks said Mr. Gates was singularly motivated by his determination to stem the rise of Google. Under a deal between AOL and Google that comes up for renewal each year, Google provides the Web search on AOL's services, and manages the advertising related to it. This year, 11 percent of Google's revenue came from advertising it placed on AOL sites.
Internally, senior executives at AOL and Time Warner have lamented that while they benefit from the Google link, they have no direct involvement in a business that is the fastest-growing sector of the advertising market.
While discussions with Microsoft percolate, that leaves the door open for Google. The Internet search leader has discussed a partnership that may not involve cash trading hands but would give AOL more involvement in the advertising relationship, according to one person involved who declined to be identified because of the continuing discussions.
Although AOL already sells other forms of advertising, search is becoming more important as more people use broadband and as search advertising evolves from text to visual formats, including video.
"AOL has been our longest and in many ways tightest partner for many, many years," Eric E. Schmidt, Google's chief, said in a recent conference call with investors. "We hope it will be true forever."
Were Comcast to join Google in a deal, it would gain access to AOL's content assets and sales force to build advertising revenue from its high-speed data customers, which Merrill Lynch estimates will total 8.5 million by the end of the year.
A Comcast partnership might also help move AOL subscribers to high-speed access in places where Comcast provides the service. Elsewhere, AOL has been testing a high-speed D.S.L. phone line service with Verizon, SBC and BellSouth that is similar to one that has been successful for Yahoo.
One executive involved in the talks said Time Warner was insisting on striking a deal with Google first and then adding Comcast as a second step, to avoid making the already tricky negotiations overly complex.
Meanwhile, people involved said Rupert Murdoch, the chairman of the News Corporation, has discussed with both Mr. Parsons and Mr. Schmidt the folding in of his Web assets, including the recently acquired Myspace.com. Mr. Murdoch has identified greater Internet reach as a top priority.
It is less likely that Mr. Murdoch will play a role in an AOL deal, however, mainly because his Fox entertainment businesses competes with Time Warner in many areas.
And Yahoo, the most-visited Internet site, has had an abiding interest in AOL and would like to replace Google as AOL's search partner, but it is believed to be reluctant to agree to an arrangement where it would not be in control.
The AOL has ended up as a potential prize in a battle between Google and Microsoft is a strange fate not lost on the players. Two years ago, Microsoft paid Time Warner $750 million to settle an antitrust dispute stemming from AOL's Netscape unit.
And last year Time Warner sold 5.1 million shares in Google that it had inherited from the AOL merger for a gain of $925 million - shares that, had it held onto them, would be worth another $1 billion today.
The rapid march of Google and its zooming stock market valuation have, as much as anything, caused Microsoft to regard AOL in a whole new way and to think that perhaps they can be more than friends.
Saul Hansell contributed reporting for this article.
