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The AOL-Google-Microsoft Love Triangle … Someone’s heart is going to be broken.
Oh AOL, thy heart is fickle! The Time Warner-owned Internet unit up until this year seemed content with its three-year-old alliance with Google, which allowed AOL to keep 80% of ad revenue generated from search ads. In 2004 that added up to the nice sum of $300 million, according to the Wall Street Journal’s report today. But earlier this year, AOL’s head was turned by pretty words promising a better partnership that would elevate its status in Internet society. And so began the flirtation with Microsoft.

Around about April, Microsoft began to paint a picture for AOL that challenged the dominance of Google. If AOL were to replace Google’s search technology with Microsoft’s, the joint venture the two would set up would allow it to sell online advertising in a way that would not only challenge Google, but also Yahoo.

You see, for this to work, Microsoft would need to dump its partner, Yahoo, which currently sells Web site MSN’s search ads. What Microsoft proposes, essentially, is if AOL leaves Google, it will leave Yahoo, and together the two of them can combine their unique visitors to vault past Yahoo, the largest seller of Internet ads. With MSN’s 100 million, and AOL’s 88 million (according to ComScore Media Metrix figures for October), they would surpass Yahoo’s 122 million. (Yahoo apparently briefly flirted with the idea of wooing AOL for its own, but last month withdrew from the fray.)

Microsoft’s offer was first in the form of a true marriage, a joint venture that could have created a public company valued over $40 billion, but too many obstacles stood in the way. The latest proposal is said to guarantee AOL a minimum amount of ad revenue, something Google has not agreed to match.

Google, however, is not going to let AOL go without a fight. It was willing to buy a stake in AOL that was valued at $20 billion, but that was essentially a mistress position, a “deepening of the existing relationship,” the Journal termed it. Keeping AOL happy is important to Google, since about 11% of its revenue from the first half of this year was thanks to its AOL alliance, and analysts have figured AOL’s business still is worth about 2% to 4% of Google’s revenue, Reuters Kenneth Li reports today. Google is “very much in the running,” he writes, and Microsoft and Google each have at least one more meeting planned with AOL where they can declare their intentions. An agreement is expected before Christmas.

Time Warner Chief Executive Dick Parsons yesterday told the Associated Press that his intent was to transition AOL from a business that relies on paid subscriptions to one that makes money based on advertising revenue, but declined to give any guidance as to which suitor stood the best chance at AOL’s hand.

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