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Originally published December 17, 2005 at 12:00 AM | Page modified December 20, 2005 at 8:11 PM

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Corrected version

AOL says no to Microsoft, opts to stick with Google

Months of negotiations to form a partnership between former rivals Microsoft and America Online ended Friday morning with a phone call to...

Seattle Times technology reporter

Months of negotiations to form a partnership between former rivals Microsoft and America Online ended Friday morning with a phone call to Redmond.

Dick Parsons, chief executive of AOL parent company, Time Warner, called Microsoft Chief Executive Steve Ballmer to say thanks, but no thanks.

Parsons called to reject Microsoft's offer to use the software company's new Googlesque search and ad-selling technology, and form a joint venture to sell online ads, according to a source close to the matter.

Instead, AOL will continue to use Google's search and advertising technology, and take $1 billion the search giant offered to sweeten the deal, according to multiple reports yesterday.

Google and AOL intend to broaden their partnership. According to an Associated Press report based on an unnamed source familiar with Time Warner's position, Google will highlight AOL Web sites as sponsored links, and will integrate AOL video clips into its new video search service.

Consumers may not notice anything different, but haggling between the current and former technology darlings drew widespread attention from Wall Street and journalists after details began trickling out in September.

A Microsoft-AOL deal would have been a blow to Google, which counts AOL as its largest customer. Google received 10 percent of its sales, or $422 million, from AOL in the first nine months of 2005, and 12 percent from AOL in 2004.

"If our relationship with America Online were terminated, not renewed or renegotiated on terms less favorable to us, our business could be adversely affected," Google cautioned investors in an earnings report last month.

Google was prepared to defend its turf. It raised $4.3 billion from a stock offering in September. A spokeswoman declined to comment Friday.

Microsoft never offered to make an equity investment in AOL, according to a source close to the matter, who refused to be identified.

"That wasn't the play that we made," the source said. "We approached this thing from a long-term, very broad perspective and from the looks of it, the deal they went with is more of a short-term, cash-infusion kind of a thing."

Microsoft made its final offer Thursday evening, the source said, a day after the company's board met. The source said Parsons called Ballmer on Friday morning.

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Time Warner's board meets next week. Meanwhile, it is not confirming the deal with Google.

"We're not commenting on the rumors," spokesman Ed Adler said.

Parsons has acknowledged recently that AOL is looking for partners to help it make the transition from a subscription-supported business to one based on advertising sales.

Time Warner has also been under pressure to raise the value of AOL. AOL bought Time Warner for $106 billion in 2001, creating AOL Time Warner, the world's largest media company as the dot-com bubble popped. Time Warner has $13 billion in debt, and recently it has been settling more than $3 billion worth of shareholder lawsuits and federal investigations into improper accounting at AOL.

Microsoft has already helped pare down Time Warner's debt. It paid the company $750 million in a 2003 antitrust settlement that also created a technology sharing partnership.

Lately Time Warner has been under pressure from investor Carl Icahn to increase the value of AOL. Google's reported $1 billion investment is for a 5 percent stake in AOL, valuing the business at $20 billion. A steal, compared with what Time Warner paid.

Brier Dudley: 206-515-5687 or bdudley@seattletimes.com

Information in this article, originally published December 17, 2005, was corrected December 20, 2005. A previous version of this story mischaracterized the 2001 merger between AOL and Time Warner. AOL bought Time Warner, creating AOL Time Warner. The combined entity is now called Time Warner.

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