http://news.yahoo.com/s/ap/20051220/ap_on_hi_te/microsoft_portal_wars;_ylt=ArqTdF2m7D_UvFEMWtr4jzojtBAF;_ylu=X3oDMTA5aHJvMDdwBHNlYwN5bmNhdA--


SEATTLE - America Online is preparing to seal a deal with Google Inc. that will deepen their relationship while leaving Microsoft Corp. as the spurned suitor.

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The software titan's failure to woo AOL away from Google in favor of its own search technology highlights the uphill battle Microsoft faces as it tries to gain traction in the lucrative business of selling online ads.

Yet industry analysts say the lost bid also shows that Microsoft, its fiercely competitive culture notwithstanding, wasn't willing to go to unreasonable lengths to make a deal work.

"I think they've learned that you don't do a deal at any price just to do a deal. You do a deal that makes sense for you," said analyst Michael Gartenberg with Jupiter Research.

AOL parent Time Warner Inc. and Google were expected to announce this week a broadening of their search and advertising partnership after a long courtship in which Yahoo Inc. (Nasdaq:YHOO - news) was also, for a time, a suitor.

In a five-year deal, Google would pay $1 billion for a 5 percent stake in AOL, said one executive familiar with Time Warner's position. Google also agreed to integrate AOL's video clips in its fledgling video service and highlight AOL's properties among the search engine's keyword ads, also known as sponsored links.

The executive said AOL also would get an undisclosed amount of credit to buy such sponsored links on Google's network. And it would be permitted to display graphics in the ads, a novelty for a Google ad partner.

Microsoft, by contrast, wasn't interested in a cash investment in AOL, say officials familiar with both sides of the talks. The software maker had tried to persuade AOL to set up a shared online advertising business in which both companies held a stake, according to a person familiar with the Microsoft camp. The officials spoke on condition they not be named because the discussions were confidential.

That doesn't ease the sting to Microsoft, which was late to develop its own search engine technology and recently launched its own platform for the lucrative business of selling paid ads that often accompany search results.

A deal with AOL would have jumpstarted both efforts.

"It slows their progress. It doesn't eliminate their progress," said Marianne Wolk, research analyst with Susquehanna Financial Group.

The deal also would have been a coup if only because it would have meant a loss for Google.

White-hot in the eyes of investors, Google is showing early success in profiting from the movement of computing from the desktop to the Web. That could eventually pose a massive threat to Microsoft's core businesses.

"It clearly would've given them bragging rights and it would have done Google a lot of damage," said analyst Rob Enderle, taking Google down a peg.

On the other hand, Enderle said, the stakes were significantly higher for Google to make a deal work.

AOL is Google's biggest customer, accounting for about $420 million, or about 10 percent, of Google's revenue during the first nine months of this year, according to regulatory filings. Losing the deal would have represented a blow to both the company's revenue and its image as the search market leader.

Also, while online search technology is at the center of Google's business, Microsoft's MSN online unit represents just a portion of its business and the company still makes the bulk of its money from its Windows and Office franchises.

"For Microsoft it was kind of a nice to have," Enderle said. "For Google it was a must have."

A deal with Microsoft would have been considerably riskier for AOL since Google's online advertising business is more firmly established and Microsoft is the relative newcomer.

"Given that there was a fairly successful relationship already established between AOL and Google, the old maxim of 'if it ain't broke, don't fix it' certainly would be coming into play," said David Garrity, director of research for Investec's U.S. operations.

Still, Garrity thinks Microsoft inability to strike a deal shows that the software giant, which recently announced a massive push into Web-based software and services, still has work to do if it wants to compete effectively with Google, Yahoo and others online.

As it moves to launch a new set of Internet-based offerings for things like checking e-mail and doing business tasks, Microsoft is weathering criticism that it is losing ground to younger, more nimble competitors.

The software gaint recently announced a reorganization that was aimed in part at addressing such bureaucratic woes.

"I do think from a cultural standpoint that Microsoft is not yet quite thinking in the way that they need to competitively," Garrity said.

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