When Steve Ballmer yelled at a departing Microsoft employee that he would “kill Google” we had no idea just how direct a method he had in mind. Buying all or part of AOL may be the first part of the master plan, as Google relies heavily on the advertising pages that come from Yahoo!, since it now syndicates its search to Google.

One estimate suggested that Google would lose as much as $380m of advertising revenue if AOL dropped its search engine and took on MSN's. That would cut Google’s profit by something like 25 per cent, potentially giving its huge share price something of a tumble. No wonder Google is thought to be entering the bidding to partner with Time Warner on AOL instead of Microsoft.

However, the move by Microsoft could still potentially backfire, although with its cash mountain you would expect it to win the day. Google only chance is to paint a sufficiently rosy future picture to Time Warner’s management about what kind of outcome there would be for an AOL partnering Google, then perhaps a lot more than that $380m could be saved.

For instance the new physical fiber network that Google is believed to be in the process of putting together, be used to transport more than just voice, advertising and wi-fi traffic. This could also become a conduit for video services, providing another route to market for the remainder of Time Warner’s content? Could the Google Video search capability index all of Time Warner’s precious content and give it another lease of life?

It’s too late for the Google Talk VoIP service to go out to all the AOL customers because AOL has launched its own complete VoIP package service. The AOL Time Warner merger had some original logic and perhaps a company as imaginative as Google could make that logic work.

On the other hand Microsoft in June 2003 paid Time Warner $750m, mostly in settlement of legal disputes, from when AOL inherited the complaints of Netscape when it bought that company right in the middle of the Microsoft anti-trust trial. But the deal also gave AOL rights to use certain Microsoft tools and the two said that they would collaborate on long-term digital media initiatives, some of which they are well into.

That agreement was certainly not a mere settlement of differences but included the Free use of Internet Explorer by AOL for seven years, collaboration on Windows Media player and DRM software and early access to Microsoft technology for AOL.

And since then the two companies, Time Warner and Microsoft, have become almost inextricably interlinked, working together on standards and buying into companies like ContentGuard together.

So Microsoft must be ahead on this deal as it comes to the table and has the money to tempt Time Warner.

The New York Post has been painting the deal as if it was a 50-50 partnership, with Microsoft buying half of AOL with other statements suggesting that the deal is nothing like that adventurous and is just a form of marketing co-operation.

Yahoo! also has time to throw its hat in the ring, and discussion between it and Time Warner has also been reported. AOL has been losing subscription customers rapidly, which is why it recently switched its business from purely subscription based to increasingly advertising-based.

Copyright © 2005, Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of the week's events in the world of digital media. Faultline is where media meets technology. Subscription details here.