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Under the proposed plan, Microsoft would pay cash upfront for AOL that would leave the two companies roughly equal partners.

However, reports in Reuters and elsewhere call the proposed merger talks 'way overblown'. The two companies have been in talks, but only to discuss search and advertising strategies. 'There have been talks on ways Microsoft and AOL assets can be better leveraged and they've taken place over the normal course of business,' according to the Reuters source.

At the moment, AOL uses Google to provide

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its search engine and its contextual advertising in the form of AdWords. Microsoft, which is developing its own contextual advertising systems adCenter would dearly like to land a prize catch like AOL as part of the roll out due early next year.

It is no secret that the board of Time Warner would like to off load AOL, which has become something of an embarrassment to the company. Not only has the service been steadily losing subscribers and market share over the past few years it has become a symbol of everything that was wrong with the dot com frenzy.

In 2000, at the height of the dot com boom, AOL bought Time Warner. At the time, it was seen as justification for all the talk of the 'new economy'. It later transpired that AOL had massaged its accounts to maintain its own high share price in order to complete the deal. Since then, Time Warner has dropped the 'AOL' from its name and has had to compensate shareholders with millions of dollars.

As a result of these travails, the Time Warner share price has dropped by some 70 per cent. A merger with MSN would not only give Time Warner some much needed cash, it would partly dispose of a declining subsidiary which is no longer part of its core business and give AOL a sense of direction which it has lacked of late.