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Microsoft is already in talks with Time Warner about a possible alliance. That would be a double victory for Microsoft, increasing the presence of its MSN network and damaging its bitter rival Google.

According to legal documents, Steve Ballmer, Microsoft’s chief executive, recently threatened to “kill” Google and bury his opposite number, Eric Schmidt.

()“Google’s not a real company. It’s a house of cards,” Ballmer allegedly said.

MSN runs its own search engine. Google is the largest search player with 36% of the market, followed by Yahoo with 30% and MSN with 15%.

Cutting out Google at AOL would even the scores on a number of levels. The combined traffic of AOL and MSN could potentially double or triple advertising revenue.

But no sooner had news of the Microsoft talks broken than Google was back in the running. The internet giant is teaming up with Comcast, America’s biggest cable company. Neither company is commenting on the talks.

AOL is two businesses: a collection of websites and a dial-up internet service. The dial-up business has been in decline for years, thanks largely to companies such as Comcast which offer high-speed internet access via cable.

It is AOL’s websites that are of interest to Microsoft and Google.

Combining Google, AOL and Comcast’s cable distribution would also create a powerful new challenge to Yahoo and software giant Microsoft.

In Hong Kong last week, Dick Parsons, Time Warner’s chairman and chief executive, tried to dampen speculation that a deal was in the offing. “It’s market rumours, and I can’t curb market rumours,” he said.

Parsons has told AOL staff that the company remains committed to them. He is thought to be keen to keep a controlling stake — no matter what combination of partners eventually evolves.

But corporate raider Carl Icahn has been building a stake in Time Warner and is pushing for a more radical sell-off.

He wants Time Warner to sell off its cable businesses. Last week Parsons dismissed the idea.

“If you cut an apple in half, you get half an apple,” he said. “(If the business were demerged) I would bet that in three or four years from now people would be struggling to get (the two businesses) back together.”

But Icahn will continue to push for change.

Douglas Shapiro, a Banc of America analyst, calculates a deal between AOL and a third party could add $3 a share to Time Warner’s share price — a move that would knock the wind out of Icahn’s sails.

Selling a stake in AOL could open a new chapter in the Time Warner’s internet saga. AOL has gone from golden goose to ugly duckling and back again in the space of five years.

Time Warner now looks like the only clear winner in this game. For its would-be suitors winning a partnership would be a great coup; losing would be a disaster.

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