According to Investor’s Business Daily, AOL and Microsoft are working on a Web ad service that would compete with Google's service. The announcement is expected to come by the third week of December according to news reports.

In light of the new reports, many industry watchers no longer expect Time Warner to unload a big piece of America Online.

Even so, rumors had circulated since September that Time Warner wanted to sell a stake in AOL or create a joint venture with Microsoft, Google or Yahoo. Yahoo is believed to have dropped out of talks with Time Warner earlier this year.

Microsoft now appears to be the front-runner in a potential deal

with AOL. But Google may still be in the race.

AOL is currently Google's main partner. Twelve percent of Google's revenue in 2004 came from ads it placed on AOL's sites.

Google would hate to lose that money. But the companies may have trouble coming to an agreement, analysts say. AOL wants to get more revenue from ads, and that could cut into Google's sales.

Google currently gives AOL 80% of the revenue from ads placed on AOL sites, analysts say. Google has offered to raise that cut to about 90%, they say. But that might not be enough to please AOL.

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