Rumors are swirling about what Time Warner (TWX) will do with AOL. CEO Dick Parsons has stood firm that they want to keep AOL as part of the company and transition it to an advertising model from a subscription model, given that AOL's more than 20 million members have been leaving, and will continue to do so for obvious reasons.

Today, with the Google (GOOG) secondary offering complete (and it went well by the way, with the stock trading above the $295 offering price) the market is trying to figure out which of the rumors could come to fruition. Will Google buy AOL? Will Microsoft (MSFT) buy at least a stake in it and combine AOL with MSN? Reports indicate that at the very least, all of these major online players have had discussions.

While I don't really have any insights into what will happen, I can tell you that the media and Wall Street will almost certainly badmouth any company that partners with AOL. For years investors have basically ignored AOL as a long-term viable part of Time Warner. Analysts often say that Wall Street is valuing it at zero when trying to explain TWX's stalled out stock price.

However, there are things to consider here. Not only would any type of deal benefit Time Warner, assuming investors are assigning no value to AOL right now, it might not be a bad deal for Google, Microsoft, or anyone else. For the first six months of 2005, AOL had revenue of $4.23 billion. Some may be surprised how profitable this business is for TWX. Adjusted operating income (before amortization and depreciation) was $1.09 billion. Clearly, AOL is worth something and that something is in the billions.

AOL has to change business models. Home users of the Internet no longer need AOL as their gateway. Advertising at AOL has an uphill battle as Google and Yahoo (YHOO) continue to gain market share. With the help of a leading Internet force, AOL could very well become even more valuable, and investors are already underestimating the value of Time Warner's America Online unit today.