Report: AOL considering breakup followed by merger with Yahoo

AOL is considering a dramatic shake-up that could eventually lead to a merger with Yahoo, according to a report from Reuters.

According to the report, plans are still in the exploratory stage and Yahoo has not yet been contacted. But the plan appears to include breaking AOL up into its two main businesses: its legacy dial-up Internet service and its online ad business.

Time Warner reportedly considered a similar split before spinning off AOL last December, but balked in the face of heavy tax liabilities. AOL has also been reluctant to sell the dial-up business that first made it a ubiquitous name in American households; the unit still generates $1 billion, or roughly 40 percent of AOL's overall revenue.

However, AOL faces pressure to merge or sell off units in the face of ongoing weakness in its core businesses. Dial-up revenue dropped almost 27 percent in 2010 while ad revenue went down 28 percent. Sources told Reuters that Yahoo has no interest in the dial-up business.