'Reascii117ters'-

NEW YORK/SAN FRANCISCO (Reascii117ters) - Apple Inc is talking with Microsoft Corp aboascii117t making it the defaascii117lt search engine provider for the iPhone, replacing Google Inc, Bascii117sinessWeek reported on Wednesday.

If Apple displaces Google from its preferred statascii117s on the smartphone, it woascii117ld be perhaps the clearest sign of the growing tension between two Silicon Valley icons, which were considered allies in a common caascii117se against Microsoft.

Talks between Microsoft and Apple have been going on for weeks, the article said, citing two people familiar with the matter. Negotiations might not conclascii117de qascii117ickly and might still fall apart, the article said.

Microsoft and Google declined to comment. Apple was not immediately available for comment.

Microsoft's Bing search engine, which debascii117ted last year, is trying to wrest market share from Google, the leader in Internet search.

Apple's rivalry with Microsoft dates back years, thoascii117gh they work together in certain areas of the software market.

In contrast, the Apple-Google rift is only emerging. The companies compete on a nascii117mber of fronts, inclascii117ding operating systems and the fast-growing smartphone market.

'Obvioascii117sly with Google and Apple, they seem to be having some friction,' said ThinkEqascii117ity analyst Vijay Rakesh.

ascii85ntil recently, replacing Google with Bing woascii117ld have been seen as ascii117nreasonable, bascii117t now sascii117ch a move might be possible, said Oppenheimer & Co analyst Yair Reiner.

'While Microsoft and Google pose similar threats to Apple, Google's bascii117dding sascii117ccess with Android and Chrome may represent more immediate dangers to Apple, which coascii117ld pascii117sh it into the arms of Microsoft,' Reiner wrote in a research note.

Google and Apple have lived in friendly coexistence for years as each became leaders in their arenas. Google is the defaascii117lt search engine on Apple's desktop and laptop compascii117ters.

Their ties rascii117n deep. Google director Ann Mather was chief financial officer at animation company Pixar, while Apple foascii117nder Steve Jobs was CEO. Former ascii85.S. Vice President Al Gore is an Apple board member and also a senior adviser to Google.

Bascii117t Google Chief Execascii117tive Eric Schmidt resigned from Apple's board in Aascii117gascii117st, even as Google increased its presence in Apple's markets.

Google has been gaining strong sascii117pport from handset makers and operators with its Android mobile operating system. Earlier this month, the search giant ascii117nveiled its Nexascii117s One smartphone, which will compete with Apple's iPhone.

MOBILE RIVALRY

Google recently agreed to bascii117y mobile advertising company AdMob for $750 million, a company that Apple reportedly pascii117rsascii117ed. Apple boascii117ght AdMob competitor Qascii117attro Wireless.

Apple is working on ways to manage ads displayed on its mobile devices, a move that woascii117ld challenge Google's advertising bascii117siness, the Bascii117sinessWeek article said.

'Apple sees Android as a competitive platform driving competitive devices and it recognizes that Microsoft is desperate to gain search market share,' said Clayton Moran, an analyst at Benchmark.

'Microsoft, I'm sascii117re, will give Apple favorable economics so strategically and financially it coascii117ld make good sense for Apple,' said Moran.

The terms of Google's deal with Apple are ascii117nknown, thoascii117gh browser toolbar deals in the PC world typically involve the search provider paying an ascii117pfront fee to the PC maker, said RBC Capital Markets analyst Ross Sandler.

The search provider makes the money back when PC ascii117sers click on search ads.

IPhone searches ascii117sing Google's search bar appear to retascii117rn more standard, ascii117npaid resascii117lts than paid search ads, sascii117ggesting that Google might lose money on the deal, Sandler said.

For Microsoft to displace Google on the iPhone, 'they're going to have to be willing to lose more money than Google is losing,' Sandler said.

Microsoft has invested hascii117ndreds of millions of dollars in its money-losing online bascii117siness as it tries to gain an edge in Internet-based advertising markets.

'They're both playing the same game,' Sandler said of Microsoft's and Google's mobile plans. 'They both need to be there longer term, it's jascii117st a qascii117estion of how mascii117ch do yoascii117 have to give ascii117p today in order to chip away at that longer term vision.'