The new company would be called AOL Time Warner Inc. and would have annual revenue of more than $30 billion. The merger would provide an instant Internet infrastructure and expertise for Time Warner's operations and a wealth of entertainment and news content for AOL's services. AOL is expected to deliver its services over Time Warner's broadband cable distribution platform.

Media businesses have invested heavily in the Internet, developing online operations and funding others. For example, Disney has a 43% stake in search engine Infoseek. But the proposed deal marks the first time an Internet company has tried to acquire a traditional media business.

Steve Case, chairman and CEO of AOL, called the agreement "an historic moment in which new media has truly come of age." He would become chairman of AOL Time Warner, while Time Warner chairman and CEO Gerald Levin would be CEO of the new company.

Analysts say the convergence of media and the Internet will accelerate. "There will be further consolidation and alliances," says Kathryn Hale, an E-business analyst at Dataquest. She also expects significant Internet deals outside the media industry. "There are many large organizations with good supply chains that might be attractive partners for Internet companies," she says.

The deal, which is subject to regulatory approvals, is expected to be completed by year's end.