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Sources wouldn't identify the PC manufacturer, but Dell is unlikely to be the partner. In May 2006, Google cut a deal with Dell for bundling its software and services.

Gateway, HP and Lenovo are likeliest candidates for the bundling deal, with the latter two offering biggest benefit to Microsoft, because of their global reach.

The initial bundling would be for the Live homepage and Windows Live Toolbar, according to sources. Live search also is expected to be included in the deal. Other products or services could come in the future.

Sources couldn't comment on financial terms, if there are any. Software and services vendors typically pay PC manufacturers a bounty for placement on the Windows desktop, or—in the case of Vista—the Windows Welcome Center. Google ponied up $1 billion for its bundling deal with Dell.

Even if the deal were with a smaller OEM, such as Gateway or Sony, Microsoft could claim some advantage in its competitive position with Google. The Dell deal made Google the default home page and bundled in Google search and software, including its search tool bar. Microsoft's bundling deal also would benefit the fledgling Live portal. Hitherto, PC manufacturers choosing a Microsoft portal had MSN as the choice.

The deal would come as uncertainty arises about the future of Windows Live. Two top Live executives—Blake Irving and Chris Payne—are expected to leave by summer. The deal confirms that Microsoft is, at least in some fashion, still committed to Live as a brand. Directionally, the bundling arrangement shows where Live is going. Last week, in a quiet executive reshuffling, some prominent Windows executives took on new roles in Microsoft's Online Services group, which is responsible for Live.

Sources tell Microsoft Watch that in the months before the November 2005 launch of Windows Live, the operating system division began absorbing what had been previously been MSN. Recent executive changes reflect the Windows organization's increasing role and control over MSN/Live. The bundling deal also reflects the directional shift, as MSN/Live moves away from being a separate online service to serving as an adjunct to bolstering either Office or Windows.