It has been my opinion since I joined the company that AOL should either buy out Pyra, or put them out of business. One is easier than the other, and now that the buy out ship has sailed, there's two problems. If AOL decides to get into the web logging market, they will have to buy someone else, (and obtain the subs list (eg, Live Journal)) or build their own tool set and introduce that to the AOL user base.
Either way, that will put them in a competitive position with Google, with whom they already have a relationship. uses Google for their search technology provider (STP, hehehehe) and likely has little desire to piss them off because the Google experience is a good experience, and no one wants to lose that. Co-optition is unavoidable though if you engage in so many diverse businesses that AOL Time Warner does.
The problem with a home grown solution is the learning process. Blogger is a refined product, and the crew building it knows what web loggers want and how they do their thing. AOL will have to learn all of that from scratch if the rumors are true and they are building a web logging system (disclaimer: I work at AOL, but not in a products group, and certainly don't know anything more than what has been published online).
To be honest though, I wouldn't expect that AOL would be inclined to simply buy a web logging business. As far as I can tell, AOL is a lot like Apple was five and ten years ago (ie, the 'not invented here' syndrome). If they are able to come up with a smart web logging solution that is user oriented (per 's core capabilities) then I think there's some interesting possibilities.
The Blogger business plan (it's basically free) can be more easily swallowed at AOL since you already pay to be a member. Thus the company could just add this as a another service under the umbrella of AOL services that members currently enjoy, and you have another vehicle to drive subscriptions. Another option is to offer it as a low cost add-on premium service for a few bucks a month. This way you probably still drive AOL subscriptions, and then boost the revenue with a few extra bucks a month from those who subscribe. That's likely not a lot of money though, and driving users to the service is a better idea.
Now, consider the Bring Your Own Access plan that AOL sells for $15/month. If an AOL web logging service was bundled into that, then I'd likely be a buyer (note: I get free access to the service). $15/month is two dollars less than my monthly costs for InMyExperience.com which is hosted at Pair.com (who rocks by the way). The feature set of the product would still have to sufficiently robust for a web developer like myself to be interested in abandoning my current system. And that is pretty much the same problem they would have if they choose to compete with Google/Pyra/Blogger.
By the way, is in no position to be buying any businesses these days due to extreme debt levels. 2003 is a debt reduction year for AOL Time Warner, and that creates a competitive disadvantage over one or two product cycles, so I have to believe any possible web logging business will come from within.