AOL, MS kiss and make up: $750M, 7 more years of IE for AOL, Windows Media gets boost

[Asher]

http://news.com.com/2100-1032-1011296.html?tag=nl

Microsoft to pay AOL $750 million

By Ian Fried and Jim Hu
Staff Writer, CNET News.com
May 29, 2003, 4:17 PM PT

update Microsoft is paying $750 million to AOL Time Warner as part of a wide-ranging settlement that also calls for the companies to jointly cooperate on software distribution and digital media.
As part of a wide-ranging deal announced Thursday, the companies will drop pending litigation, including an antitrust complaint filed by AOL Time Warner's Netscape Communications unit in January 2002 against Microsoft. AOL also agreed to a seven-year royalty-free license of Microsoft's Internet Explorer browser.

"It seemed like an opportunity to do something smart for both companies," AOL Time Warner CEO Richard Parsons said during a conference call with reporters.

Microsoft Chairman Bill Gates added during the call, "It puts any past issues behind us. It extends the technical cooperation we've had with AOL on the browser while increasing cooperation in other areas such as new ways to distribute digital content."

Besides the $750 million payment and AOL's continued use of Internet Explorer, key elements of the pact and its ramifications include:

• AOL receives a long-term, nonexclusive license to use Microsoft's Windows Media 9 software, which offers playback, delivery and rights management for digital media. Considering that AOL has 32 million subscribers worldwide, Microsoft is gaining access to a large portion of the market.

• The companies will explore ways to increase the adoption and distribution of digital media, such as making more digital content available and accessible while protecting copyrights. This is also important for Microsoft, which has been pushing its own format called Windows Media for encoding and protecting music and video files. Gaining Time Warner's confidence could help Microsoft win support from other content and hardware companies.

• AOL will receive a seven-year, royalty-free license to continue using Internet Explorer on its flagship online service. Microsoft will provide beta tests of future Windows versions and allow AOL to participate in tests of its upcoming "Longhorn" operating system at the same time and on the same terms as other software vendors.

• The companies will explore ways for AOL and MSN Messenger to interoperate. Microsoft has sought such access for years, while AOL has advocated walling off its millions of subscribers from competing messaging products.

• Microsoft will expand its support contract with AOL and will allow AOL engineers to work on its Redmond, Wash., campus.

• Microsoft will help distribute AOL CD-ROMs to PC builders around the world, which could help stabilize AOL's sagging subscription numbers. Under the deal, Microsoft will provide AOL software discs worldwide to "system builders"--smaller PC manufacturers that obtain their Windows discs from authorized Microsoft distributors.

In the first quarter, 55.8 percent of worldwide shipments came from PC makers not among the top five, according to research firm Gartner. Under Thursday's deal, these builders will get AOL discs when they order Windows. "This could be pretty big for AOL," said Roger Kay, an analyst at IDC.

Both companies win
As for the two headline-grabbing elements of the settlement--the $750 million payment and the dropping of the antitrust suit--Microsoft and AOL can each claim to be the winner. AOL can use the funds to pay off some of its $26.3 billion in debt and Microsoft can cross off its to-do list one of many nagging lawsuits.

The company has settled with nine states and the U.S. Department of Justice over claims that Microsoft abused its monopoly power. Two states have appealed that settlement. The Bush administration said this week that it won't help Microsoft in that battle.

Sun Microsystems has its own antitrust case against Microsoft, as does defunct operating system maker Be. A Sun representative declined to comment on the AOL settlement.

"Microsoft has been very pragmatic in putting its antitrust issues behind it," said Rich Gray, an antitrust attorney in Silicon Valley who's tracked Microsoft antitrust battles for years. "What will be interesting is to see if they settle with Sun. That's a bit more of a grudge match."

Jupiter Research analyst Michael Gartenberg said the agreement is a win for both AOL Time Warner and Microsoft.


"Microsoft gets to put probably the biggest of the antitrust and anticompetitive lawsuits behind it while simultaneously using this as an opportunity to drive things forward like Internet Explorer and Windows Media," he said. "AOL and Netscape are vindicated. They are walking away with a significant amount of cash."

Gartenberg said AOL also benefits from Microsoft distributing its software while losing little by potentially adopting Microsoft's media technology. "There is very little downside for them to accept the media technology because it's not a business they are in in the first place."

Gartenberg said it remains to be seen what the deal means for companies that produce media software in competition with Microsoft.

"AOL has not announced any change in its technology architecture," Gartenberg said. "The real question is, in the future, which technologies AOL will opt to use. That will ultimately determine the impact of this deal."

As for AOL's license of Internet Explorer, Gartenberg said the impact will be minimal. "There isn't anyone else in the browser market. I guess the Opera guys are sort of left out."

Despite AOL's seven-year contract to use IE in its flagship service, Parsons was vague about the future of Netscape beyond maintaining it as a subsidiary under AOL. He said AOL is continuing to evaluate Netscape for its value, but pledged AOL's support for IE.


Gates and Parsons were not specific about the timing of the settlement. Parsons said there was "no magic in the timing," adding that Gates called him six to eight weeks ago to discuss a potential agreement.

The deal comes just weeks after Steve Case ceded his role as chairman of AOL Time Warner. Case said in January that he would step down this month. Case remains on the board of AOL Time Warner.

Despite the deal with Microsoft, AOL will continue to do business with companies such as RealNetworks and others, Parsons said, stressing that the deal with Microsoft is not exclusive. "We'll work with all of the players in the market who are trying to find ways to bring what we produce and create in this company to consumers...in a secure way."

As for instant-messaging interoperability, Gates did not offer any specific timeline for allowing their rival services to communicate. The deal is more of an agreement to hold discussions rather than a technological roadmap.

"We've created an overall framework for us to have a very focused discussion on IM interoperability," Gates said during the call.

The deal was announced after the stock markets had closed. In after-hours trading, Microsoft shares were down about 13 cents to $24.27 and AOL shares were up 43 cents to $15.29.

http://news.com.com/2100-1025-1011383.html?tag=nl

Microsoft wins in digital media


By Evan Hansen
Staff Writer, CNET News.com
May 29, 2003, 5:06 PM PT


AOL Time Warner's settlement with Microsoft on Thursday brings the software giant a powerful ally in extending its digital media technology--part of Microsoft's plan to keep Windows the world's dominant computer operating system and expand onto new devices.
The deal allows--but does not require--AOL Time Warner to use Microsoft's Windows Media 9 Series software and future versions of the multimedia technology, including its digital rights management (DRM) tool for securing music and video files from piracy.

Despite the open-endedness of the terms, the deal represents an important victory for Microsoft, which has tried for years to overcome reluctance from AOL Time Warner and other media companies to embrace its digital media technology over that of rivals, notably RealNetworks and Apple Computer.

"This is a huge win for Microsoft," Gartner analyst David Smith said.

The deal comes just weeks after Apple opened its iTunes Music Store, selling millions of downloads and putting Microsoft on the defensive.

While AOL Time Warner has announced no specific use for the Microsoft technology in the deal, analysts said it is likely just a matter of time before the company begins announcing products and services that rely on Windows Media--for example, in a digital music download store or in an Internet video-on-demand service. AOL Time Warner's Warner Music Group includes a group of record labels that together control one of the five largest collections of music rights in the world.

Broadly, the deal suggests that Microsoft and AOL Time Warner are untangling their competitive interests over technology. In the past, the two have clashed on a number of fronts in this regard, offering competing Web browsers, streaming media technology and instant messaging services, for example. Thursday's settlement lays the groundwork for cooperation in all of these once-contentious areas.

"This signals detente," said Matt Rosoff, analyst at Directions on Microsoft. "The companies are diverging. AOL no longer sees itself as a technology company. It will use whatever products make sense."

Microsoft has poured hundreds of millions of dollars into developing digital media security technology in a bid to convince media companies to adopt its formats for emerging entertainment products and services. The software giant has wooed customers using tried-and-true methods honed during the browser wars with Netscape, including bundling its technology with other products at no extra cost.

Still, it has taken years for the company to chip away at the lead established by RealNetworks in technology for distributing real-time audio and video, known as streaming media. Its Windows Media formats are still only a footnote in the world of music downloads, where the MP3 format rules supreme. And Microsoft has suddenly found itself playing catch-up to Apple in the race to develop commercially viable digital music services.

The AOL Time Warner settlement is the latest sign that Microsoft is gaining momentum in an arena that could ultimately reap enormous profits. These would come through sales of the server software used to encode and distribute music and video, as well as from licensing fees from hardware makers who agree to support those formats. In recent months, Microsoft's technology has increasingly found a foothold in DVD players, portable music players, home entertainment networks and other consumer-electronics devices.

Rich Gray, an antitrust attorney in Silicon Valley who's tracked Microsoft's antitrust battles, said the agreement opens up the possibility of an alliance with a major media company at a time when legal issues related to digital technology are still being hashed out.

"It will be interesting to see whether the arrangement about digital media is just a fig leaf or a meaningful alliance," he said.

Changing relations
AOL Time Warner had long been a Microsoft holdout, endorsing RealNetworks' technology and, more recently, developing its own internal streaming tools for its Internet radio services. But the alliance with RealNetworks has shown signs of stress as RealNetworks has established itself as an aggregator of paid online video content through its RealOne subscription service, which increasingly competes with new features in the broadband version of America Online's Internet service.

RealNetworks downplayed the announcement, saying AOL will continue to use its technology.

"We don't think it means anything for Real," said Dan Sheeran, vice president of marketing at RealNetworks." What's important is not that AOL may support Microsoft technology, because it's already there as part of the operating system. What's important is that they include us, which is what they're doing and what they plan to keep doing."

AOL has also been tightening its ties with Apple, giving the computer company a coveted berth in its instant-messaging network and raising the prospects of a possible AOL-Apple alliance on digital music--although Thursday's settlement now makes such a collaboration less likely. Apple declined to comment.

AOL has been stocking up on alternative digital media formats of late, including licensing audio technology endorsed by the MPEG standards group called AAC and video technology from start-up On2. Those deals, as well as its existing relationship with RealNetworks, could leave the company a back door if it begins to chafe under Microsoft.

In the meantime, AOL finally appears ready to cozy up to its longtime adversary.

"This agreement underscores both companies' deep commitment to developing solutions that expand consumer choice and access to high quality content, and at the same time create new opportunities for content owners and promote innovation," said Will Poole, a senior vice president at Microsoft.

http://news.com.com/2100-1032-1011379.html?tag=nl

AOL, Microsoft to talk about IM


By Ed Frauenheim and Jim Hu
Staff Writer, CNET News.com
May 29, 2003, 4:37 PM PT


As part of their major truce announced Thursday, AOL Time Warner and Microsoft pledged to discuss making their instant messenger products talk to each other.
The promised cooperation comes after years of IM acrimony between the two tech giants. But it's not clear the talks will end IM turf wars--the companies did not provide a specific time line for allowing their rival services to communicate.

Analyst Genelle Hung of market research firm The Radicati Group said the companies may just be trying to seem friendly on the IM front. Both Microsoft and AOL Time Warner depend on their IM products to hold on to customers, she said. "I'm a little skeptical about so-called 'interoperability.' I don't think they would be willing to relinquish control," Hung said.

AOL Time Warner and Microsoft said they'd discuss IM interoperability as part of a broader agreement between the two media powerhouses to collaborate on digital media initiatives and settle pending litigation. Microsoft is paying $750 million to AOL Time Warner as part of the pact, and the two companies will drop the pending litigation, including an antitrust complaint filed by AOL Time Warner's Netscape Communications unit in January 2002 against Microsoft. AOL also agreed to a seven-year, royalty-free license of Microsoft's Internet Explorer browser.

In the instant messaging arena, the companies said they "have agreed to explore ways to establish interoperability between AOL and MSN Instant Messenger networks in a manner that will protect consumer privacy, security and network performance."

In a conference call, though, Microsoft Chairman Bill Gates said the companies have not committed to a schedule for getting their products to communicate. "We've created an overall framework for us to have a very focused discussion on IM interoperability," Gates said. "No time frame has been set for that."

If AOL and Microsoft are serious about interoperability, the result would end years of nasty, brutish, below-the-belt fighting between the two giants.

The companies have been at odds since the summer of 1999 when Microsoft launched its own Web-based client called MSN Messenger. At the time, most IM users used AOL-owned products, either AOL Instant Messenger or ICQ.

Although Microsoft and AOL have not reached an accord on interoperability, AOL has partnered with Apple to produce the AIM-compatible iChat for Macintosh users. It is not clear if the Microsoft deal will have any impact on that arrangement. Apple on Thursday declined to comment on the AOL-Microsoft settlement.

Microsoft wasn't shy about its entry into the IM ring. Its software let users communicate directly with AIM users, which incensed AOL and prompted the company to block MSN users. AOL called it a hack. Microsoft claimed it was defending consumer rights.

In the end, Microsoft backed down, but not for long. The following year, while AOL defended its merger with Time Warner in front of regulators, Microsoft brought back its experience in 1999 as proof that AOL was playing unfair. Gates himself phoned the then-chairman of the Federal Communications Commission to express his concerns at AOL's IM dominance. The FCC's merger approval required AOL to limit its IM capabilities or be forced to interoperate with competitors.

After the FCC ruling, something unexpected happened. The companies that complained about AOL's IM dominance began to gain traction. By 2002, the calls by MSN and Yahoo for IM interoperability had died down. That's because IM interoperability sparked Net users to download multiple clients to talk to their contacts, allowing AOL, MSN and Yahoo to essentially share loyal customers. User numbers for MSN and Yahoo also skyrocketed.

Taking note of MSN's and Yahoo's gains, AOL in April filed a petition to the FCC asking the commission to lift the restrictions imposed on it in 2001. So far, no decision has been made.

Meanwhile, IM technology has become an increasingly important tool in the workplace. The Radicati Group estimates that the total number of corporate IM accounts will exceed 52 million in 2003, growing to 290 million by 2007.

Analyst Hung said that if Microsoft and AOL genuinely plan to get their IM products to talk with each other, it may be part of a strategy to "squish the smaller competitors."

Does anyone else find it funny how much time/money AOL spends on Mozilla, then uses IE?

[Urban Ranger]

MS pays AOL to develop Mozilla.

[Asher]

Originally posted by Urban Ranger


MS pays AOL to develop Mozilla.

AOL is using it to pay off some of its $26B in debt.

If anything, it looks like Mozilla funding is getting the axe.

I take it you didn't read the articles?

[St Leo]

Death to Microsoft! Death to AOL! Life to Mozilla, Mirabilis, and Nullsoft!

[monolith94]

They kiss and make up, eh? That must be like watching Anna Nicole Smith and Yanni in a make out session... *shudder*

I'll stick with safari, thank you very much.

[Asher]

Originally posted by St Leo
Death to Microsoft! Death to AOL! Life to Mozilla, Mirabilis, and Nullsoft!

You are aware of who owns Nullsoft, Mozilla devs, etc right? Or was this an attempt at a joke?

AOL's death means Nullsoft and Mozilla's death.

[MichaeltheGreat]

Kiss and make up, but you didn't specify what part of MS that AOL had to kiss.

Other than the cash transfer (which is pretty paltry compared to the value of everything else) MS came out ahead on this deal in every way. Overall, it's hugely beneficial to MS.

[JohnT]

$40 billion in cash will buy better lawyers than $26 billion in debt, I guess.

[Odin]

I think this agreement keeps it a monopoly because they are working together.

[MichaeltheGreat]

Originally posted by JohnT
$40 billion in cash will buy better lawyers than $26 billion in debt, I guess.

Yeah, like a full house beats a pair of threes any day.

[Harovan]

Microsoft will help distribute AOL CD-ROMs to PC builders around the world

Shudder... yet more free beer mats for all. As if one free AOL CD every other month with "50 free hours" on it isn't enough. Waste disposal is expensive. Down with AOL and all its CDs.

Oh, and before I forget: Down with Microsoft as well

[Urban Ranger]

Originally posted by Asher
AOL is using it to pay off some of its $26B in debt.

If anything, it looks like Mozilla funding is getting the axe.

I take it you didn't read the articles?

You mean points like this one?

Despite AOL's seven-year contract to use IE in its flagship service, Parsons was vague about the future of Netscape beyond maintaining it as a subsidiary under AOL. He said AOL is continuing to evaluate Netscape for its value, but pledged AOL's support for IE.

What indicated Mozilla is getting the axe?

[Asher]

Netscape is going under "evaluation" for its value.

Care to explain to me why AOL, who is in financial trouble, should fund Netscape software engineers for a product they won't use?

Or even better, why you think they'd increase their investment in a product they'd never use?

[monolith94]

I hate Microsoft to an equal extent that I pity AOL for being one of the most pathetic, lame, catastrophic companies ever created.

The both suck, but each for wonderfully different reasons.

[Urban Ranger]

Originally posted by Asher
Netscape is going under "evaluation" for its value.

Care to explain to me why AOL, who is in financial trouble, should fund Netscape software engineers for a product they won't use?

Or even better, why you think they'd increase their investment in a product they'd never use?

Take an analogy. What good are standing armies? Same reason why AOL wants to have an alternative browser in the wings.

On what basis do you think the AOL will *cough* never *cough* use something else? It's not the first time MS fails to hold up its end of a business deal.

[Ted Striker]

Nah, I mean browsers have become so commoditized nowadays it doesn't really matter.

The sooner Netscape dies off for good the better.

[Urban Ranger]

Originally posted by Ted Striker
Nah, I mean browsers have become so commoditized nowadays it doesn't really matter.

The sooner Netscape dies off for good the better.

[Kuciwalker]

Netscape sucks. I like IE.

[Asher]

Originally posted by Urban Ranger
On what basis do you think the AOL will *cough* never *cough* use something else? It's not the first time MS fails to hold up its end of a business deal.

Well, if AOL is truly stupid they'll use something else and get sued up the yin-yang for breach of contract...

I think you're grasping at straws. When a struggling business says they're going to "evaluate the value" of a division, particularly a division as useless as Netscape, they'll most likely cut funding.

It doesn't make sense for a struggling company to keep spending money on a division "just in case". There are other options if for some reason they can't use IE, like KHTML, Opera, etc.

I guarantee you they'll either try to sell the Netscape division or just can everyone in it.