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May 29 — In a sweeping settlement, Microsoft will pay AOL Time Warner $750 million to end a private antitrust lawsuit over Web browser technology. The agreement also will place Microsoft digital media technology on AOL’s online service and clears the path for the two companies to explore technology sharing.
THE DEAL settles allegations by AOL that Microsoft used its massive muscle within the software industry to edge Netscape all but out of the Web browser market. Netscape Communications is now a division of AOL.
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Perhaps more significantly, the deal will get the two firms working together on common Internet technologies, notably their instant-messaging systems, which are installed on tens of millions of computers around the world. The collaboration could break down the wall between Microsoft’s MSN Messenger and AOL Instant Messenger (AIM), which compete directly using largely incompatible systems.
It also will get the two working together on the issue of digital copyright protections of online music, video and other media, which is a profound issue for both companies, especially for AOL’s media divisions.
SYMBOLIC SHIFT
And symbolically, the settlement is a major shift toward conciliation for two corporate megaliths that have waged the most bitter of battles during the Internet era.
“While our companies will continue to compete,” Microsoft Chairman Bill Gates said in a statement, “I’m pleased that we’ve been able to resolve our prior dispute and I’m excited about the opportunity to work together collaboratively to make the digital decade a reality.
The Netscape suit was a private sector companion to the U.S. government’s case against Microsoft. In that case, the Justice Department convinced a federal judge that Microsoft’s business practices gave it a monopoly in software operating systems. A federal appeals court upheld findings that Microsoft hampered Netscape’s distribution abilities because of its Windows monopoly, but did not determine whether Microsoft had established a browser monopoly. Microsoft eventually settled the case with the federal government, though two state attorneys general have continued their own antitrust efforts against the software maker.
“Both AOL Time Warner and Microsoft win on this one,” said Rob Enderle, an analyst with Giga Information Group. “Microsoft turns what had become an aggravating enemy into at least a marginal friend and possibly a cooperative partner. AOL gets much-needed cash and are able to divest themselves of units that were costing them money like the Netscape unit.”
Enderle, a longtime Microsoft analyst, noted that the competitive environment has changed significantly since 1995, when AOL emerged as a major rival to the Redmond, Wash.-based software giant. At Microsoft, the MSN online service has remained a tiny part of Microsoft’s business, which is increasingly focused on large-scale technologies. Meanwhile AOL Time Warner is now dominated by executives from the “old media” world of the former Time Warner and has largely returned to its original roots in developing content.
The online divisions of both companies are suffering from an onslaught of competitors providing cut-rate raw access to the Internet, Enderle said.
BROWSER WARS
The Netscape suit, filed by AOL after the media giant bought the Mountain View, Calif., software firm in March 1999, sought to show that Microsoft’s access to computer desktops through its Windows operating system gave it an unfair advantage in marketing Internet Explorer, which most computer users received free as part of the installed package of Windows software.
AOL argued that Microsoft not only owed it compensation for the lost market share, but should be forced to sell a version of Windows without Internet Explorer installed. Because of the government’s partial success in its own antitrust effort, AOL was cleared to sue privately and asked for triple actual damages for the lost business, plus punitive damages. It did not specify a dollar amount in its lawsuit, though it did ask the court to hem in Microsoft’s ability so that other “middleware” — such as a Web browser — would have an even field of competition in PC operating systems.
Microsoft claimed that Internet Explorer was an integral part of its operating system, but could be easily disabled or removed for a user who preferred the Netscape browser.
In the early days of the Internet’s mass-market transformation, Netscape largely dominated the browser market, refining technology that many of its engineers had designed while working on the Mosaic project at the National Center for Supercomputing Applications at the University of Illinois. But Microsoft, modifying a private version of Mosaic, quickly countered Netscape.
By 1998, Internet Explorer edged out Netscape’s user base — helped, in what would be an ironic twist, by AOL using the Microsoft technology as its primary Web browser. Just a year later, at the peak of the dot-com boom, AOL reversed itself and bought out Netscape for $4 billion in stock. Even with AOL’s backing, Netscape’s market share slid, and the slide continued when AOL and Time Warner announced their merger in early 2000.
Access to the Time Warner stable of properties was intended to give AOL a vital boost — in part through its Netscape.com Web portal, which many Netscape users saw each time they launched their browser.
But AOL never fully adopted the Netscape software, and by the time the AOL-Time Warner merger was approved by federal regulators in January 2001, Netscape had a tiny sliver of the browser market, less than 15 percent. One study suggested that even if all AOL users adopted Netscape technology, Netscape would only capture a 20 percent market share.
MEDIA MOVES
Both companies Thursday focused on the deal as a way to distribute — and control — online media.
AOL Time Warner Chairman Richard Parsons called secure delivery of music, movies and other media offerings the “principal challenge of AOL Time Warner as a business.”
“All of these things are going to be distributed and delivered in digital form,” Parsons said during a Thursday conference call. “Unless and until we can figure out an environment that is secure across a variety of platforms and content, we aren’t going to really be able to expand the market and explore the new opportunities this technology puts at our feet.”
That’s precisely what some portions of the settlement are designed to do. AOL will be able to include the latest version of Windows Media software in its online service. The Microsoft product allows Internet users to watch audio and video on their computer desktops. AOL recently dumped Real Networks’ media technology in favor of the AAC media system created by Dolby Laboratories Inc. The nonexclusive license doesn’t require AOL to provide Windows Media to its users. AOL also can include Microsoft software that manages users’ access to copyright-protected music and video offerings.
At the same time, the two firms will work together to develop new systems that protect rights to all those media offerings, and will look for new ways to deliver high-quality media through broadband Internet connections.
AOL has struggled with the issue of rights management, which allows copyright holders to control the use of downloaded music and videos by end users. While that is a major issue for AOL’s media divisions, its online unit has been primarily focused on a battle for market share. Microsoft has rights management built into Windows Media, and has been developing technology to extend it to portable listening devices. That has become crucial as users increasingly download music and videos, and providers seek ways to ensure that customers pay before they listen or watch.
AOL’s case was handled by U.S. District Judge J. Frederick Motz in Baltimore, who ruled against Microsoft last December in a lawsuit brought by Sun Microsystems over Microsoft’s inclusion of the Java programming language with Windows. Sun claimed Microsoft used its own version of Java instead of the one developed by Sun, which developed the language.
Motz told Microsoft it would have to include Sun’s version with Windows, but Microsoft appealed the ruling. Arguments were heard by the Fourth Circuit Court of Appeals this April.
Thursday’s settlement was announced after U.S. markets closed for the day, but AOL’s shares were up about a dollar in after-hours trading. Microsoft edged down slightly.
AOL’s Parsons said his company would use the settlement cash to help pay off some of its $26 billion in debt.
Microsoft settles browser suit with AOL
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