Microsoft and AOL Linking Their Products.
Microsoft and America Online are negotiating a licensing and some legal issues so contentious that the two sides disagreed over the weekend whether they were even still talking.
The companies are trying to iron out an agreement on how to include each other's software in each's own products and services. But a significant and unresolved area of dispute is Microsoft's demand that AOL agree not to challenge Microsoft in court over antitrust matters, according to people close to both sides of the talks.
Although a Microsoft spokesman, Jim Cullinan, called reporters on Friday evening to say that the talks in Denver had broken off, AOL said yesterday that the discussions, had continued over the weekend. On Sunday, a Microsoft spokesman agreed that the talks had restarted and said the company was pleased that they were continuing. Several people close to the talks said the two sides were still far apart on many issues and that no deal would happen soon.
"We're very pleased with our position in the market place," said Kenneth Lerer, an AOL executive vice president. "If we're able to come to terms with Microsoft that make sense and that's good and if we're not that's O.K. as well."
The wrangling comes as Microsoft awaits an imminent decision on its appeal of a federal court ruling last year that the company had so abused its monopoly power that it should be broken up. While the talks with AOL are not directly related to that case, many of the issues involve questions of Microsoft's market power.
The discussions began this spring after a contract expired under which America Online licensed Microsoft's Internet Explorer software. They mainly focus on areas in which the companies compete in delivering Internet service to millions of computer users around the world.
Several people close to the talks said a key topic was whether America Online's access software would be included in the consumer version of Microsoft's new Windows XP operating system, which goes on sale on Oct. 25.
But a person close to the talks said Microsoft had been trying to persuade AOL to agree not to lobby against Microsoft in current or future court battles. AOL is still holding open the possibility of pursuing legal action against Microsoft, on antitrust grounds, if the two sides cannot otherwise agree, this person said.
Because Windows is the standard operating system installed on the great majority of new personal computers, making deals to bundle software with each new version is a crucial means for many companies to build and maintain market share.
But AOL, as the dominant provider of consumer Internet access, has advantages few other software companies can exert. For one thing, its service is so popular that most PC makers stand ready to strike bundling deals with AOL, regardless of whether Microsoft includes the AOL access software in Windows XP.
AOL can also exert leverage over even mighty Microsoft in the online market, where AOL has 29 million subscribers compared with the 5 million for Microsoft's MSN network. Issues in the companies' recent talks have included Microsoft's desire to make its MSN Messenger service compatible with AOL's more popular Instant Messenger system, which enables users to communicate by text messages in real time.
Microsoft has also been trying to persuade AOL to add the Microsoft Windows Media Player to the video and audio software formats that can be used with AOL's service.
But for AOL, underlying the specific negotiating points is a broader concern that Microsoft is moving rapidly to consolidate its operating system monopoly and will try to use it to dominate the next generation of consumer Internet services.
People close to AOL said that in recent months the company has grown increasingly concerned about Microsoft's new .Net Hailstorm strategy, which is meant to aggregate a wide range of personal information and consumer transactions. Microsoft has sketched the broad outlines of a software strategy that shifts from the computer desktop to the Internet, with a variety of services to be offered for both PC and mobile devices like cell phones and personal digital assistants.
And AOL's Netscape Navigator browser, which it acquired when it bought Netscape Communications a few years ago, is no longer considered an equal to Internet Explorer. AOL is concerned that future versions of Windows and its bundled Explorer will increasingly steer users toward MSN as part of the .Net Hailstorm effort.
AOL also considered but recently shelved plans to create an "AOL PC." It would have used the GNU-Linux operating system in an inexpensive Internet computer that was outside Microsoft's control, according to several people who have been in negotiations with AOL.
AOL had held several rounds of discussions with Eazel Inc., a California software company that recently folded. Eazel was developing an icon-driven user interface for the GNU-Linux operating system, in hopes of making it more accessible to nontechnical users.
Eazel initially approached AOL last fall. Several people who participated in those talks said AOL came back to the talks in March and April after becoming alarmed by Microsoft's Hailstorm strategy.
But the AOL PC project died this spring, these people said, after Robert W. Pittman, co-chief operating officer of AOL Time Warner, concluded that competing head-to-head on the PC desktop against Microsoft was a battle that AOL could not win. Instead, they said, AOL Time Warner sees the Internet and future interactive television systems as more opportunistic fields.
AOL Time Warner has made recent investments in two Silicon Valley start-ups, TiVo and Rearden Steel, which have technologies that may be useful as the company prepares for an interactive TV future. AOL Time Warner already has a strong cable TV presence through its Time Warner cable systems.
"Originally they were thinking about a frontal assault on Microsoft on the desktop," said one person who participated in the discussions. "They've backed off on that and decided not to compete and to come in through the living room instead."
With this strategy in play, AOL has become less interested in forging cross-licensing deals with Microsoft, according to a person close to the AOL executives.
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