Microsoft, AOL Clash Again
N E W Y O R K, June 18, 2001 -- At the moment, Microsoft and America Online can't seem to live with each other. But in the long run, can the two technology giants live without each other?
For now, they will have to. Over the weekend, the two companies stopped negotiations aimed at including AOL's software in Microsoft's new XP operating system — and gave different accounts about why the negotiations broke down.
AOL said Microsoft was attempting to undercut Internet streaming media leader RealNetworks, an AOL partner and Microsoft competitor, by trying to use its own video and audio players for certain applications.
But Microsoft cited a variety of snags, including differences over video and audio technology as well as instant messaging systems — and AOL's unwillingness to agree not to bring legal claims against Microsoft.
Bundling Again?
The latter is a key issue, since Microsoft's insistence on including only its own products in the XP system seems to echo the notorious "bundling" strategy that led to the government's antitrust case against the company.
It was Microsoft's insistence on including its own Internet Explorer browser in the Windows 95 operating system that led to a suit by browser rival Netscape — since purchased by AOL — and a federal antitrust decision to split up Microsoft a year ago. A decision on Microsoft's appeal of the case is expected imminently.
But Microsoft and AOL have had distribution deals for years that have resulted in AOL's latest software being included in Microsoft's Windows package — the world's dominant operating system. Those deals have helped AOL become far and away the leading Internet access provider in the United States, with about 24 million customers, and 30 million worldwide.
And some observers think the prospects for future lawsuits, alleging unfair practices on Microsoft's part, are unlikely.
"Microsoft really does not have an obligation to put anybody else's software in their operating system," says Nicholas Economides, a professor at New York University's school of business, who has written extensively about antitrust cases.
Other place the blame for the failed negotiations more squarely on AOL's shoulders.
"It is clear that AOL Time Warner's obsession with litigating contributed to the breakdown," says Jim Pendergrast, executive director of Americans for Technology Leadership in Washington. "AOL Time Warner made clear in these negotiations that they had every intention of suing Microsoft over XP if they did not get theirway."
Wanted: Desktop Space
The last deal between the two companies ended in January, and an agreement seems unlikely before XP is launched in the fall.
Still, AOL is probably in a stronger position now than it was in past years, and with a bigger subscriber base, may find that a spot on the Microsoft desktop when the XP system comes out is no longer a necessity.
"It's nice to have, but I would not put it in the 'need-to-have' category," says analyst John Corcoran of investment bank CIBC Oppenheimer in Boston.
The new operating system includes tighter links between Microsoft's programs and various Internet-based consumer activities, including financial services and shopping opportunities. It's part of Microsoft's much-publicized ".Net" strategy, in which it aims to compete with AOL as a one-stop Internet destination for Web users.
On the "Start" menu of Windows XP, for instance, there are only Microsoft-owned applications. That means AOL's Internet connection or RealNetworks' video or audio players must be installed separately. And with AOL having struck a partnership with RealNetworks to provide an online subscription music service later this summer, that's an increasingly important issue.
But AOL could still find its way onto XP by negotiating with computer manufacturers, who have some latitude to add applications to Microsoft's operating systems.
Tough Times
The context for this conflict is a year that may be singularly bad for the computer industry. International Data Corp., a leading technology market watcher, has forecast that personal computer sales will drop by more than 6 percent in 2001 — which would be the first-ever annual decline in PC sales.
That means potentially bad news for Microsoft, which makes money with every operating system it can place on a personal computer. Indeed, a Salomon Smith Barney analyst forecast today that Microsoft may soon announce a warning in the second quarter of the year.
At the same time, both Microsoft and AOL are trying to diversify their products in an uncertain market.
"Neither one of them wants to get stuck as just a dial-up provider on the desktop," says Corcoran. "In terms of infrastructure, they want to be a part of dial-up, cable access, DSL, satellite … and they are competing in gaming, browsers and interactive TV."
All of which leads to a situation in which both companies can benefit from the other — but is also wary of the competition.
"Will they come back to the negotiating table at some point?" asks Corcoran. "Yes. Next week? No. Do I think it will happen before XP is released? Probably not."
ABCNEWS.com's Peter Dizikes contributed to this report.