Posted on 2-6-2003
Microsoft
+ AOL = Digital Fist
By Jonathan Krim, Washington Post,Friday 30 May 2003
Microsoft Corp. agreed yesterday to pay $750 million to AOL
Time Warner Inc. to drop an antitrust suit against the software
giant, in a deal that turns one-time rivals into powerful partners.In
addition to settling their legal battle, the two companies --
the world's biggest software maker and the biggest entertainment
company -- agreed to collaborate on technology that could one
day set the standard for how music and movies are sold over
the Internet.
The deal is a surprising twist in the long-running legal saga
over Microsoft's violation of antitrust laws. AOL sued Microsoft
after federal courts found that one of its subsidiaries had
been harmed by Microsoft's anti-competitive actions. With yesterday's
settlement, the two companies could capitalize on a lucrative
new market.The companies said the deal is important for consumers
because it could make much more entertainment available online
by reassuring Hollywood and the music industry that their offerings
could be better protected from piracy. "With Microsoft's
media technology expertise, and AOL Time Warner's content expertise,
we believe we can accelerate . . . digital media for the Internet,"
Microsoft Chairman Bill Gates said.
But one anti-Microsoft trade group said AOL's embrace of Microsoft's
digital media technology could raise new antitrust questions.
"Now Microsoft gets to own another market which is critical,"
said Mike Pettit, executive director of ProComp. "It's
worth billions and billions and billions of dollars."The
deal, struck between Gates and AOL Time Warner chief executive
Richard D. Parsons, brings a badly needed cash infusion to AOL
Time Warner. The company has been weighed down by $27 billion
in debt and disappointing results from its online operations.
The settlement includes several parts: Microsoft agreed to renew
AOL's license to use Internet Explorer, its software for surfing
the World Wide Web, for seven years, royalty-free. Microsoft
pledged to give AOL greater access to its Windows operating
software code to ensure better performance of the AOL service.
The two companies also said they would try to make their competing
instant-messaging services compatible, so users of one system
could trade short text messages with those of the other.
Company executives said one of the most far-reaching aspects
of the agreement is the digital entertainment initiative. AOL
will license Microsoft's Media 9 software, which allows users
to play digital music and video and also includes features to
prevent unauthorized copying and sharing.AOL's 35 million users
currently can choose to use Microsoft's media software on the
AOL service, but they also have the option to use Microsoft's
top competitor for playing digital content: RealNetworks. Parsons
said the Microsoft deal would not shut out RealNetworks because
it's a nonexclusive agreement. But Microsoft hopes that by adding
its version of anti-piracy features, the entertainment industry
will want to use its format for distributing music and videos.
The two firms remain head-to-head competitors when it comes
to providing Internet access, with America Online's paid service
vying with Microsoft's MSN, which has about 8 million subscribers.
Legal and technology analysts viewed the new alliance of the
two corporate giants with wary fascination."All of these
areas bear close watching," said Mark Cooper, director
of research for the Consumer Federation of America. He said
the cyber-revolution is "stalling" because of a lack
of innovation and collaboration that makes high-speed Internet
access and digital content more available. Thus, he said, the
deal could be helpful.But consumers could be hurt by an anti-piracy
system that is dominated by one set of players. "There
are dangers," Cooper said. "They could get it wrong."Others
said that while the deal is a necessity for AOL Time Warner,
it is a huge victory for Microsoft."They are getting off
cheap," said Mark S. Ostrau, a Silicon Valley antitrust
lawyer. Ostrau said AOL stood to win far more than $750 million
in court because federal courts already have ruled that Microsoft
broke antitrust laws.
As for AOL, Ostrau said that having Microsoft as an ally is
a smart move for any struggling company.The deal closes the
chapter on one of the biggest engines of the Internet's early
growth, the Netscape Navigator Web browser, which AOL bought
in 1999 for $10 billion.Netscape helped spark the Internet revolution
in the early 1990s by being the first to offer consumers an
easy and graphically pleasing way to navigate the Web. Microsoft,
however, viewed Netscape as a potential threat to its dominance
of operating systems that powered personal computers. The company
feared that consumers might one day get software and other services
from the Internet, with the browser -- not Microsoft's dominant
Windows program -- serving as the intermediary.
Microsoft embarked on a campaign to develop its own browser,
but while that was in development it engaged in a number of
business practices that antitrust regulators determined were
designed to unfairly crush Netscape. Netscape went from having
most of the market for browsers to having little.The Justice
Department sued in 1998, alleging that Microsoft had strong-armed
developers and computer makers to favor Microsoft's Explorer
browser.After bruising court fights, a federal appeals court
affirmed that Microsoft had broken antitrust laws, and it ordered
the case back to a lower court judge to determine sanctions.In
late 2002, the Justice Department settled with Microsoft, striking
a deal that AOL and other competitors called inadequate and
filled with loopholes.
Subsequently, AOL and two other competitors sued Microsoft privately.
The cases of Sun Microsystems Inc. and Be Inc. are pending.
Edward J. Black, head of the Computer & Communications Industry
Association, which receives funding from AOL and supported stiff
sanctions on Microsoft for antitrust violations, said his group
is "pleased that AOL Time Warner was successful in extracting
a substantial measure of compensation for the destruction of
Netscape."But the deal "is a relatively small price
to pay for illegally crushing the company that brought the World
Wide Web to most consumers," he said. "The full consequences
of many of the remaining provisions will obviously need greater
study."
The deal is one of several government and private class-action
suits that Microsoft has worked to settle. But the company remains
under investigation by antitrust enforcers in Europe for the
way it bundles its media player software with its core Windows
operating system.
For AOL Time Warner, the deal is yet another demonstration of
the ascendance of the Time Warner side of the company, which
AOL acquired in 2000. Parsons said that while AOL and Microsoft
were, and in some areas still will be, "spirited competitors,"
this is AOL Time Warner now. "The Time Warner side has
had a long relationship with Microsoft. . . . While Bill and
I don't play bridge together . . . we have great respect for
each other."
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