AOL, Microsoft Sweet Deal

Late this afternoon, Microsoft and AOL Time Warner settled a private antitrust lawsuit for $750 million. In conjunction with the cash settlement, the software titan and media giant made several agreements and strategic partnerships, covering digital media, digital rights management, instant messaging interoperability and Web browsing technologies. The overall deal is a win-win scenario for the two companies and their customers. But the peace agreement doesn’t help RealNetworks, Yahoo! and companies looking to profit from the Microsoft-AOL Time Warner spat.

To recap: In January 2002, AOL Time Warner’s Netscape division sued Microsoft, alleging that actions taken during the so-called browser wars harmed Netscape. In April 2000, a federal judge had ruled Microsoft’s anticompetitive practices thwarted Netscape in the browser market.

AOL Time Warner wasn't the only company suing Microsoft. Be and Sun are among a handful of aggrieved Microsoft competitors also seeking damages from Microsoft's actions during the so-called browser wars. But the AOL Time Warner lawsuit exposed Microsoft to the most potential risk, because of facts established by the government's case.

By settling the lawsuit, Microsoft has dispatched its most dangerous pending private lawsuit stemming from the antitrust case and used the settlement as a means to greatly extend use of the company’s technology. At the same time, cooperation between AOL Time Warner and Microsoft could foster greater adoption of digital media content. AOL Time Warner and Microsoft will work together on digital rights management technology that the companies’ chairmen claim would help eliminate piracy of digital content, removing one of the biggest barriers to content creators supporting wider use of digital media.

Neither company gave a clear timeline, but during a conference call with analysts and the media today, AOL Time Warner chief executive Dick Parsons indicated DRM could protect content across all the company’s digital properties, including CNN. Right now, Microsoft’s DRM is tied to Windows Media 9 Series file formats. Wide adoption of Windows Media formats by AOL Time Warner’s online service and media, movie and music properties could greatly extend the reach of Microsoft’s digital technologies.

Both companies stand to profit by wider adoption of digital content, AOL Time Warner as a publisher and Microsoft as a technology provider. Microsoft, PCs companies and consumer electronics manufacturers also would benefit from wider consumer adoption of digital media content. Microsoft also is betting the deal could inspire renewed technology-media company partnerships beyond AOL Time Warner.

Rights management might not stop with music or movies. Later this year, Microsoft plans to deliver Windows Rights Management Services (RMS), an add-on to Windows Server 2003. At this early stage, RMS is designed primarily to protect documents, e-mail and Web content. AOL Time Warner would have the option of using the technology to protect, say, content from its print or Web operations. The rights management technology could be used for AOL Time Warner content, while giving the new Microsoft technology an early boost out of the gate. Later on, RMS would support additional content types, such as digital music.

AOL Time Warner also has the rights to use Microsoft’s entire Windows Media 9 Series platform, which runs on Windows 2000 Server or Windows Server 2003. The technology platform would allow AOL Time Warner to create, serve and distribute digital content. Microsoft benefits from AOL Time Warner’s potential use of the technology--rights that would extend to future versions. For AOL Time Warner’s part, the agreement is non-exclusive and does not require the company to ever use Windows Media.

During today’s conference call, Parsons and Microsoft Chairman Bill Gates spent a good chunk of their comments discussing how important the agreement would be to fostering wider adoption of digital content.

The two companies plan to establish interoperability of their respective instant messaging networks. But Gates said that “no timeframe has been set” on IM interoperability. Opening of its network could allow AOL Time Warner to add new features to its instant messaging client. FCC restrictions placed during the AOL and Time Warner merger limitrd AIM developments while the network remained closed.

Joining of the two largest instant messaging networks also would remove barriers consumers face when friends or coworkers use a different network. But interoperability between the MSN and AIM messaging networks would not necessarily include other networks, such as Yahoo!. During today’s conference call, AOL Time Warner did not give any indication whether it would extend interoperability to other instant messaging networks.

Microsoft also extended to AOL Time Warner a seven-year, royalty-free license for Internet Explorer for use in the AOL online client. The agreement could hurt lower market share Web browsers, including AOL Time Warner’s own Netscape or Opera. The deal also covers technical data, which AOL Time Warner would receive ahead of the release of new Windows versions, including Longhorn. Microsoft also agreed to distribute AOL discs to system builders.

Posted by Joe Wilcox at May 29, 2003 06:45 PM