Microsoft Settles Netscape Suit with AOL

May 30, 2003

Michael Singer

Microsoft Thursday said it will settle a private antitrust lawsuit brought by AOL Time Warner on behalf of its Netscape unit.

The agreement sparked a $750 million payout from Microsoft to AOL in exchange for new opportunities to jointly develop and support steps for digital media technology, digital rights management (DRM) initiatives.

Microsoft chairman and Chief Software Architect Bill Gates and AOL chairman and CEO Dick Parsons said the companies would continue to compete where they can but the settlement gives them an opportunity to fight piracy and help migrate media from analog to digital.

"A lot has changed in the last few years," Gates said during a conference call with reporters. "We have shared ideas on how to handle digital media.

Both men said the new partnership is expected to impact all forms of content including music, television, movies, and text.

The agreement also ignites a seven-year pact under which AOL will use Microsoft's Internet Explorer browsing technology for free over the next seven years. Parsons said there were no plans to disband his own Netscape division. The companies also said they will advance instant messenger interoperability between the two platforms.

"We've obviously looked at ways of maximizing the valuable," Parsons said. "What we've done is extend the browser and client, frankly because it [Internet Explorer] has done very well."

Parsons said AOL's announcement with Microsoft would not change its relationship with Real Networks or other partners that compete directly with Microsoft.

Gates also said the settlement does not mean that Microsoft would be moving in on AOL's territory as an Internet service provider or vice-versa.

" We've been talking with other industry participants to help drive the media business including the Warner Music and the cable people," Gates said. "With Microsoft's media technology expertise and AOL Time Warner's content expertise, we believe we can and help content providers across the entire industry."

Parson said he welcomed putting the lawsuit behind him.

"Bill gave me a call 6- 8 weeks ago and we started talking about it," Parsons said. "We look forward to others in the media and entertainment industries joining together with us to help to advance the digital distribution of content to consumers while maintaining copyright protection."

The legal settlement resolves the private antitrust lawsuit filed against Microsoft in January, 2002 by AOL on behalf of its Netscape Communications subsidiary. It also eases AOL's growing $24 billion debt. Parsons said the company would specifically use the settlement money to help pay it off.

What's Changed?
As part of the companies' agreement on digital rights management, they have established a long-term, non-exclusive license agreement allowing AOL Time Warner to use, if it so chooses, Microsoft's entire Windows Media 9 Series digital media platform, as well as successor Microsoft digital rights management software.

The companies said they will work to broaden consumer access to high-quality digital content, in such areas as: online music services offering single downloads and/or monthly subscriptions; authorized Internet access to movies; and high-definition video content with interactive features on a single optical disc.

As part of its browser agreement, Microsoft said it will give AOL technical information contained in test or "beta" versions of its Windows operating system at the same time that Microsoft makes them available to other independent software vendors. Microsoft also said it will have AOL participate in the development of Microsoft's next-generation "Longhorn" version of Windows.

The olive branch has been extended so far that Microsoft has invited AOL's development team to work at Microsoft's Redmond, Wash. facilities. The companies said they would also establish an Executive Council to meet periodically to resolve support and other issues and to promote the long-term development of a constructive relationship between them.

Clash of the Titans
If there were any two companies that rapidly became mortal enemies, it is Microsoft and AOL. The companies have even taken to launching campaigns dogging the other's products and services.

Netscape's Navigator, once the dominant player in the browser space, was knocked off the hill by Microsoft, which introduced its Internet Explorer browser in 1995 and bundled it with its Windows operating system. Since then, in aggregate, versions of Microsoft's browser have claimed about 91 percent of the market while Netscape's browser hangs in at about 4 percent.

Netscape's complaint that Microsoft was unfairly competing by tying its browser to its highly popular operating system formed the basis of the U.S. Department of Justice's long-running (and still ongoing) antitrust suit against Microsoft (numerous other charges were subsequently added).

In April 2000, U.S. District Judge Thomas Penfield Jackson ruled Microsoft had violated section 2 of the Sherman Act by using its monopoly power to block rivals from marketing their own operating systems or emerging technologies that threatened Microsoft's market dominance.

The story didn't end there, and an appeals court later overturned Judge Jackson's remedy, but his findings of fact stood.

Currently, two states -- Massachusetts and West Virginia -- are continuing to press the courts on the issues of Microsoft's alleged bullying techniques with its market dominance.

"This is a classic win-win for both companies. It's a big announcement," said Michael Gartenberg, lead analyst for Jupiter Research (whose parent company also owns this publication). "The question is, how big will it be?"

If the companies were to perhaps extend their collaboration to a possible online music service for AOL, using Microsoft's digital rights management and other media technology, "that would be a major issue and send shock waves through the industry," Gartenberg said.

Although Microsoft's MSN still competes with AOL's online service, Gartenberg noted that the settlement marks an end to an often-hostile relationship and sets the stage for an era of cooperation between the two companies. "That can only be a good thing for consumers in the long run," he said. And if the companies decide to work more closely in the future, "the implications could be staggering."


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