Tech, Media Giants Launch New Relationship

ANALYSIS: Now that it has settled its lingering private anti-trust lawsuit against Microsoft , AOL Time Warner has before it great opportunities to leverage Windows technology in future digital media offerings, analysts and experts say.

“This relationship may have the potential to help the AOL service develop and deliver premium content and/or services which will help to accelerate the all-important deployment of AOL’s broadband strategy,” wrote media analyst Jessica Reif Cohen of Merrill Lynch in a note Friday.

Microsoft has agreed to pay $750 million to settle the AOL lawsuit, which charged that Microsoft’s bundling of its IE browser with its dominant desktop software was unfair and illegal competition for AOL’s own Netscape browser. Now, the two companies have put years of hostilities behind them to launch a new era of cooperation on digital media products.

And the potential impact — on the marketplace as well as on their competitors — of a major media and technology company working together instead of at odds is only beginning to sink in.

(Also see accompanying analysis on the intriguing possibilities for instant messaging (IM) interoperability).

The settlement terms include work “on a series of initiatives to
support the more rapid deployment of digital media for consumers and support new business models for content owners through digital rights management technology.”

In addition, the companies said they have entered into a long-term, non-exclusive license agreement allowing AOL Time Warner to use Microsoft’s Windows Media 9 Series and future software for creating, distributing and playing back high-quality digital media.

“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 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.

The news could not have been worse for RealNetworks , which provides media player software that lets AOL subscribers watch video and listen to audio. Because its RealOne player competes directly with Windows Media 9, RealNetworks could find its business relationship with AOL marginalized, depending on the extent of AOL’s collaboration with Microsoft on digital media products.

Merrill’s Cohen called the settlement funds of $750 million “a welcome inflow for AOL Time Warner to work toward its debt reduction strategy.” AOL Time Warner is shouldering close to $26 billion in debt, and has said it wants to cut that to under $20 billion by the end of 2003. During a conference call with reporters Thursday, AOL Time Warner CEO Dick Parsons said the settlement money would go toward reducing the company’s debt.

Other bright spots for AOL, in a settlement payment seen as a drop in the bucket from Microsoft’s $46 billion cash horde, is Microsoft’s pledge to “bundle AOL software with various OEMs [original equipment manufacturers] where AOL does not have an existing relationship, helping to enhance its distribution,” Cohen noted.

“Additionally, Microsoft has agreed to work with AOL engineers to enhance the compatibility of the AOL browser and Microsoft Windows. Further, Microsoft and AOL Time Warner will work together to broaden industry-wide digital offerings (e.g. music, video offerings) and security standards (anti-piracy).”

What is less clear is how this newfound corporate friendship between AOL and Microsoft impacts the competitive advantages and disadvantages of their ongoing battle for Internet service customers through their respective, MSN and AOL brands.

Microsoft has for years held dominant browser market
share as an adjunct to the monopoly it holds with its Windows desktop operating system at 90 percent of the market.

Its MSN online service, which counts about 8 million subscribers, is still a distant second to AOL’s roughly 34 million customers.

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

The deal also helps AOL and Microsoft put a few of their own troubles behind them.

Revenues at AOL fell to $2.2 billion in the first quarter, down 4.1 percent from the previous year, in part thanks to declining dial-up subscribers. AOL is still under investigation by the U.S. Justice Department and Securities and Exchange Commission over alleged accounting malfeasance in the way it booked revenue from advertising deals during the dot-com heyday.

For its part, Microsoft has one less legal headache in a batch of outstanding anti-trust cases regarding its tactics with its desktop software monopoly.

“Microsoft finally gets to put this lawsuit
behind it, and gets to push Windows technologies onto other platforms” with its AOL deal, said Gartenberg.

And, of course, the deal ends the Navigator-Explorer “browser wars.”

The Netscape issue “is simply not relevant at this point,” Gartenberg added. The Opera browser and Apple’s Safari browser “represent a more interesting story” for Microsoft.

The IE-Netscape “competition has been way overblown in past couple of years. The two companies really only compete on the fringes,” said David Smith, Microsoft analyst for research firm Gartner .

“Microsoft is a supplier of technology. AOL is a user of technology as a media company.” To talk about browser wars now is ridiculous, he said. “It is so off the map these days and out of the world of issues that people have. Very few people use [Netscape], very few care.”

What matters now, Smith added, is the what the future digital media landscape could look like, depending on how far the two companies decide to take their relationship.

“Far more interesting are the implications of this deal (with Microsoft’s) Digital Rights Management, and which media formats they will use together. Those could have a potentially huge impact on the market moving forward.”

If the companies decide to work more closely in the future, added Gartenberg, “the implications could be staggering.”

Erin Joyce contributed to this story

Updates to correct reference to the Opera browser

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