Battle For World Domination Joined

After 15 months of a brutal shakeout, the battle for domination of Internet content appears to be down to two companies: AOL Time Warner and Microsoft . So much for the democratizing power of the Internet.

And RealNetworks appears to be ground zero in the battle between the two giants.

Talks between Microsoft and AOL over a new distribution and sharing agreement collapsed over the weekend, which will likely intensify the fierce rivalry between the two.

Microsoft claims the talks fell apart over AOL’s refusal to make its instant messaging software compatible with Microsoft’s MSN Messenger. With 116 million registered users between the two services, there’s little doubt it was a significant issue in the talks, with Microsoft trailing AOL by a wide margin in that area (80 million to 36 million). AOL no doubt sees IM as a key element in maintaining its dominance over MSN and other rival service providers, and instant messaging is viewed by some as a communications platform with a great deal of potential for the future.

But AOL’s claim that the talks broke down over Microsoft’s insistence that AOL use Windows Media Player holds just a little more credibility, in our opinion. Both companies are developing online music subscription services, and AOL holds one huge advantage in this area: the impressive holdings of Warner Brothers and Warner Music Group, among other holdings. The online audio and video market is potentially worth billions, and AOL didn’t acquire Time Warner to hand the advantage to Microsoft.

And then there’s the small matter of RealNetworks. AOL has a multi-year deal with RealNetworks to use the company’s RealPlayer software. For AOL, Microsoft’s insistence that AOL use Windows Media Player smacks of another first-mover in the Internet software space that was hounded by Microsoft: Netscape Communications Corp., acquired by AOL after Microsoft’s brutal campaign against the company, which became the focal point of the Justice Department’s antitrust case against Microsoft.

Noticing a pattern? Microsoft uses free software to gain an edge over an established Internet software rival, wreaking havoc on the rival’s business model. AOL defends the incumbent to maintain its own dominance, even acquiring the battered Microsoft rival, if necessary.

It’s a shame it’s come down to this yet again, but I guess we should have seen it coming.