AOL Marshals Troops Against MS XP Offensive

Corporate giants AOL Time Warner and Microsoft are set to face off in what could prove to be the most influential power struggle the Internet has ever seen.

What once started as a mutually beneficial relationship has deteriorated into intense fear and loathing, as Microsoft prepares to directly compete with the largest online service provider in the world, former ally America Online. Microsoft's upcoming Windows XP will be the first step taken toward integrating Web services directly into the OS, a move that has AOL struggling to respond.

While Windows XP looms on the horizon with an improved embedded media player and instant messenger, Microsoft has also been preparing to launch into beta HailStorm, an effort to bring Web-based services to the desktop. The initial services include myProfile, myAddress, myContacts, myInbox, myWallet, myDocuments, myCalendar, and others. Most importantly, seamless Passport authentication allows users to access HailStorm services by simply logging into Windows.

Threat of a HailStorm

For AOL, the threat of HailStorm's potential force is very real. By continuing to innovate, Microsoft is effectively phasing out the need for third party applications. If AOL is indeed excluded from Windows XP, new users will no longer be inclined to use the client; all AOL-like services will be readily available within the operating system through either bundled Microsoft software or HailStorm.

Microsoft refused to comment on whether the actions it was taking were intended to "box out" AOL from Windows.

Tension over competing products has existed between the two companies since the launch of MSN, but both had managed to put aside differences and work together. Microsoft offered AOL valuable showcasing within Windows in exchange for Internet Explorer being used in AOL client software. However, after the contract expired this January, discussions on renewal broke down.

Microsoft has no reason to renegotiate, with many analysts blaming the partnership for MSN's lack of success as an ISP. In addition, while it is easy to remove AOL from future versions of Windows, removing Internet Explorer from AOL is a long and arduous process.

AOL has had years to embed the browser and make the client as robust as possible, switching systems without proper testing could be catastrophic for customers. Internal memos viewed by BetaNews show AOL continuing to add full support for IE6, even while developing Komodo, a technology allowing AOL and CompuServe to use Netscape's Gecko browser engine.

OEM Limitations

To make matters worse, Microsoft has decided to revamp its policies towards featuring third-party applications within the operating system. OEMs will no longer be able to monetize desktop real estate or decide how many applications they can add to the Start Menu, which means if AOL wants exposure, it must go through Redmond.

Microsoft spokesperson Jim Cullinan confirmed this change, stating that XP "has a new User Interface marked by a significantly cleaned up desktop with no icons - including Microsoft's." He added, "So, While there may have been changes to the desktop the new rules apply to everyone - including us."

AOL had previously worked out deals with OEMs to guarantee registrations, including commitments numbering in the hundreds of thousands from major PC manufacturers.

AOL Forced to Take Action

BetaNews has examined an internal AOL call to arms document, outlining the company's possible strategies for dealing with Microsoft initiatives. Titled "(Preliminary) Summary OEM Strategy Response to .Net/XP" and sent to top-level executives at the company, the document exhibits the risk .Net poses to the AOL franchise.

Microsoft's (MS) new .Net strategy, coupled with the impending release of XP, presents a significant risk to the AOL franchise. By integrating and embedding traditional AOL functionality (e.g., email, IM, chat, wallet, calendar, address book, web browsing, content aggregation, media players, etc) into the OS and .Net initiative, Microsoft is essentially absorbing much of the AOL client based functionality into the OS. The boundaries that separate the OS and the Internet will disappear. The risk exists that the consumer will not see the value of using the AOL client for online activity and will simply use the default Microsoft solutions.

The document continues by outlining the current OEM situation, AOL's only leverage against the software giant.

MS is currently forecasting an RTM date of 7/25. If this date is attained, approx. 7-10 million PC's will ship with XP this fall. A number of OEM's have expressed concern regarding MS's intention to modify the OS in a manner that eliminates the OEM's ability to effectively monitize the Desktop. MS's intention to remove all icons from the Desktop, to remove the system tray, to control the number of preinstalled applications on the top level of the Start menu, etc...are seen as examples of this strategy. HP and Compaq have specifically indicated they are interested in taking steps "remonitize" the desktop.

Resist Assimilation

Seven possible options AOL can explore with OEMs are provided, followed by a set of minimum goals AOL hopes to achieve with out-of-box integration.

AOL begins by stating it can "Accept Assimilation" and "Partner with Microsoft to support their initiatives while gaining specific 'carve outs' for AOL."

By partnering with OEMs however, AOL has a wealth of options to fight Microsoft restrictions. One includes forming a "Coalition" with OEMs "to ensure AOL is the default application and service for all online activity, and that AOL has extensive presence throughout the OS." Another would involve replacing the default Microsoft desktop by working with a provider such as xSides.

Stalling XP

Two options in the document, which bring into question the ethics of AOL, entail stalling Windows XP deployment and adoption. If OEMs continue to offer Windows Me, "AOL can develop an appropriate XP solution." Likewise, the company proposes sending a "message to AOL members and the public that XP is "not ready" for broad adoption (i.e., has bugs, will not run AOL, will not run your existing software, will violate your online privacy, etc...)."

Perhaps the boldest option, AOL mentions it could "develop and launch a more esoteric solution such as an alternative OS or a modified MS OS."

AOL seeks to undermine several other Microsoft key initiatives as well, including having OEMs disable features such as the Active Desktop and lessening MSN's Start Menu presence. AOL additionally strives to have Winamp, AIM, and Netscape set as the default for their respective features, overriding Microsoft applications.

AOL Time Warner faces a new corporate schema where value and muscle of its properties have yet to be determined. Microsoft seems to have the upper hand, refusing to provide documents needed by AOL to complete work on XP-compatible clients and the OOBE. If not granted exemption from Microsoft's logo program, AOL inclusion may also force OEMs to sacrifice software rebates, a course of action most will be reluctant to follow.

When asked how the company feels about options AOL is exploring, Microsoft's Cullinan told BetaNews, "Like many companies in high tech industry we cooperate and compete with AOL. We have always said that AOL/Timewarner is a major competitor to us in various areas. If these documents are accurate they only reinforce our point that AOL will do whatever is necessary to preserve its 'walled garden approach'."

AOL plans to complete its new client, code-named Taz, in mid-August. Although as noted in internal discussions, about 70% of AOL members use PCs that do not meet Windows XP system requirements.

AOL responded to inquiries about the document and strategies, however denied any knowledge. "Management is not familair with these excerpts or the document referred to and they are not reflective of company thinking or strategy," stated AOL spokesperson, Ann Brackbill.

"It's not appropriate for us to comment on internal AOL docs," Cullinan noted, "we'll leave that to the AOL folks to explain."

While the outcome of these corporate games between AOL Time Warner and Microsoft remains to be seen, Internet users can be assured they will experience quite a show in the next year.

Aaron Dobbins, Craig Newell, and David Worthington contributed to this report.