Microsoft, AOL Make Nice with $750 Million Settlement

In a scene reminiscent of Microsoft's 1997 investment in Apple and associated patent settlement, Redmond announced that it will pay AOL $750 million as part of a wide ranging deal in which AOL will drop all pending litigation against Microsoft.

AOL will receive a royalty-free seven-year license to continue using Internet Explorer in its client software, and license to use Windows Media 9 Series technologies. The companies have also agreed to establish interoperability between AIM and MSN Messenger.

The settlement puts an end to the January 2002 antitrust lawsuit filed by AOL on behalf of Netscape, claiming illegal conduct by Microsoft destroyed Netscape's ability to compete in the browser market.

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By agreeing to the continued use of Internet Explorer, AOL effectively puts to rest the company's longstanding plans to transition AOL client software service to its own Gecko browsing technology used in Netscape. AOL's original license to use IE expired on January 1, 2001, and the companies failed to reach a new agreement. "AOL can use any browser technology they want in their client," Microsoft spokesperson Jim Cullinan said at the time.

As first reported by BetaNews, AOL worked hard to develop browser agnostic technology dubbed Komodo that would support Gecko, even testing the technology in beta versions of the service. But its efforts have met with little success and AOL's main Windows client continues to use IE.

AOL says it will not close its Netscape unit "at this point," which means development of Gecko and support for the open source Mozilla browser are likely to continue.

The new license to use Internet Explorer also means AOL will work alongside Microsoft engineers with full access to the Windows source code to optimize the performance of AOL on Windows. Microsoft will provide to AOL beta versions of its operating systems and offer detailed development information pertaining to Longhorn at the same time as other software vendors.

Microsoft and AOL will additionally establish an "Executive Council" that meets periodically to jointly resolve support and other development issues.

AOL will not, however, gain a key concession it has sought from Microsoft - direct placement in Windows. Instead, AOL discs will be provided to small computer manufacturers building Windows PCs. After being dropped from Windows XP in early 2001, AOL attempted to finalize a deal with Microsoft for desktop real estate. But talks fell apart when Microsoft demanded AOL open its instant messaging network to MSN.

This time around, things are different. As part of the deal, AOL will work with Microsoft to enable communication between AOL Instant Messenger and MSN Messenger "in a manner that will protect consumer privacy, security and network performance."

Interoperability would give Microsoft access to AOL's 32 million AIM users as the company works to bolster its consumer IM offerings with MSN Messenger 6.0, currently in beta. However, no timeline has been set for a joining of the two networks.

"A lot has changed in the last few years, not only in the marketplace, but also for Microsoft and AOL Time Warner," said Microsoft Chairman and Chief Software Architect Bill Gates. "We're pleased to reach this new agreement that's forward looking and provides for a higher level of technical cooperation while, at the same time, the companies will continue to compete in a number of areas. A particular area of importance is making it easy for consumers to get digital media on the Internet."

Microsoft will garner a wider audience for its media formats in the deal. AOL receives access to Microsoft's digital rights management technologies, as well as Windows Media 9 Series audio and video. AOL has already begun to expand its digital media offerings in a beta version of AOL 9.0 with the addition of QuickTime, and Windows Media is likely to follow.

"We welcome the opportunity to build a more productive relationship with Microsoft," said Dick Parsons, AOL Time Warner Chairman and CEO. "Our agreement to work together on digital media initiatives marks an important step forward in better serving consumers and protecting the interests of all content businesses."

Parsons says AOL's agreement with Microsoft does not mean it will cease doing business with RealNetworks. An older version of RealPlayer currently ships with the AOL client software.

"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," Parsons said.

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