AOL, Microsoft settle for $750 m

SEATTLE: Microsoft Corp. said it would pay $750 million to AOL Time Warner Inc. to settle a 16-month-long antitrust dispute as the rivals agreed to work together on Internet-based media and technology.

The wide-ranging deal marked the end of one of Redmond, Washington-based Microsoft's most contentious legal disputes following last November's federal antitrust settlement. New York-based AOL Time Warner said it would use the settlement money to pay down part of its $26 billion in debt.

"The agreement we've reached marks a new phase of relations between Microsoft and AOL Time Warner," Microsoft Chairman Bill Gates said in telephone news conference. "It puts any past issues behind us," Gates said.

AOL Time Warner shares rose in after hours trade to $15.28 from the $14.85 close on the New York Stock Exchange. Microsoft stock eased to $24.28 from its Nasdaq close of $24.40. As part of the deal, AOL won a royalty-free license to use Microsoft's Internet Explorer browser technology for seven years. Microsoft will also distribute AOL's online service software discs with Windows that are shipped to the "white-box" personal computer manufacturers that make customized PCs from off-the-shelf components.

Analysts said the deal appeared to have been made easier by the departure of America Online co-founder Steve Case, who had built up the Virginia-based Internet services provider as a technology company that competed aggressively against Microsoft. Case, whose company bought Time Warner Inc. in 2001, stepped down as AOL Time Warner chairman in May.

AOL had charged Microsoft with abusing its monopoly power against Netscape, a Web browser that AOL bought in 1999 when Microsoft's Internet Explorer was already overtaking it as the dominant browser.

'BEST-CASE SCENARIO'

"This is the best-case scenario for Microsoft and AOL Time Warner -- exploiting Microsoft software technology and AOL's ability to capture and hold an online audience," said Dwight Davis, an analyst at Summit Strategies.

The AOL antitrust lawsuit, filed in January 2002, called for monetary damages as well as for competition to be restored in the market for Web browsers. Netscape pioneered a browser for mainstream users, which touched off the explosive growth of the Internet in the 1990s.

"To me this clears up, although at great cost, a nagging issue with AOL. Clearing the air is a definite positive... Investors will like that," said Bob Austrian, an analyst with Banc of America Securities.

Microsoft also said it would open data from "beta" or trial versions of its Windows operating software to AOL and let the company help develop the next generation of Windows, known by the code name "Longhorn."

While much of the deal represented concessions that Microsoft gave to AOL, both sides emphasized that Thursday's agreement hinged on their shared interest in creating a bigger and more efficient market for digital media on the Internet, including access to songs and movies.

Analysts said the licensing of Microsoft's technology would give it and AOL an edge in competing against entrenched digital media software and service providers such as RealNetworks Inc. and Apple Computer Inc.'s iTunes service.

Dan Sheeran, Vice President of marketing at RealNetworks, said the Seattle-based company's relationship with AOL remained intact: "We work a lot with AOL in many different areas and AOL has assured that this announcement does not change that."

PIRACY PREVENTION

AOL Time Warner Chairman and Chief Executive Dick Parsons said the alliance with Microsoft was aimed at making it easier for media companies to embrace digital distribution, avoiding the kind of rampant piracy that the music industry blames for undercutting CD sales.

"Until we can figure out how we can create an environment that is secure across multiple platforms, we aren't going to be able to expand the market and explore new technologies. And that what this is about," Parsons said.

Other analysts said that the deal was also a recognition of Microsoft's overwhelming strength in software and AOL Time Warner's dominance as the world's largest media company.

"I think it's more like the enemy of your enemy is your friend," said Jamie Friedman, an analyst with Fulcrum Global Partners. "What AOL has that Microsoft needs is the broadband carriage and the digital assets. What Microsoft has that AOL needs is the ability to actually use those digital assets through software."

Sun Microsystems Inc. said it would press ahead with its own pending antitrust lawsuit against Microsoft despite the AOL settlement.

© Reuters