AOL, Microsoft Work on Hurdles

Move closer to deal bundling AOL client, XP

Microsoft Corp. and AOL Time Warner Inc. moved closer last week to an agreement to bundle the AOL online service client with the forthcoming Windows XP operating system, which would significantly strengthen the two most powerful online companies.

But sources close to the negotiations say the deal is facing big hurdles as well as opposition from senior executives within Microsoft, including Jim Allchin, the companys senior vice president for Windows.

Despite the win-win prospects of the deal for the pair, some of the snags in the negotiations may be rooted in a long-standing beef. Internet service providers, including AOL, whose offerings were bundled with Windows 95 had agreed to certain marketing conditions in return for placement in the operating system. Microsoft is believed to feel that AOL did not live up to the agreement, sources said.

"Allchin oversees the Internet Explorer team and is trying to make AOL live up to some of the marketing relations that they never did under the Windows 95 agreement even though [the marketing relations] formed part of the original contract," one source said. "What AOL wants from Microsoft is the opening of [IE] and the disclosure of plans on future versions of MSN [Microsoft Network] Explorer. The whole deal hinges on IE and MSN, as these compete with AOLs offerings."

Allchin did not respond to requests for comment by press time.

The two companies control the two largest networks of sites on the Web—AOL Time Warners sites boast 69.3 million users, Microsofts 60.7 million. Such a deal was unexpected, given AOLs acquisition of a competing browser through its purchase of Netscape Communications Corp. in 1999 as well as the two companies intense rivalry over instant messaging.

Nevertheless, some kind of new marriage has business benefits for both sides, said Dwight Davis, an analyst at Summit Strategies Inc., in Seattle. AOL is the largest distributor for Microsofts IE browser, and AOLs client is based on IE. AOL, in turn, would lose the significant exposure it gains by being bundled on the XP client.

Despite Allchins and others reservations, representatives of the two companies have been negotiating for weeks, reviewing the list of bundling issues, including logistics and schedules, as they try to beat the clock to get AOL ready for the XP launch this fall, sources said.

The sources said that a verbal agreement was reached last week and that the formal contracts are being drawn up. In the interim, both sides are working to ensure that the products can be integrated if and when a final contract is signed. If not, the AOL client could be pulled from Windows XP at the last minute, sources said.

If AOL wants to meet the deadline for inclusion in Windows XP, it has to deliver the Steppenwolf client—a version of AOL 6.0 for Windows XP—by mid-July. This is necessary to ensure that Steppenwolf meets Microsofts internal deadlines and does not delay the Oct. 25 launch of Windows XP.

AOL spokesman Jim Whitney declined to comment. Microsoft President Rick Belluzzo would say little on what he described as "basically a rumor at this point."

Other issues the two sides are discussing include what exactly is to be included in the Windows XP OPK (OEM Pre-Installation Kit).

AOL, of Reston, Va., last week also sent an engineering team to Microsofts Redmond, Wash., campus to address firsthand the bundling and application compatibility issues that may arise, sources said. AOL is also considering a more permanent presence at the campus depending on the issues raised and developments around the contract negotiations, sources said.

One of the issues that sources said has still not been resolved is that the English language bundling of the AOL client on XP requires about 84MB, with another 42MB if the CompuServe online service is added. Microsoft has apparently informed AOL that there is only 70MB left on the XP CD.

As such, AOL is considering an improved single installer that would detect and install the required resources at install time, allowing a single installer for multiple countries. It is also looking at what can be removed from the bundled client to reduce its size.