Microsoft, AOL Wrangle Over IM, Digital Media

The browser may have brought Microsoft and America Online to the bargaining table in January, but it's the fate of Windows XP, digital media, instant messaging and a new generation of Internet services that's kept the giants jostling for the last six mont

The browser may have brought Microsoft and America Online to the bargaining table in January, but its the fate of Windows XP, digital media, instant messaging and a new generation of Internet services thats kept the giants jostling for the last six months.

Its also left some industry observers predicting that RealNetworks, which pioneered audio and video delivery over the Internet, will suffer the same fate as Netscape Communications — the company that pioneered Web browsing and became a footnote in Internet history.

While the licensing negotiations between Microsoft and AOL have more subplots and twists than a daytime soap opera, theres no confusion over Microsofts goal: to protect and extend its operating system (OS) franchise.

In the late 90s, that goal was accomplished by making its free, stand-alone Internet Explorer browser a part of its Windows OS. But Microsofts browser-OS integration came at a price: the 1998 antitrust trial by the U.S. government. A final decision in the case, in which a trial court called for the breakup of Microsoft, is due from the U.S. Court of Appeals soon.

Microsoft appears so confident it will win its appeal that it has already announced plans to incorporate other free, stand-alone technologies — including its IM software and its Windows Media audio and video player — in Windows XP, a new version of its OS scheduled to ship Oct. 25.

But standing in the way of Microsofts XP ambitions are AOL and RealNetworks, with AOL stoking its own ambitions to be a dominant digital media purveyor.

From its side of the bargaining table, Microsoft acknowledges it is working to renew a 1996 licensing agreement that put its Internet Explorer browser in the client software now used by AOLs more than 29 million users. But reports have been circulating that the company is also asking AOL to enable its popular AOL Instant Messenger software to talk to the Windows Messenger software, which Microsoft said last week it is building into Windows XP.

Microsoft also reportedly wants AOL to agree not to pursue legal action against the company and its new OS. AOL has told Washington lawmakers that Windows XP is "anti-innovation, anticonsumer and anticompetitive," claiming Microsoft is taking advantage of its OS monopoly position to move into new markets.

In addition to AOLs antitrust concerns, Windows XP is already attracting criticism from Internet companies that object to a feature called Internet Explorer Smart Tags, which modifies Web sites by providing links to related sites that Microsoft has chosen.

Microsoft and AOL said they are not commenting on the negotiations, but AOL insiders maintained that the company is not concerned. "When we did the deal with Microsoft five years ago, we didnt have the relationship with [PC manufacturers] that we do today," one insider said. "We also didnt have the retail distribution for the service that we have today."

"Theres a much bigger game at play here than we saw with the browser five years ago," said Steven Vonder Haar, director of media and entertainment strategy at The Yankee Group. "With XP, Microsoft is starting to see digital media as a key application that can encourage usage of future generations of its operating system. To the extent they can weave audio and video applications and IM into the OS, they give additional users additional reasons to buy new copies of Windows."

To win AOLs support, Microsoft is dangling in front of AOL the same carrot that it offered in 1996 — placement of the AOL service in the consumer version of Windows XP.

The problem is that AOL doesnt really need the vegetable intake. AOL no longer needs the help selling consumers on its service that it did five years ago. If Microsoft does not choose to bundle AOL in Windows XP, AOLs popularity will enable it to cut its own bundling deals with the major PC makers. And AOLs 1999 acquisition of Netscape for $10 billion in stock gave the company a bargaining chip it did not have before: its own browser.

Microsoft is also asking AOL to include support for Microsofts Windows Media file format in the AOL client software, which would allow AOL subscribers to view audio and video content published in Microsofts proprietary format. The current generation of the online access software, AOL 6.0, supports competitor RealNetworks RealPlayer streaming technology as part of a July 2000 agreement that also saw AOL deploy RealSystem 8 servers throughout AOLs network.

"Media format is an issue," Microsoft spokesman Jim Cullinan said last week. "And we do believe it would be in the best interests of our mutual customers [for AOL] to support other media formats — including Windows Media format."

If AOL opts to support the Windows Media format within its client, it would likely do so in addition to and not in lieu of RealNetworks format — at least for now. AOLs agreement with RealNetworks comes up for renewal this July, sources said, and AOL could at that time offer Microsoft Windows Media favored nation status — if it decided that doing so would help it with its negotiations with Microsoft.

For its part, RealNetworks said its not worried that negotiations between Microsoft and AOL might jeopardize its relationship with the media giant.

"We have a very deep, very broad and very long-standing relationship, looking backward and forward, with AOL. Its a multiyear signed agreement with AOL, which encompasses a wide variety of things," said Adam Selipsky, solutions marketing manager at RealNetworks.

But RealNetworks does have things to worry about. Microsofts bundling of its Windows Media technology in Windows XP, and its ability to offer its servers to enterprises with its Windows 2000 licenses have given Microsoft a boost in the enterprise space.

Convenience, in part, is driving enterprise customers to Microsoft, said Greg Howard, a founder of consultancy The HRTC Group. "Whenever a company buys Windows 2000 Server, the streaming is included. The players for Microsoft [Windows] Media are free and included with the OS," he said.

Another problem both face is an industry push toward standards for streaming media. Today, content providers may need to support up to three media architectures — Apple Computers QuickTime, Microsofts Windows Media and RealNetworks media systems — to deliver content to users, who in turn must have each of the players to view content .

That troika of media delivery standards cannot continue indefinitely. "Theres a lot of near-term posturing to buff up whatever youve got for sale," said Tom Jacobs, director of digital media services at Sun Microsystems and president of the Internet Streaming Media Alliance. "But over the long term, standards win out."