May 30, 2003 1:35 PM PDT

AOL, Microsoft's peace a sign of times

Microsoft planted the seeds of Thursday's surprise antitrust settlement after a sweeping management shake-up at AOL Time Warner that culminated with America Online founder Steve Case announcing his resignation as chairman in January.

With Case on his way out, Microsoft founder Bill Gates made the first move to settle the case, phoning AOL Time Warner's then-chairman-elect Dick Parsons about two months ago to discuss a possible resolution. In announcing the $750 million settlement, Gates hinted that the change in the AOL guard may have helped the talks along.

"We have had good relationships with a number of the groups at AOL Time Warner, including Warner Music and the cable people, and this allows us now to take advantage of all the discussions we've had there," he said during a conference call with reporters. America Online was notably absent from Gates? list of friendly groups.

The AOL Time Warner that settled with Microsoft is a different company than the one that last year filed the private antitrust lawsuit seeking billions of dollars in damages on behalf of its Netscape Communications subsidiary. All of the key architects of the 2001 merger that created the company, including Case, have left or been demoted. In addition, the company's grand plan to dominate the media world with new technologies and Internet "synergies" are in tatters.

While the two companies framed the settlement in terms of a broad strategic shift for both, analysts said personality likely played a key role as well, given the long history of conflict between Gates and Case.

"With the last vestiges of AOL's top brass now gone, it paved the way for the legacy Time Warner executives to put this dispute behind them," said Mark May, an analyst at Kaufman Bros.

While details of the negotiations remain under wraps, Case's role seems to have been minimal. One source close to AOL Time Warner said Case was "informed every step of the way," but declined to comment on whether Case participated in the negotiations.

Since the mid-1990s, the relationship between Case and Gates ranged from uneasy partners to all-out adversaries. Gates once told Case that he would destroy AOL after being rebuffed from an acquisition proposal, according to published reports. Microsoft later launched the money-losing MSN Internet service to back up the threat.

For his part, Case has consistently dismissed MSN as a quixotic strategy du jour.

"I don't think between Case and Bill Gates there were more fierce competitors," said James Goss, an analyst at Barrington Research Associates.

Case's declining influence within AOL Time Warner may have played a role in spurring the settlement talks. During the Thursday conference call, Parsons said Gates called him about six to eight weeks ago to initiate talks that lead to the settlement.

"It seemed the opportunity to do something smart for both companies was present, so you take it," Parsons said.

While cash was the major component of the deal, the two companies also agreed to cooperate in developing new technologies. Microsoft gave AOL a seven-year royalty-free license for use of its Internet Explorer browser. AOL, meanwhile, licensed Microsoft?s digital media software, including its antipiracy technology, for use in possible future products.

As a result, Thursday's settlement appeared to signal that AOL's interest in developing new technology on its own is waning. AOL has spent billions of dollars on technology, acquiring Netscape and a handful of start-ups such as Mirabilis, the creator of the ICQ instant messenger, and WinAmp multimedia player developer Nullsoft. But those purchases have been a mixed bag, with few products becoming a significant contributor to the bottom line.

Microsoft, too, has seen its fortunes shift in the past few years. Once deemed all but invincible, it has shown signs of vulnerability as it struggles to make inroads into new businesses, such as handheld computers and cell phones, and as it fends off increasingly vigorous competition from open-source Linux software. In addition, it has faced a backlog of private antitrust lawsuits in the wake of a federal appeals court decision that upheld a lower court decision that it had illegally abused its monopoly power.

While it's debatable how much Microsoft has suffered as a result of its legal setbacks, it has obviously shifted its priorities. Notably, it has backed away from its media investments during the 1990s and has focused instead on its core software development efforts, in a bid to convince potential partners such AOL Time Warner that it cares more about distributing its digital media software than about competing with content owners.

 

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