May 25, 2001 3:10 PM PDT

Microsoft, AOL consider new alliance

America Online and Microsoft are in preliminary discussions to revise their long-standing partnership agreement, a move that could see renewed cooperation between the technology giants after a period of apparent discord.

Some of the issues on the table include the inclusion of AOL software on Microsoft's upcoming Windows XP operating system and AOL's use of Microsoft's Internet Explorer Web browser, sources familiar with the talks said Friday. However, these sources cautioned that the talks are at an early stage and may not lead to a deal.

The discussions highlight the sometimes-awkward alliance between the two companies, which compete vigorously in some markets but have called a truce in others. Their uneasy relationship recently faltered, but the companies appear to be attempting to work out a new deal to mutually benefit from their market leadership.

Specifically, AOL had a contract with Microsoft to use Internet Explorer as its default browser. In return, Microsoft agreed to bundle AOL software on the Windows desktop.

Microsoft has said the contractual agreement expired Jan. 1, 2001, and AOL declined to renew it. AOL is a unit of AOL Time Warner.

The rift between the two companies appeared to widen recently after details emerged that AOL was developing technology that would allow alternative browsers to be used on its online service.

Last month, internal documents showed AOL is developing software, code-named Komodo, that would allow the company and its CompuServe subsidiary to support multiple Web browsers. With the move, AOL appeared to be laying the foundation for browser options if a contract extension could not be struck with Microsoft.

Details of the latest round of discussions were first reported by BetaNews.

Another issue included in the talks involves AOL's possible support of Microsoft's Windows Media software, which delivers audio and video content on the Internet. Although no agreements have been inked, the possibility of AOL using Windows Media could signal a significant blow to RealNetworks, which is engaged in a market share battle with Microsoft.

RealNetworks has an agreement with AOL to be its exclusive streaming media provider. The contract, however, is slated to expire by mid-July, raising the question of whether AOL could strike a new deal to include Windows Media into its software. However, sources have emphasized that the streaming media discussions have not come close to being resolved.

"It's a big coup for any of these players to distribute their client software along with AOL's version," said John Corcoran, an equity analyst at CIBC World Markets. "If Microsoft gets to do it as well, even if it's side by side with RealNetworks, it's a big negative for RealNetworks."

Microsoft, AOL and RealNetworks declined to comment.

 

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