-Caveat Lector- ------- Forwarded message follows ------- From http://www.economist.com/business/PrinterFriendly.cfm?Story_ID=666566 }}>Begin Microsoft and AOL >From friends to foes Jun 21st 2001 | SAN FRANCISCO >From The Economist print edition The two technology giants are set to become bitter enemies IN 1996, AOL and Microsoft cut a deal that made high-tech history. AOL agreed to build its service around Microsoft’s web browser, Internet Explorer. In exchange, Microsoft gave AOL’s software prominence on its Windows operating system. The arrangement boosted both firms. It helped Microsoft to win the browser war against Netscape, and it helped AOL to pick up millions of new subscribers. The failure of the two companies to renew their deal, which was announced on June 16th after weeks of negotiations, could prove just as significant. It is true that the absence of an agreement will have only mild short-term consequences: although AOL’s software will not now be attached to Windows XP, Microsoft’s new operating system, due out on October 25th, AOL (now AOL Time Warner) can still strike deals with PC makers to load the program on to their machines. Rather, the impact will be felt in the long run. The collapse of the talks could signal the beginning of a titanic battle between the two firms. Both parties had hoped to gain something from a new agreement. AOL wanted once more to ensure that its software had top billing on computer screens; Microsoft’s main objective was to use AOL to gain market share for its W indows Media Player, a program that lets PC users listen to music or watch videos. Microsoft wanted AOL, among other things, to offer its audiovisual content in a format that can be played by Windows Media Player. For now , this content works only on software provided by RealNetworks. Why the negotiations failed depends on whom you ask. AOL says it was because Microsoft wanted to banish RealNetworks’ music-and-video program from AOL software so that Microsoft could gain “as much control of music on the Internet as possible”. Nonsense, retorts Microsoft. Several issues led to the collapse of the negotiations, it says, not least that AOL refused to make its instant-messaging service inter-operable with Microsoft’s becaus e it hopes to continue to dominate this technology. Spinning aside, the convergence of software and online services has put the two companies on a collision course that makes it hard to cut deals. Microsoft, having realised that winning the browser war was not enough to gi ve it control of the Internet, is increasingly encroaching on AOL’s territory. Windows XP comes bundled with many of the services AOL offers, including new instant-messaging features. The battle could turn bloody. Much of it may be fought not in the marketplace, but in court. According to AOL insiders, the firm had agreed not to sue Microsoft on antitrust so long as the two companies had a technology-s wapping pact. Now it is free to let its lawyers loose. Only recently, AOL gave warning that Microsoft was again abusing its Windows monopoly to push into new markets. A similar claim set off the government’s big antitrust trial against the software giant (in which the appeals court is expected to rule any day now). If war now looks inevitable, it is also unfortunate. A clash between AOL and Microsoft would be bad for consumers, because it could leave them having to grapple with competing standards. PC users want to see the two companies developing common technical rules and competing on implementation, rather than each trying to dominate the standard for online music, instant messaging and so on. Sadly, that looks less likely than ever. Copyright © 1995-2001 The Economist Newspaper Group Ltd. All rights reserved. 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