Microsoft and AOL Settle Netscape Suit

Microsoft Corp. will pay AOL Time Warner Inc. $750 million to settle an antitrust lawsuit alleging that the software giant unfairly crushed AOL’s Netscape Web browser.

In the settlement deal announced Thursday, the rivals also agreed to collaborate on digital media initiatives to thwart piracy, an important move as the Internet gains currency as an entertainment medium piping music and movies into homes.

Seen as a victory for both companies, the agreement resolves the biggest corporate fight over the demise of Netscape, which was one of the main subjects of the federal antitrust suit Microsoft settled last year.

The deal gives AOL needed cash and the security of an alliance with the world’s biggest software company at a time when unhappy shareholders have been questioning the leading Internet service provider’s basic strategy.

The settlement came together in the last two months after Microsoft Chairman Bill Gates called AOL Chief Executive Richard Parsons. Parsons said he was motivated by the realization that litigation “is rarely all that constructive” and that AOL would be better served by joining forces to fight digital theft.

“Music, theatrical video, television -- all of these things are ultimately going to be distributed in digital form,” Parsons said. “The major hurdle to the onset of that has been piracy.”

Analysts said the agreement was made possible by the ascent to AOL’s top ranks of former Time Warner publishing executives, who previously reported to Steve Case, former chairman of AOL Time Warner and architect of the online service’s success.

“Case wanted to divest himself of all Microsoft technology” at AOL, including Microsoft’s Internet Explorer Web browser, said Giga Information Group analyst Rob Enderle.

Now the priorities are different, he said. “There are much easier, more secure ways to deliver a variety of things -- music, movies, songs, whatever -- to the PC. That’s really the goal of both Time Warner and Microsoft. They view each other as much closer to partners than competitors.”

Sanford C. Bernstein analyst Charles Di Bona agreed. “Over the last couple of months, [AOL] has been de-emphasizing the technology side of their business, and this is a step in that direction.”

Said Gates, “A lot has changed in the past few years. There’s been some interest in a media company and a technology company taking some bold steps. Here we have Microsoft and AOL stepping forward.”

Under the agreement, Microsoft will extend AOL’s right to use Explorer in its Web service for seven more years, free of royalties. And AOL will be able to use Microsoft’s Media Player 9, which gives greater control than earlier versions of the video and music player over how content can be displayed and stored.

Executives at the companies said they hoped the collaboration on new digital-rights mechanisms would speed delivery of more content and cut into the soaring use of peer-to-peer networks that let users swap pirated content for free.

Other aspects of the deal include a provision that Microsoft distribute AOL start-up kits to some PC makers. Richard Doherty, analyst at Envisioneering Group, estimated that the move would put America Online software on 20 million additional personal computers next year.

Those computers come from small manufacturers that use Microsoft’s operating system but have no relationship with AOL, a group that supplies about one-third of the computers sold in the U.S. and more than half sold overseas, he said.

“This is a tremendous benefit to AOL, and you’d have to say, is it at the expense of MSN,” Microsoft’s competing Internet access service? Doherty said.

Financially, the deal is a small cost to Microsoft -- it earns $750 million every 25 days. AOL, on the other hand, carried $28 billion in long-term debt at the end of its March quarter and has been looking to sell off pieces of itself. The deal was announced after the close of regular trading.

AOL shares rose to $15.46 in after-hours trading after closing at $14.85 on the New York Stock Exchange. Microsoft eased to $24.32 in late trading after closing at $24.40 on Nasdaq.

One of Microsoft’s top priorities is to establish Windows Media as the dominant format for music and movies online. That would come at the expense of industry standards and such rivals as RealNetworks Inc. Although it’s made headway into Real’s business, particularly in the anti-piracy area, it hasn’t been able to win much support from AOL.

The agreement could change all that. “It’s absolutely huge,” said analyst David Smith of Gartner Inc., a technology research firm. “You can’t think of many companies they’d rather have on their side than AOL. It’s a well-spent $750 million, if you’re Bill Gates. He can certainly afford it.”

But there’s no guarantee AOL will do anything with Microsoft’s software. AOL executives said the deal wouldn’t affect its radio services, which use a format supplied by Dolby Laboratories Inc., or its subscription music service, which relies on Real’s technology.

Real Vice President Dan Sheeran said, “AOL has assured us this announcement does not change our relationship or what we’re doing together.”

Still, AOL has agreed to work with Microsoft and others to increase the amount of music and movies available over the Internet, another Microsoft priority. That means expanding current services as well as distributing high-definition movies on discs.

Microsoft has been pushing Hollywood for more than a year to use the Windows Media format to create high-definition versions of their DVDs that would play on computers and selected DVD players. AOL’s Warner Bros. already is distributing some pay-per-view movies online in Microsoft’s format, and one of its executives said this week that the company was considering Windows Media for high-definition discs.

Di Bona said Thursday’s deal hastened the day content will be managed the Microsoft way.

“Everything that’s digital starts to be managed in the same way,” he said. Once that happens, the means of distribution -- Internet service provider, cable system or DVD store -- becomes less important, and the content owners “can take more strength,” he said.

Based on work done at the University of Illinois in the early 1990s, the Netscape browser made it easy for ordinary PC users to navigate the World Wide Web. Netscape Communications Corp., which distributed the browser at no charge, sold stock to the public in 1995 and ignited the dot-com boom.

Microsoft responded by including its own browser in copies of its Windows software, an act federal courts held was an abuse of Microsoft’s monopoly power over operating systems. AOL bought Netscape and filed an antitrust suit in January 2002.