Two Gorillas Make Nice

Last week the technology elite gathered in Carlsbad, Calif., for a Wall Street Journal technology conference. Nobody gave it a second thought that some of the Microsoft people seemed to be hanging around folks from America Online just a little too much for blood rivals. But second thoughts were in order. Just after the conference closed last Thursday, the two biggest and fiercest competitors in the digital world veered sharply from a collision course for an ugly court battle over Microsoft's anticompetitive behavior. Instead, they announced that AOL Time Warner was dropping its antitrust suit (a follow-on to the federal case lost by Microsoft) and entering a collaboration with Bill Gates and company that involved digital-property protection, licensing agreements and distribution arrangements.

Both sides are talking like winners. Microsoft gets to spin an embarrassing payoff for misconduct into a sweeping technology alliance with the world's biggest Internet provider. (The $750 million recompense didn't even make the first page of the joint press release.) AOL, burdened by a crushing $25.5 billion debt, pockets a nice chunk of change for a company trying to maintain its credit rating.

Beyond the financial aspect, there's hope that the two rivals can work together. This development reflects both Microsoft's desire to be seen as a good corporate citizen and AOL's contention that CEO Dick Parsons is changing its culture from cantankerous to constructive. Still, AOL made sure that it nailed down Microsoft's assurance that it would have sufficient access to upcoming versions of Windows--so future iterations of AOL would work smoothly. Microsoft execs insist that they would never never withhold information, but as one AOL exec says, "We wanted it in writing."

Microsoft, meanwhile, is jubilant that the deal sets the stage for AOL to adopt its schemes for digital-rights management to protect movies and music distributed over the Internet. It's not yet clear to what extent these technologies will find their way into the AOL services, but Microsoft people are already converging on Hollywood to help Warner Brothers fortify its flicks. The idea is that other studios and labels will come onboard, and the Softies will be the leaders in the field.

Ironies abound in the settlement, which was months in the making but accelerated by Bill Gates's personal call to the negotiation-minded AOL honcho Parsons earlier this spring. The heart of AOL's case was that Microsoft clobbered the once dominant Navigator browser made by Netscape (which AOL bought in 1998 for $4.2 billion in stock). But since last week's agreement extends AOL's license to use the Microsoft Internet Explorer as its built-in browser, prospects for a rejuvenated Navigator are nil. (Parsons, when asked at a press conference whether he will kill Netscape, could only manage, "Not at this point.")

Finally, the two parties agreed to explore whether their respective instant-messaging systems would work with each other. Don't hold your breath. AOL, with a dominant market share, has consistently ducked its promises to make its AIM system play nice with other schemes. Its people believe that if they opened things up, Microsoft would unfairly make use of its Windows monopoly to grab market share, making AIM as dead an issue as, well, Netscape. Ah, friendship.