Microsoft hands AOL USD750 million to kiss and make up

30 May 2003

Microsoft [Nasdaq: MSFT] and AOL Time Warner [NYSE: AOL], two of the world’s largest corporations, yesterday came to a historic agreement to put the long running battle of the internet browsers to bed. Microsoft’s aggressive promotion of its Internet Explorer browser over Netscape, AOL’s own browser subsidiary, started in the 1990s and resulted in Bill Gate’s company being found guilty of breaking antitrust laws for illegally maintaining its monopoly in home computer operating system software. The two media giants have knocked heads repeatedly in the intervening years, but now it seems a truce has been called, with Microsoft agreeing to pay AOL USD750 million to make amends for its conduct. However, the payment is part of a broader deal that will see AOL’s internet service adopting Microsoft’s Windows Media technology and browser, whilst Microsoft has pledged to ensure that AOL will work well with its Windows operating system, effectively signalling the end of Netscape, despite the company’s protestations to the contrary. Microsoft will continue to market its MSN internet service as a rival to AOL.

The deal will be viewed by many as a softening in Microsoft’s stance, but the logic behind its decision suggest the exact opposite. USD750 million is relative peanuts for a corporation that is cash rich to the tune of USD46 billion, with a further USD1 billion rolling in each month. Contrastingly, the payment is vital to AOL, which is struggling to reduce the USD26.3 billion debt legacy of its rapid expansion. And whilst Microsoft’s promotion of its rival’s internet service will no doubt help reduce that debt further, it is the adoption of Windows Media by the world’s largest ISP that has provided the impetus for Microsoft’s change of heart. The potential establishment of Windows Media as the standard for digital media will eventually make it easier for companies to charge for digital content. And, in the end, that is where the real money is going to be made.