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The negotiations between Microsoft and AOL Time Warner over the placement of AOL software within the Windows XP operating system have reached a bitter and revealing impasse. Sources at both companies confirmed Monday that Microsoft has tried to impose as a condition of any deal that AOL not lobby the government to take continued antitrust action against the Redmond, Wash.-based software giant. “They want release from legal liability going backward and forward in time,” says one AOL executive close to the negotiations. “There aren’t many companies who would relinquish their legal rights as part of a business negotiation.” The timing of this disclosure is extraordinary. Microsoft is awaiting a verdict by the U.S. Court of Appeals for the D.C. Circuit in the Department of Justice antitrust suit, the result of which could be announced any day. Key issues in that case included the bundling of the Internet Explorer browser with Windows, resulting in the precipitous decline in market share of the rival Netscape Navigator browser, now owned by AOL. Another point of contention was Microsoft’s control over what computer makers could put on the first screen of their machines, an issue still alive in current negotiations over Windows XP. The willingness of Microsoft execs to demand immunity from legal pressure and to allow that stipulation to leak out suggests a confidence that the appeals court will rule in its favor. The demand also betrays a profound nervousness about future court challenges and a burning desire to bury its legal problems forever. The subject of the closed-door talks is renewal of a 5-year-old deal that put AOL inside Windows and makes Internet Explorer AOL’s default browser. The original deal expired in January. A new deal would govern the relationship of AOL to Windows XP, an enormously important product release for Microsoft with a huge marketing budget, due for release Oct. 25. The issues at stake cover the broad range of overlapping interests between the two giant companies. Will AOL come bundled as part of the operating system, accessible from the Start menu? Will the AOL client software work optimally with the new OS? Will AOL use Internet Explorer as its default browser or jump to a new version of Netscape’s? Will AOL preserve its exclusive arrangement with RealNetworks for streaming audio and video technology or add support for Microsoft’s competing Windows Media Technology? And most controversially, will AOL stop trying to whip up further antitrust concern on Capitol Hill, as it has been doing since at least last fall? “Any discussion will take into account the broad range of issues,” says a Microsoft source, who asked for anonymity. “Nothing will happen in isolation.” The negotiations are directed for Microsoft by Windows group VP Jim Allchin and for AOL by company President Ray Oglethorpe. The talks, which were happening in Denver, broke down last Friday and the negotiators returned to Reston, Va., and to Redmond. Over the weekend, they resumed by phone. Sources close to the negotiations say it isn’t likely that further talks will be protracted; a final outcome is expected within a week. AOL says that bundling its desktop software with the OS is not as important to the company now as it was when the original deal was struck. “If it happens, great. If not, that’s fine,” says an AOL exec, who also requested anonymity. If AOL is not bundled with Windows, he suggested, it now has the clout to do separate deals with the computer makers to pre-load the software on their machines on top of the operating system. “Microsoft would have no say,” says the AOL source. Bundling with Windows, he asserted, made an “infinitesimal” contribution to AOL’s new subscriber base last year. “We are very confident of our position in the marketplace,” the AOL source added. “In the competition between MSN and AOL, we’ll do just fine irrespective of how Microsoft tries to use its operating system monopoly to advantage its service.” But excluding AOL from Windows is only part of what Microsoft can do. The other part is what Microsoft chooses to put in. Inclusion of new Microsoft software in the operating system could have great bearing on the future of AOL. On Monday, Microsoft announced that Windows XP will include a single interface called Windows Messenger enabling real-time communication among users. Both instant messaging and the capability to collaborate on shared files and applications will come bundled with the new OS. That means every computer sold with Windows XP will now serve as a distribution point for a wide range of Web services that depend upon network awareness of the user’s presence and identity and the ability to exchange information in real time. This is central to Microsoft’s .Net strategy and its HailStorm services initiative. It represents a long-term challenge to AOL’s ambition to be the leading provider of online services (including instant messaging). Even as these sensitive talks go on, Microsoft executives listen with acute attention to the news every Tuesday and Friday morning, when the Washington, D.C., court announces its decisions. If the talks with AOL fail, then even if the appeals court rules heavily in Microsoft’s favor, that might not be the end of antitrust claims. Related Articles from The Industry Standard: AmEx Working Its Way to the Middle Orbitz Stokes Web Airfare Wars, Critics Say Judge Overseeing Microsoft Appeal To Leave Post In July Copyright � 2001 The Industry Standard

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