Update: AOLTW, MS settle Netscape suit

Microsoft will pay AOL Time Warner (AOLTW) $750 million to settle a private antitrust suit filed on behalf of Netscape Communications by America Online in January 2002, the companies announced Thursday. 

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As part of the deal, AOLTW's America Online Internet division will receive a royalty-free, seven-year license to use Internet Explorer with AOL's client software, the companies said. They will also work together to make their respective instant messaging clients work together, though "no time frame has been set for that," Microsoft Chairman and Chief Software Architect Bill Gates said at a press conference to discuss the deal.

The industry giants will also collaborate on long-term initiatives for distributing digital media to consumers, and to support new business models for content owners, the companies said. Microsoft will further provide AOL with a new worldwide distribution channel for software to certain PC users, and provide technical cooperation and information "to ensure the best possible AOL member experience on current and future Microsoft operating systems."

The antitrust suit, filed in U.S. Federal District Court for the District of Columbia, alleged that Microsoft harmed Netscape's browser business through anticompetitive practices related to the Windows operating system. That suit was filed after a U.S. District Court ruled that Microsoft engaged in anticompetitive practices in violation of federal antitrust law and illegally used its Windows operating system monopoly. Using that case and the subsequent appellate ruling that upheld the District Court findings, Netscape argued that Microsoft's practices "resulted in harm to competition and antitrust injury to Netscape in particular."

Discussions between Microsoft and AOLTW had been under way for six to eight weeks, AOLTW Chairman and Chief Executive Officer Dick Parsons said in a news conference.

Observers were not surprised that a deal had been struck.

"It was one of those things that cried for a settlement," said Mark Ostrau, a partner and chair of the antitrust practice at Fenwick & West, in Mountain View, Calif. "It was in neither party's interest to go through a protracted legal battle here."

AOL was "staring in the face of a very long and protracted legal battle with Microsoft for which most of the management probably had little appetite. They needed to solve problems today, and this case was not going to be resolved any time soon," Ostrau said.

One aim of the agreement is to develop what the companies call a "digital media environment" that is free from piracy, open to companies across various industries and provides consumers with access to content. AOLTW will use Microsoft's Windows Media 9 Series and future software to create, distribute, and play back digital media under a long-term, nonexclusive aspect of the deal.

"We've not been able to get our arms around the piracy issue, and I think by agreeing to work cooperatively together ... we can begin to make a real positive statement and step in the direction for creating a world where content can be distributed digitally to consumers," Parsons said during the press conference.

AOLTW and Microsoft will also "explore ways to establish interoperability" between their respective instant messaging clients, according to a statement, though a timeframe for that has not yet been established, Gates said.

AOLTW's Netscape division will continue operations, Parsons said. "We have been looking at ways to maximize the value of what we already have there," Parsons said, though he stopped short of saying what specifically AOLTW planned to do with the Netscape group. "We have no plans to get rid of the Netscape unit at this point," he said.

The deal further underlines AOLTW's move away from technology development, said Matt Rosoff, an analyst with Directions on Microsoft. "I think the Netscape unit is a loss," he said. "I think that AOL's current management is not interested in being a technology company."

The collaboration between AOLTW and Microsoft will not end AOL's work with RealNetworks, Parsons said. "This gives us the opportunity to expand the loop and work more cooperatively with Microsoft as well in some of these areas -- none of these are exclusive kinds of arrangements or deals," Parsons said.

Analyst David Smith of Gartner said he wasn't surprised by the settlement news. "We've been on the record predicting that these two companies are far more likely to end up as partners than competitors," he said.

As for the monetary part of the settlement, $750 million is "nothing" for Microsoft, he said.

Fenwick & West's Ostrau agreed. "Microsoft got off cheap," he said. "Microsoft got off very cheap in this deal."

-- Stacy Cowley in New York contributed to this report.