Microsoft Corp and AOL Time Warner Inc said they will stop bundling America Online software with the Windows operating system after the two companies ended talks that began six weeks ago.
Microsoft, the biggest software company, will stop distributing AOL software with Windows when a new version of the product goes on sale in October. One of the key stumbling blocks was a dispute over whether AOL would let customers access audio and video over its Internet service coded in a digital format championed by Microsoft.
The talks collapsed at a time when Microsoft is boosting investment in MSN, a unit the software maker has built into the world's second-largest Internet service provider after AOL. MSN recently offered discounts to America Online customers when AOL raised rates. Cancellation of the bundling agreement might cause some people to choose MSN because they won't look beyond their personal computer's pre-installed software to find an online service.
"This is going to make things more difficult for AOL," said Christian Koch, an analyst with Trusco Capital Management, which holds shares in Microsoft and doesn't own stock in AOL. "Having your product bundled with Windows is a big deal."
About 95 percent of the world's personal computers run on Microsoft's Windows operating system. AOL has 29 million members, up from 5 million when it started bundling its software with Windows.
America Online has played down concerns that ending the agreement will hurt its sales. The company "doesn't really use the desktop to get consumers," AOL Chairman Barry Schuler said Tuesday. "If we have a deal with them, that's great. If not, that's fine." The companies said they decided to abandon the talks today during a phone call between Microsoft Vice President Jim Allchin and America Online President Raymond Oglethorpe.
Microsoft officials wouldn't comment on the reason that the talks failed.
AOL blamed the failure of the negotiations on a dispute over deployment of rival digital music-and-video formats. AOL uses Real Networks Inc.'s Real Player and Microsoft wanted to let AOL users access its Media Player format.
The talks broke down over "Microsoft's insistence on gaining control of music on the Internet in a way that is similar to their control of operating systems on the desktop computer," said AOL spokesman John Buckley.
While Buckley wouldn't elaborate on the issue, an AOL official who spoke on condition of anonymity said that Microsoft demanded that its Windows Media Player be easier for AOL customers to access than the Real Networks digital music player. The AOL official said the company had agreed to make its video and music content accessible to users of the Windows Media Player.
Microsoft spokesman Vivek Varma wouldn't comment on the media player or other issues that came up in the negotiations.
A Microsoft official who spoke on condition of anonymity said that the software maker hadn't demanded that Media Player get preferential positioning on the AOL desktop. The Microsoft official said that AOL insisted that Time-Warner content be accessible only with the Real Player.
The AOL official who declined to be identified said the company had also agreed to a provision that would bar it from bringing antitrust claims against Microsoft over Windows XP during the term of the distribution agreement. The Microsoft official said no such agreement had been reached and that AOL insisted it has a right to sue for damages from Microsoft to Netscape.
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