AOL/Microsoft battle looms

AOL Time Warner and Microsoft could end up at war if current talks over co-bundling fail. The pair are currently discussing terms on bundling each other's software within Microsoft's operating system and AOL's online service, but have already missed their original 1 June deadline.

Sources close to the negotiations have warned that the pair may not reach an agreement in time to complete the process before Windows XP hits the streets.

AOL wants to renew an agreement signed with the Redmond giant in 1996 that ran out in January, but Microsoft may have already decided to integrate its own instant messaging client into Windows XP. Both companies also have rival media players.

Discussions, already said to have been broken off once, are yet to involve senior executives and there are substantial differences, sources said.

The problems are exacerbated because any eventual agreement may not be signed in time to be worked into Microsoft's development schedule. Windows XP is slated to launch on 25 October and beta testing time is running out, with the first release candidate due later this month.

Analysts disagree on the implications of a breakdown in talks for the two companies and the public.

Merrill Lynch analyst Henry Blodget said that bundling further technologies would be a more aggressive move by Microsoft than its decision to bundle its Internet Explorer web browser with Windows, which triggered its legal fight with the US government.

Other analysts, however, have said that AOL was unlikely to pursue antitrust claims because of its own dominant position.

Even more diverse positions have been adopted on how a failure to renew the agreement may affect consumers. Gartner analyst David Smith said that if talks do breakdown "consumers should prepare for a major war between the two internet heavyweights".

But Jordan Rohan, head of media research at Wit Soundview, said that "if these two companies are not working together, and not creating products that work together, the consumer hurts, and the government will have something to say about that. Microsoft and AOL will find a way to work within each other's platforms."

Smith explained that, while most of the time AOL and Microsoft do not compete, the impending launch of Windows XP and Microsoft's ambitious HailStorm initiative, which establishes a secure online identity for users that is necessary to support for-pay web services, took Microsoft into AOL's territory.

"The companies are fighting over the consumers of the future. AOL and Microsoft want to control new potential platforms, such as media players and IM clients," he said. "Because the future of the pay-as-you-go internet is at stake, consumers and vendors should expect continued clashes between AOL and Microsoft."

"The struggle will unfold on several battlefields: in the courts, through further negotiations and even with deals," he continued. "The deal under negotiation, which is apparently on the brink of collapse, would not have settled all their differences. That could take many, many years."

However, Rohan said the fortunes of the two are too closely intertwined for either to stomach a major falling out, and that the US government would bang their heads together should differences affect consumers.