AOL/Microsoft co-bundling talks collapse

AOL Time Warner and Microsoft have failed to agree terms on bundling each other's software within Microsoft's operating system and AOL's online service.

AOL said talks had reached an impasse over its inclusion of Real Networks' RealPlayer media player, a competitor to Microsoft's own player, Windows Media Audio 8, which will be included with Windows XP.

Microsoft said that no one issue killed the deal. The software giant said in a statement: "We are disappointed the discussions between AOL and Microsoft ended without an agreement on a broad range of issues between them."

However, John Buckley, corporate vice president at AOL, said: "The talks broke down over Microsoft's determination to control digital music on the internet."

The issue could trigger another three-way fight between Microsoft, its competitors and the US government similar to the ongoing internet browser battle.

Earlier this month, Gartner analyst David Smith warned that if talks were to break down, "consumers should prepare for a major war between the two internet heavyweights".

But Jordan Rohan, head of media research at Wit Soundview, said the US government would step in to ensure that relations between the two were not broken off altogether.

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 paid-for 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."