Microsoft and AOL: Friends again

Microsoft and Amer­ica Online set­tled their browser law­suit, putting an end to spec­u­la­tions that AOL would dump IE from its lead­ing client. As part of the deal, AOL receives a seven year royalty-free license to include Inter­net Explorer and will get an early peek at any­thing new in Red­mond. Most inter­est­ing to me in the dif­fer­ent reports I have read is the fol­low­ing state­ment from Bill Gates:

We have shared ideas on how to han­dle dig­i­tal media

. What exactly does that mean? I wish some­one else elab­o­rated on that point as it isn’t clear. Does it mean that they will col­lab­o­rate on devel­op­ment of joint ser­vices? Does it mean they will col­lab­o­rate in the devel­op­ment of joint product?

What­ever hap­pens is a bit wor­ri­some as we now have the two largest play­ers on the Amer­i­can Inter­net essen­tially join­ing forces. Microsoft has a com­mand­ing lead in the desk­top OS and the web browser mar­ket. AOL hold most of the remain­der of the browser mar­ket (yes, a few peo­ple out there use browsers like Mozilla, myself included), and has a sim­i­larly large lead in the IM and access mar­ket. The two of them join­ing forces leave cold beads of sweaty fear run­ning down my back.

Obvi­ous losers in today’s announce­ment are Yahoo, which will have to fight an uphill bat­tle in terms of mak­ing their mes­sag­ing client remain a viable option in a mar­ket where AIM and MSN mes­sen­ger will inter-operate, Real Net­works, which will have to fig­ure out how to makes its media player more com­pet­i­tive in the mar­ket­place (part of the agree­ment between Microsoft and AOL includes the right for AOL to use the Win­dows Media 9 soft­ware suite).

Sur­pris­ingly, few of the press reports seem to cover the point about Win­dows Media 9. This is pretty sig­nif­i­cant as it could play a major role in shap­ing the future of dig­i­tal media. At the cur­rent time, Microsoft is in a three way bat­tle with Real Net­works and Apple (which makes quick­time) for future supremacy over next gen­er­a­tion online audio and video. Offer­ing their media suite to AOL gives them tremen­dous lever­age as it could increase their mar­ket­shares by sev­eral mil­lions. Con­sider yesterday’s announce­ment that AOL was drop­ping Real from its part­ner lineup, it looks like Real will have to even­tu­ally trans­form itself to the point where let­ting go of its own tech­nol­ogy might make sense. At that point, only two play­ers will be left, with Microsoft becom­ing the dom­i­nant player in the arena, and Apple pick­ing up the remain­der of the mar­ket. Smaller for­mats, like Ogg Vor­bis, will remain the province of afi­ciona­dos but won’t gain much in the way of mar­ket­shares. The wor­ri­some part about all this is that DRM restric­tions on both end might get worse and worse as time goes on. I have already com­plained about Apple not dis­clos­ing what DRM setup it was offer­ing and it seems that they are already tight­en­ing the vise. I some­how doubt that a new alliance between Microsoft and AOL will be more magnanimous.

How­ever, it’s not all bad news. PC Mag­a­zine reports that AOL does not intent to close Netscape, which might be good, though it is not clear why they are doing so.