UPDATE The final collapse over the weekend of the talks between AOL Time Warner and Microsoft came as no surprise. But the ultimate cause of the breakdown is a matter of importance and controversy.
AOL insists that the deal-breaker was Redmond's insistence on the removal of the RealNetworks media player from any AOL software to be included in the upcoming Windows XP operating system.
That point crucially reduces the breakdown of the talks to a question of whether Microsoft was being anticompetitive, attempting to limit consumer choice on the Internet. In AOL's version of the discussions, Microsoft's tactics are akin to the way it made deals with computer manufacturers in the mid-1990s to deliberately exclude another third-party competitor, Netscape.
"It was more important to them to have their digital media plans supported than it was to us to have AOL bundled with Windows XP," said John Buckley, a corporate VP for AOL Time Warner.
Microsoft spokesperson Jim Cullinan confirmed that the RealPlayer was a point of contention but only, he said, as part of a broader issue with third-party software in general. "We don't care if they use RealPlayer," said Cullinan, "but we're not about to ship anything AOL tells us. They have a bunch of other technologies in there that they don't take responsibility for."
Cullinan said there was no single deal-breaker.
"AOL didn't offer Microsoft enough business value for us to sign anything," said Cullinan. Another issue was extracting a commitment from AOL not to attack Microsoft in court over Windows XP. "AOL has made it clear that it values the courts and government intervention as a key business strategy," Cullinan said. "We did not reach a deal that would have allayed our concerns."
Negotiations finally collapsed after a closing phone call on Saturday between Microsoft Group VP Jim Allchin and AOL President Ray Oglethorpe. What remains after these acrimonious peace talks is increasingly open warfare.
In a clear indication of bad blood – and hardball negotiating – between the two Internet powers, AOL has been offering behind-the-scenes commentary for at least two weeks. Although ensuring that quotes could be attributed only to anonymous sources, high-level AOL execs have freely vented to journalists their opinion of what they consider to be Redmond's great monopolist.
"They want to take their strip-mining machine and apply it to the Internet," said one senior AOL exec while the talks were still on, insisting on anonymity.
Clearly, AOL felt it had the upper hand in the negotiations. It wanted one thing that it could live without: its desktop client software embedded inside the upcoming Windows XP operating system. AOL can achieve essentially the same goal, inclusion on the XP Start menu, through deals with computer hardware manufacturers, which will have reserve slots on that opening menu.
Microsoft had wanted four things from the negotiations: assurance that it would not be sued over what AOL sees as anticompetitive aspects of Windows XP, support for its Windows Media audio and video file formats, interoperability on instant messaging and continued AOL use of Microsoft's Internet Explorer browser. With the collapse of the talks, Microsoft gets nowhere on any of these aims.
An AOL Time Warner source close to the negotiations was very specific about Microsoft's objections to the RealNetworks media player. He said Microsoft raised questions of legal liability concerning the inclusion of third-party software, and even of the "stability" of RealPlayer. During final discussions this past week, this source said, "It became very clear that Microsoft did not want the RealPlayer in the AOL client." He said Microsoft even agreed to ship AOL software with XP if it was the previous 5.0 version, which does not include RealPlayer, rather than the 6.0 version, which does.
Microsoft's Cullinan confirmed the legal and stability questions raised about RealPlayer during the negotiations. "That's smart thinking," he said. However, he denied that Microsoft agreed to include AOL 5.0. That was an AOL suggestion, Cullinan said, and Microsoft rejected it.
The titanic head-to-head
