Analysts: AOL, Microsoft Wars Have Just Begun

Expect things between corporate giants Microsoft and AOL TimeWarner to get nasty, and soon.

Reports suggest contract negotiations are inching along between the two companies over the inclusion of AOL's installation icon in Microsoft's upcoming Windows XP operating system. The haggling between the companies could signal the start of friction that could lead to a major war between the two Internet heavyweights. Both hope to control new platforms such as media players and instant messaging services, according to research company Gartner.

The two may prove unlikely bedfellows, says Gartner Internet strategies analyst David Smith in a recent report. Each company's plans to dominate new technologies may lead them into more complex deals, touch-and-go negotiations, and even courtrooms, he says.

The two companies have been in heated talks over the extension of a deal that gives AOL placement on the Windows operating system desktop in exchange for AOL's exclusive use of Microsoft's Internet Explorer IE browser over AOL's own Netscape browser. Although these should have been relatively simple negotiations, Smith says, the talks almost came to a screeching halt in early June. That's when the companies reportedly sparred over Microsoft's plans to integrate its new Windows Messenger service into Windows XP, to the exclusion of AOL's dominant AOL Instant Messenger.

The negotiations even took a swipe at innocent bystander RealNetworks when rumors that Microsoft was giving AOL the hard sell to adopt its Windows Media Player in place of RealNetworks' RealPlayer sent RealNetworks' stock tumbling 20 percent in late May.

Hailstorm Brouhaha

All the excitement over AOL's installation and AIM is nothing compared to the upcoming battles between the Internet titans, Gartner analysts say. Microsoft's October release of Windows XP, coupled with its HailStorm initiative, will place the software company in the pay-as-you-go Internet territory that AOL clearly wants to tread. This will leave the companies fighting for future customers as they move to stake claim to dominant positions in the nascent IM and media player markets.

Microsoft plans to incorporate its HailStorm services in Windows XP. The company says HailStorm will establish a secure online identity for consumers, which will support for-pay Web services. Analysts predict that HailStorm will reduce demand for competing products from companies like AOL, RealNetworks, and Yahoo.

Instant Messaging Battle

On the IM front, Microsoft's new Messenger reaches beyond traditional text-based messaging to incorporate voice, video, and user-shared applications.

Gartner analysts believe that Microsoft is hoping its new and improved IM service will force AOL's hand--causing the company to open up its IM service to interoperability. So far the company has been reluctant to do this. Interoperability would benefit users, the analysts say, but would take a bite out of AOL's marketshare.

Responding to speculation over the companies' sticky relationship, an AOL spokesman said Tuesday that "AOL and Microsoft are both partners and competitors and nothing in the talks (will) change that."

No one from Microsoft was available for comment Tuesday morning.

However negotiations between the Internet giants shake out, consumers can hope that the fierce competition will at least spur more options and cheaper services in the end.