Microsoft and AOL Fight Over Windows XP Users

As the development of Windows XP reached its conclusion this past summer, two of the industry's heavyweights—Microsoft and AOL Time Warner—held last-minute negotiations to determine whether Microsoft would bundle AOL's most recent Internet-client software with XP. But when the negotiations fell apart, AOL turned to PC makers to help it stake out some territory on the XP desktop. AOL requested that PC makers provide AOL advertising, services, and products. The return: A payoff for each new AOL convert.

AOL wanted new-PC purchasers to encounter AOL icons, pop-up notices for AOL sign-up, and messages as part of new PCs' default desktops. XP's Out-of-Box Experience (OOBE) lets PC makers modify and configure XP's startup sequence, and AOL wanted its online service and the Netscape Web browser to be installed as default Internet clients—with Microsoft's offerings (e.g., MSN, Outlook Express, and Internet Explorer—IE) to be downplayed or uninstalled. AOL also wanted AOL Instant Messenger (AIM) prominently located in the XP Start menu and wanted to replace Windows Media Player for Windows XP (MPXP) with RealNetworks' RealPlayer, which is already bundled in AOL's Internet client software. AOL agreed to pay PC makers $35 for each customer who signed up for AOL's online service.

When the news became public, a Microsoft spokesperson declared that "AOL's actions are unprecedented and completely anticonsumer. AOL is paying [PC makers] to eliminate consumer choice, forcing people to select the most expensive service in the industry." (At the time, AOL's unlimited online service cost $23.90 per month, compared with $21.95 for MSN.) In a statement to The Washington Post, an AOL spokesperson retorted that "Microsoft can't come to grips with the fact that they are a monopoly and the court has ruled that their behavior must change ... Microsoft cannot apparently accept the notion that after a decade of forcing multiple promotions of MSN on both the computer manufacturers and consumers, finally another entity is able to strike marketing deals to promote its service. This is a forthright step into being able to market to consumers in ways that, because of Microsoft's monopoly, AOL has not been able to market previously."

Mere days after the news that at least one PC maker—Compaq—had agreed to AOL's terms, Microsoft announced that it would require PC makers to include the MSN icon on the XP desktop whenever icons by any other company—such as AOL—were present. So PC makers have two choices: Ship XP computers with clean, empty desktops—which is what Microsoft says consumers want—or include the MSN icon with any third-party icons that appear on the desktop. Predictably, the maneuver didn't amuse AOL. AOL Time Warner Vice President John Buckley fumed, "It appears that Microsoft is backing off [its] much ballyhooed itty bitty teeny weeny sliver of flexibility and heading back to the rigid stance that has been slapped down by the second-highest court in the land."

Microsoft claimed that the icon decision had nothing to do with AOL's actions. Microsoft Platforms Group Vice President Jim Allchin said the company simply hadn't done a good job of communicating its requirements earlier. "Given the appeals court ruling, a decision was made at a senior level that we should go back and give freedom on the desktop. We've done that," he stated. Allchin also noted that PC makers that place AOL icons on the desktop must include not only the MSN icon but the standard selection of previous Windows icons (e.g., My Computer, My Documents, IE). "We told PC makers that if they were going to put a bunch of icons on the desktop, then so were we ... In hindsight, I feel bad that we didn't make this public earlier. But it wasn't a change, it was something we told the PC makers all along," Allchin said, claiming that Microsoft and PC makers had concluded that users prefer a clean desktop.

Still, Microsoft shouldn't be surprised at the deal between AOL and Compaq, which is likely to be but one of many such agreements. Given falling sales and margins, PC makers need all the money they can get, and adding icons for third-party applications and utilities might prove to be a simple way to improve earnings per PC.

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