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.

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