net.wars: Shotgun truce

by Wendy M Grossman | posted on 30 May 2003

So that's it, then: Microsoft gives AOL $750 million and AOL does what Microsoft wants it to do: drop the lawsuit, use Windows Media Player 9, commit to using Internet Explorer for the next seven years (albeit royalty-free), work on cross-opening its instant messaging servers, and Microsoft will distribute AOL CDs to PC builders around the world.

Wendy M Grossman

Makes you almost want to throw rice at them, doesn't it? Oh, yes, we don't throw rice at weddings any more, do we? Apparently birds eat the rice, it swells in their stomachs, and the birds explode. Confetti. We'll throw confetti. And let the CompuServants clean it up.

When you read the broad outline of the deal, it seems like Microsoft is getting most of the benefits: AOL's 35 million users will default to Microsoft products embedded in their AOL client, which is good for Microsoft. The $750 million is a fair whack of change for AOL Time-Warner - it's a bit less than twice AOL Time-Warner's first-quarter profits of $396 million (and of course the company lost money last year, largely due to accounting changes). But of course it's tip-jar money for Microsoft, whose cash reserves currently stand at $46.2 billion - even if you assume it would have cost the company nothing to continue to defend the lawsuit.

It changes little. AOL was always using Internet Explorer in its client, even after it paid $4.2 billion for Netscape in 1999. The purchase, the company said at the time, was really about acquiring the 20 million-strong traffic to Netscape's home page. Of course, that's what it said when it acquired GNN (Global Net Navigator) way back in 1995, practically the dawn of the Net, and within a year GNN was basically gone.

The fact is that AOL has a very weird history, acquisition wise. It tried to market GNN via free CDs, the first Web site to sell ads, and failed utterly. It bought Netscape, spent some money on development, but never used it in its own service because it was already tied contractually to Microsoft, and now, if the "Is Netscape dead?" pundits are right, will probably kill it forever. It bought Nullsoft, maker of Winamp, and the Net radio service Spinner for $400 million in stock in 1999.

But shortly afterwards, AOL had to recall its 6.0 client because it used unlicensed Winamp code. Winamp wasn't in 7.0, and now AOL will be using Windows Media Player for the foreseeable future. Then it paid some $400 million for ICQ in 1998, saying that acquiring ICQ would give it the ability to bypass the need for a browser at all. Your instant messaging software could be your portal! (Remember portals? In 1998, discussions of how to succeed on the Net were all about portals and whose was biggest.)

Then, in what seems to have been a satisfying moment of revenge, AOL bought the failing CompuServe service, which had been the market leader through much of AOL's existence. CompuServe, which was and should have continued to be a well-structured service for professionals is now primarily known in the US as "AOL's budget arm". Of course, AOL's weirdest acquisition was Time-Warner. Plenty of people have analyzed the economics of that moment of mathematical insanity, so I won't do that here. I will simply note that Big Media in general has a poor track record in figuring out how to Do Net, and this acquisition is probably the most glaring example of Old-Media panic. Well, let's not gloat. It could have happened to any of us who only read our own output.

So: AOL bought and killed GNN; bought and ignored Netscape; bought and gloated over the remnants of CompuServe; bought and may be sold byTime-Warner. It's arguable that what it hoped to do with ICQ was subsume it into its proprietary AOL Instant Messenger (which probably would have remained limited to AOL's proprietary system if ICQ hadn't come along to challenge it). In fact, the biggest thing that Microsoft gets out of this transaction is a promise to open up AOL's instant messaging servers to MSN Messenger, previously stubbornly inter-inoperable. Don't be surprised if five years from now Microsoft is the biggest IM provider.

It seems to me that AOL's problem is the extremely common one among tech companies: it made a big success with its first product, has no second product, and needs to secure a future for its first product before it goes out of relevance. You can only live for so long on selling ease-of-use to newbies - AOL's numbers are shrinking in the US. Hence the emphasis on all those different types of portals: how do you sell AOL to the wider, AOL-contemptuous Net? AOL has lasted longer against the free content and increasing ease-of-use of the Net at large than I ever thought it would - especially given its lousy email client - but dial-up is dying and AOL is having a tough time finding its way into broadband.

The one bit of good news is that AOL probably can't afford to buy and kill anything else we love.

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Wendy M. Grossman’s Web site has an extensive archive of her books, articles, and music, and an archive of all the earlier columns in this series. Readers are welcome to post here, at net.wars home, follow on Twitter or send email to netwars(at) skeptic.demon.co.uk (but please turn off HTML).