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Commentary: To take AIM, or not

As computing becomes more widely connected, Microsoft and AOL are wrestling for control of the user experience, not the user interface per se.

    The current negotiations between AOL Time Warner and Microsoft over whether and how prominently AOL software will be bundled into the Windows XP operating system are being driven by concerns about long-term market position rather than short-term technical or business issues relating to this particular agreement.

    See news story:
    Will AOL miss the window for Windows XP?

    AOL's negotiating position has eroded during the five years since the previous agreement was reached on bundling AOL into Windows. Netscape Navigator was then still a viable mass-market competitor to Microsoft's Internet Explorer (IE). In return for AOL making IE rather than Navigator its primary Web browser, Microsoft agreed to give AOL's software--including AOL Instant Messenger (AIM)--a prominent position in Windows on the desktop. Now that IE has achieved dominance, AOL no longer has the same leverage.

    In return for the placement it wants, AOL could offer interoperability between its instant messaging (IM) system and Microsoft, but AOL does not want to bargain with that chip yet. It has been stalling for time regarding active movement toward an IM standard to maximize the commerce and relationship value it gets from its own network. There has been no compelling market driver to force IM interoperability from government sources or competitors (which, while growing their IM install bases, have not been able to capture mind/brand share).

    However, AOL is probably unhappy with Microsoft's decision to include its Messenger communications software in XP. While AOL can continue to interface with IE, Microsoft is positioning Messenger not as an IM tool, but as a next-generation communications dashboard.

    Microsoft, on the other hand, is angry because AOL has been lobbying Congress and the courts against it. Even with a Republican administration in Washington, Microsoft cannot afford to appear too heavy-handed with its monopolistic position on the desktop. It also has to be concerned about its position with the European Union, which is watching the software maker closely.

    Of course, Microsoft is also a direct competitor to AOL, with its Microsoft Network (MSN) and its instant-messaging services. Therefore, Microsoft is in an anomalous position in these discussions, debating how much promotion and favorable positioning it will permit a direct competitor to gain in connection with XP.

    Controlling the experience
    We believe the stakes between Microsoft and AOL are higher than which browser or instant-messaging software is used. The fight is for a place in the communications lifestyle of consumers. As computing becomes more widely connected (for instance, with game consoles connected to the Internet), the two companies are wrestling for control of the user experience, not the user interface per se.

    We expect AOL and Microsoft to eventually reach an agreement that resolves the remaining issues blocking the inclusion of AOL software in XP. However, AOL will probably be forced to accept less favorable positioning than it wants, and both companies will maneuver publicly to try to gain political advantage at the other's expense.

    Individual customers will probably see little or no effect from these negotiations, regardless of the outcome. There is no basic compatibility problem between XP and AOL's client software. Therefore, AOL customers who upgrade to XP will still be able to run AOL software and access the AOL service even if the two companies do not come to an agreement. No matter what Microsoft does, individual PC makers have the option of bundling AOL into their systems. If they do not, AOL will be happy to provide its software at no cost to customers on CD or via download.

    Those who do not now have Web service may find Microsoft Network (MSN) more prominently presented in XP than AOL. Users looking for simple Web access will do better to subscribe to a local ISP instead connecting to the Internet via AOL. People who want a service aggregator that provides the feeling of a community have several choices, including Yahoo and, for the gaming community, Sony, in addition to AOL and MSN.

    Few businesses use AOL, so they will be unconcerned about whether AOL's software is bundled with the desktop systems they buy. However, they may be concerned about whether they can communicate with business associates via the AOL Instant Messager (AIM), since it is unlikely that AOL will permit users to IM with its subscribers using the new software that Microsoft wants to add to XP.

    Meta Group analysts Jack Gold, William Zachmann, David Yockelson, Mike Gotta and Val Sribar contributed to this article.

    Visit Metagroup.com for more analysis of key IT and e-business issues.

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