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This week in Microsoft

Microsoft makes peace with RealNetworks and forms an alliance with Yahoo.

Microsoft has buried the hatchet with RealNetworks and formed an alliance with Yahoo, but such moves are unlikely to cool the regulatory heat under the software giant.

Microsoft and RealNetworks announced a sweeping deal on Tuesday that puts aside their legal differences and aims to shore up their respective digital-music strategies. Under the deal, Microsoft will pay $460 million in cash to RealNetworks to settle antitrust claims. It will also pay $301 million in cash to support Real's music and game efforts, and Microsoft will promote Real's Rhapsody subscription music service on its MSN Web business.

RealNetworks had alleged in its December 2003 lawsuit that Microsoft had abused its "monopoly power to restrict how PC makers install competing media players while forcing every Windows user to take Microsoft's media player, whether they want it or not." Real originally sought $1 billion in damages.

As part of the deal, Real will also end its direct involvement in antitrust investigations across the globe, including probes in Europe and Korea.

RealNetworks was the largest corporation participating in the European Union's antitrust prosecution and must withdraw from those proceedings under the terms of the settlement. But that likely won't make things easier for Microsoft during its appeal.

"The settlement strengthens the Commission's case," said Thomas Vinje, an antitrust attorney with Clifford Chance in Brussels, Belgium. "Real has already provided evidence for the case, and that record is complete and in Luxembourg."

Some CNET News.com readers scorned the deal. "MS continues to staunch legal wrangles by infusing cash into the former competitors," . "Sounds like the Michael Jackson approach to me."

Perhaps ironically, Apple Computer may have given RealNetworks an incentive to strike a deal with Microsoft. In early 2004, RealNetworks Chief Executive Rob Glaser made several appeals to Apple Computer CEO Steve Jobs, asking him to make the popular iPod compatible with other companies' music services. Jobs later told Apple shareholders that working with RealNetworks was simply "not worth it."

Three months later, the shunned RealNetworks announced that it had successfully reproduced Apple's iPod technology with its new "Harmony" music tool. Glaser said the development of Harmony, which also provided compatibility with Microsoft software, helped improve the relationship between RealNetworks and the software company.

Whatever its impact on RealNetworks and Microsoft, the deal is unlikely to change the dynamics in the broader digital music market anytime soon, analysts said. Apple's iTunes music store and its iPod music player each retain more than 80 percent of their respective markets. That dominance has been locked in place by consumers' ongoing love affair with the iPod, and rival MP3 manufacturers' inability to create a similarly popular product.

At least one top record company executive said the deal could help push Apple toward offering its own subscription service, a business model that Jobs has criticized in the past. But the same label executive, who asked not to be named, said Microsoft and its hardware allies still need to make better, simpler, more widely compatible MP3 players if they are to encroach on Apple's share.

Microsoft also buddied up to Yahoo, announcing plans to make their instant-messaging services interoperable. Analysts called the move a shot at market leader America Online's AOL Instant Messenger and a defensive jab at newcomer Google. Beginning in the second quarter of 2006, customers of Yahoo Messenger or MSN Messenger programs will be able to exchange instant messages, see the presence of their contacts, share emoticons, add friends from either service and make PC-to-PC voice calls.

Multiprotocol IM clients like Trillian and Fire seem seamless enough for many users, enabling them to use several instant-message programs under one interface. But Yahoo and MSN have tried to wall out third-party integrators, calling their moves preemptive measures against IM spam, or spim.

But the partnership has a flipside, an instant-messaging security expert said. "As Microsoft, Yahoo and others connect their global IM networks, IM worms will spread faster and attack a larger population of end-users," said Jon Sakoda, chief technology officer at messaging security company IMlogic.