AOL and Microsoft: Goliath vs. Goliath

The confrontation has so far developed as a classic game of copycat and one-upmanship between the two technology giants.

It was a year that saw Microsoft take shots at AOL's dominance in the instant messaging and Internet service provider markets. In addition, both companies rushed into partnerships with offline retailers in a bid to bring the Internet to Main Street.

Entering the new year, the companies are poised to continue their mad scramble in hopes of rounding up Internet newbies looking for an unthreatening way to get online. They also are expected to release new services such as wireless access aimed at freeing users from the PC.

Both companies will face major challenges in the coming year not only in the United States, but in Europe and Asia, which are poised for dramatic growth in Internet use.

The face-off has barely begun in earnest, but already some battle wounds have been scored--only this time, Microsoft has come out more bloodied than its opponent.

Microsoft's biggest setback came this fall, when it ceased efforts to unilaterally make its instant messaging software interoperate with AOL Instant Messenger (AIM).

Instant messaging software lets users know when friends and colleagues are on the Internet and allows "buddies" using the same service to exchange text messages. It has become one of AOL's most popular products, with more than 45 million users registered in its AIM Buddy List network.

Hoping to tap into AOL's huge installed user base, Microsoft included a feature in its competing MSN Messenger product allowing its customers to communicate with AIM users.

The move sent AOL into an uproar, leading it to accuse Microsoft of "hacking" into its servers. In response, AOL blocked MSN Messenger users from the service, leading Microsoft to circumvent the block.

Microsoft then began calling for AOL to join the Internet Engineering Task Force in creating a universal protocol for instant messaging.

The posturing continued throughout November, when Microsoft announced it would no longer make MSN Messenger interoperable with AIM, citing security risks for MSN users.

The fight--which will likely move forward on other fronts in the new year--was significant not only because of the battle for control of an extremely popular software application, but also because messaging software could lay the groundwork for another platform for accessing the Web.

Around the same time of the messaging battle, speculation began circulating that Microsoft would try to take on AOL's dominance as an ISP by seeking either a low-cost or a free access strategy. These concerns sent AOL's stock into a tailspin.

Instead, Microsoft eventually announced it would raise its prices for MSN Internet Access to $21.95 from $19.95, to the surprise of many.

The two companies also began offering discounted ISP pricing plans with computer manufacturers and retail stores.

AOL announced that computer buyers could get a $400 rebate with select electronics stores if they signed up for CompuServe for three years. The rebate plan expires Jan. 29 for all retailers except Circuit City, however.

Microsoft has since mirrored AOL's deal by announcing $400 rebates on PCs purchased at Office Max and Office Depot when customers sign up for three years of MSN Internet Access. MSN has also been offered at a discounted rate when users sign up for a long-term deal.

In the latter half of the year, the companies found themselves in another skirmish on the outskirts of the Internet--this time in the physical world of brick-and-mortar retail chains.

In November, Microsoft fired its first round by signing a deal with RadioShack, the electronics retail chain owned by Tandy. The deal gave Microsoft a "store within a store" where RadioShack's sales force would promote the company's Internet products.

Microsoft trumpeted the deal as way to drive subscription growth for its stagnant MSN Internet Access provider and as a way for selling broadband services in the future.

AOL shortly followed, inking similar promotional deals with electronics retailer Circuit City and department store giant Wal-Mart, giving it a foothold in store aisles in hopes of turning mainstream consumers unfamiliar with the Internet into subscribers.

A day after AOL's deal with Wal-Mart, Microsoft announced an agreement with Best Buy. The deal gave Microsoft prominent display of its products in more than 350 stores and a $200 million investment in Best Buy's Web efforts.

All of these deals gave the Internet giants a channel through which to promote their services in kiosks or CD bins. In return, retailers received promotion on AOL's network of properties--such as its proprietary service, AOL.com, Netcenter and CompuServe--and throughout Microsoft's umbrella of Web sites, including MSN.com, MSNBC, WebTV and Hotmail.

While the two companies raced to sign their retail deals before Christmas, however, Web portal leader Yahoo also made a move, albeit in a more limited fashion.

On the same day AOL unveiled its Wal-Mart deal, Yahoo announced it was launching a free ISP service with Kmart. In return for offering its content on the service, called BlueLight.com, Kmart agreed to promote the ISP throughout its stores and to sell Yahoo-branded merchandise in the form of linens, backpacks and other novelties.

AOL and Microsoft currently control the browser--the most powerful platform through which consumers access the Web. With AOL's ownership of Netscape Communicator and Microsoft's Internet Explorer, the two companies have been able to funnel considerable traffic to their respective default home pages: Netcenter and MSN.com.

In addition, the 20 million subscribers to AOL's proprietary service automatically get AOL.com as their starting point when they access the Web.

MSN and Netcenter have both undergone cosmetic changes and are perpetually trying to one-up each other with their offerings.

But as the two titans look for ways to out-maneuver each other, Yahoo continues to rank closely behind AOL's Web sites and above Microsoft's network of sites, according to Media Metrix ratings.

Yahoo's popularity as the premier portal brand has set it ahead of its other competitors--Lycos, Excite and AltaVista--which largely remain under a glass ceiling in terms of growth.

What remains for these contenders lies relatively untouched. The Internet as a whole has not penetrated the likes of mainstream America as the PC has done.

The showdown in the coming century will likely take place over people who today remain on the sidelines looking for the right time to get online. The winner will be the one most persuasive to the masses.