An America Online executive today provided seemingly damaging testimony on how Microsoft strong-armed AOL into using Microsoft's Internet Explorer Web browser by giving the online giant an offer it could not refuse--distribution on Windows 95.
According to David M. Colburn, AOL's senior vice president of business affairs, the offer prohibited the online service from promoting a Netscape Communications' Navigator. If true, the claim would bolster the government's case that Microsoft used its de facto monopoly in operating system software to establish its browser software.
The direct, written testimony filed today by Colburn details the Virginia company's decision to choose IE rather than Navigator as the primary Web browser for the AOL online service. His statements are meant to support the Department of Justice's antitrust case against Microsoft, now in its second week of trial.
"While AOL viewed the Netscape and Microsoft browsers as comparable, distribution and promotion in the Windows operating systems was something that Netscape simply could not provide," Colburn said.
In a written response, Microsoft said it was "an attempt at revisionist history" and maintained that AOL's decision was based on IE's "superior" technology--not its ability to distribute AOL on Windows.
The testimony highlights the complex deal-making behind Microsoft's alleged objective of limiting Navigator's market share. That process included AOL's decision to shake hands with Microsoft--even though AOL apparently understood that Redmond was simultaneously trying to bury it in the online space.
Colburn, who was directly involved in negotiations with Microsoft, states that in September 1995, AOL began looking to replace its Booklink Web browser. Though the decision naturally came down to the two primary Web browsers, AOL favored Netscape, which was then the clearly dominant browser.
It resisted choosing Microsoft because the software giant was a direct competitor, and had begun using Windows to distribute its own online service, the Microsoft Network (MSN). AOL viewed the promotion of MSN on the Windows 95 desktop as an unfair advantage allowing Microsoft to keep AOL out of a pivotal distribution channel, Colburn said.
"Because a large majority of the personal computers sold in this country include the Windows operating system, Microsoft was thus to achieve virtually costless distribution of MSN to almost every new computer user," states Colburn's testimony.
"Moreover, the bundling of MSN with Windows 95 and the inclusion of an MSN icon on the desktop created a sense in the marketplace that MSN's commercial success was inevitable."
Microsoft countered that MSN could not have been a threat to AOL, since AOL then (as now) enjoyed a dominant position. "Mr. Colburn seems to say that AOL viewed MSN as a serious competitive threat even though AOL had the overwhelming market share in the online services market," the Microsoft statement said.
"As Microsoft began to recognize the popularity of the Internet, the company developed MSN as an integrated component of Windows 95," the statement reads. "This was a new technology and had zero market share when it was released in August 1995. To this day MSN has less than 10 percent market share compared with AOL's 70-plus percent market share today."
AOL signed an agreement with Netscape on March 11, 1996, to develop a browser that AOL could integrate into its client software, according to Colburn.
Knowing that AOL was negotiating with its browser rival, however, Microsoft decided to put an offer on the table that AOL had wanted: Microsoft offered to bundle and promote AOL software with its Windows operating system, Colburn said.
"The value of distribution through and promotion on the Windows desktop was something that Netscape could not provide," Colburn stated.
Colburn noted that the IE browser was more easily adaptable to AOL but did not cite that as a major factor in AOL's decision.
But Microsoft said it had evidence showing Netscape's reluctance to develop a customized browser for AOL. AOL chose IE because it could provide an easily-customizable browser, according to Microsoft.
"At the core of Microsoft's winning of AOL as a customer was Microsoft's decision to provide a modular architecture so that AOL could integrate browser technology seamlessly into AOL's service," the statement said.
Microsoft's statement also cited a book entitled Competing on Internet Time, by Michael A. Cusamano and David B. Yoffie, which quotes Netscape executive Ram Shriram as saying, "Netscape was saying, 'We're not really interested. Our focus is not consumers, so we're not terribly interested in working with you.' We lost another opportunity to take charge of another 10 to 12 million browsers."
AOL signed its deal with Microsoft on March 12, 1996, the day after it signed one with Netscape. The deal, according to Colburn gave AOL placement on the Windows desktop in an "Online Services" folder icon. AOL, in turn, agreed to exclusively feature IE as its only browser.
It also was prohibited from promoting or distributing Navigator, Colburn said.
"As a result of the Microsoft agreement, AOL must and does strictly limit its distribution, promotion, and advertising of Netscape Navigator," Colburn said. "Microsoft has sought to strictly enforce these restrictions, and has carefully monitored references to Navigator or Netscape on the AOL service."
Colburn emphasized that AOL's desire for ubiquity outweighed the company's choice of browser brands. AOL chose IE "because AOL believed that inclusion in the Windows operating system and on the desktop was essential to mitigate, at least partially, the adverse competitive effects of Microsoft's bundling of MSN with its operating system, and because such inclusion had very significant distributional advantages that could not be obtained in any other way," he said.
The relationship has spawned more agreements between the two companies that further Microsoft's efforts to increase IE's market share. For example, Colburn described a December 19, 1996, agreement in which Microsoft agreed to pay AOL 25 cents for each member it converted to IE from another browser.
But AOL started to believe that Microsoft had begun undermining its agreement after Microsoft excluded AOL from a desktop "channel bar"--a feature that "points to content and services that were both already available on the computer and that have links out to the Internet"--according to Colburn.
Today's testimony also highlighted Colburn's displeasure with AOL's uncomfortable predicament of worrying that a wrong move would jeopardize its distribution on the powerful operating system, powering over 90 percent of the world's PCs.
For AOL to be included in the channel bar, AOL agreed to a number of restrictions, Colburn stated. AOL could not to distribute other browsers, such as Navigator, promote Navigator in AOL Web sites except for paid advertising, or pay Netscape for distributing or promoting AOL content.
"AOL would not have been prepared to accept the restrictions on its distribution and promotion of Netscape Navigator had Microsoft not insisted on those restrictions as an element of the licensing agreement," Colburn concluded.