Microsoft's stake in the AOL-Amazon deal

Longtime foes in areas such as instant messaging and online access, AOL and Microsoft are facing off in the e-commerce arena--specifically over technology that makes it easier to navigate the Web and make purchases online. So-called e-wallets--which store commonly requested information such as a login name, shipping address and credit card number--are shaping up as a key leverage point for controlling how consumers and businesses use the Internet.

According to a source within AOL, Monday's deal was aimed at boosting the company's e-wallet and related authentication services by tapping Amazon's e-commerce technology--a key element behind the e-tailer's reputation for strong customer service. The source added that signing with Amazon was a direct means of competing against Microsoft's high-profile authentication service, called Passport.

The stakes are high: control of the technology that will be the underpinning of billions of transactions on the Web, as well as access to a vast database of consumer data.

"If you believe fundamentally that the next generation won't be like us, and will actually do shopping online...you better win the online directory," Sun Microsystems CEO Scott McNealy said Monday at The Industry Standard Internet Summit in Carlsbad, Calif.

Although he didn't specifically mention the deal between AOL and Amazon, McNealy said, "There's a big battle going on, and I find it fascinating to figure out who's going to win." In addition to AOL and Microsoft, Yahoo is considered a major player.

A longtime nemesis of Microsoft, McNealy said the software giant is the company to beat because its Windows operating system gives it control over the desktop, making it easier to distribute its service and compile data. For example, Passport is needed to use advanced instant messaging features that Microsoft will include in Windows XP, its upgraded operating system scheduled for release in October.

Microsoft also has put Passport front and center in its business plans, having already detailed one proposal, code-named HailStorm, that will rely heavily on the authentication technology. Still in development, the service has been billed as a way for subscribers to access and share documents such as calendars via a range of devices beyond the PC.

Such services are seen as a powerful way to develop long-term relationships with consumers. For example, Web users have been reluctant to change Internet service providers because of the difficulty in switching e-mail addresses. By providing an even more pervasive online identity through Passport, Microsoft could wield considerable influence not only with its own customers, but with Web companies seeking to do business with millions of Passport users.

If AOL is indeed playing catch-up, the deal with Amazon could help it gain ground.

A response to HailStorm
AOL Time Warner's America Online service has been developing e-wallet and authentication software for some time, offering a Screen Name Service as well as a Quick Checkout shopping tool that was first unveiled in November 1998.

Both companies have been marketing their services to Web partners with mixed success. By teaming with Amazon, AOL hopes to close the gap with Microsoft and even edge out in front in a market that holds significant strategic importance for the bitter rivals, according to analysts.

"Microsoft has made a big deal about HailStorm--this is AOL's response to that," said Phil Benyola, digital media research associate at Raymond James. "This is the third example of AOL bringing in a partner to challenge Microsoft. First it teamed up with Netscape in the browser market, next RealNetworks in digital media, and now Amazon on e-commerce."

The looming confrontation over Passport comes as AOL and Microsoft find themselves increasingly in each other's way in far-flung arenas that touch on nearly every aspect of the Net, including Web browsers, instant messaging and digital music.

The contest pits two very different companies against each other. Microsoft has long held bragging rights as a premier technology player, committing billions of dollars to research and development. AOL has countered in large part with its skill in marketing, used to build a franchise of more than 33 million paid subscribers on its AOL and CompuServe online services. Its success allowed it to acquire media behemoth Time Warner last year.

AOL's Quick Checkout and Screen Name Service offer registered users of Netscape, AOL Instant Messenger or CompuServe a single sign-on and password that is used to access about 40 AOL Time Warner properties and some third-party sites. Partners include SchoolSports, a site that provides news and links on high-school athletics, and TestU, which offers information on Scholastic Aptitude Tests (SATs), according to information on AOL's Web site. In addition, about 100 sites, including 1-800-Flowers.com, Victoria's Secret and Avon, support Quick Checkout.

Microsoft executives said more than 200 companies have signed on to the Passport service, including Starbucks, RadioShack, Blue Nile, 1-800-Flowers.com, Office Depot, Office Max, Victoria's Secret and Hilton.com, as well as all of Microsoft's MSN properties and travel site Expedia.

Passport facilitates some 2 billion authentications a month, said Adam Sohn, product manager for Microsoft's .Net strategy. He contended that Microsoft has an early lead because Passport has been available since 1999.

"If you want to compete in the marketplace, we're ready to do that," he said. "We think Passport is a great offering. We are not a content company; we're a technology company, and our expertise is in building these broad platform assets to third-party developers and Web sites to help them drive their business."

A "Magic Carpet" ride?
In partnering with Amazon, AOL appears to have signaled that its own technology development efforts need help, he added.

AOL and Amazon representatives also characterized the deal's significance in terms of technology but would not elaborate on specifics regarding e-wallet and authentication.

"This is not a marketing agreement--this is a technology agreement," said AOL spokesman David Theis. "We will work on future initiatives; one includes customer-authentication and wallet services."

An Amazon representative also characterized the deal broadly, saying the agreement primarily grants AOL access to Amazon's search and personalization tools, product comparisons, and consumer reviews. In addition, the representative said, the two companies will collaborate on new technologies, including e-wallet and authentication services.

There are other signs that AOL plans to overhaul its existing wallet and authentication services. According to BetaNews, a Web site that tracks new software releases, AOL is quietly working on a project code-named Magic Carpet that builds on the Screen Name Service and appears to be aimed at Microsoft's Passport. An AOL spokesman acknowledged that he was aware of the project but refused to discuss any details.

The Amazon deal, which is expected to lead to the launch of a jointly developed e-commerce technology near the end of 2002, is a vote of confidence in the giant e-tailer. The company has suffered from fading revenue growth, according to an earnings report this week, sparking some analysts to questions its long-term prospects.

Leaving the door open for Microsoft
Far from negotiating the deal from a position of weakness, Amazon said it licensed its technology on favorable terms, maintaining control over its property and reserving the right to strike deals with other partners, including Microsoft.

"We're not giving anything away here," said Patti Smith, an Amazon spokeswoman. "The technology that we are sharing with AOL remains with Amazon. We are not selling this; the technology remains with us. We crunch the data and set up the technology, but it stays under our control at all times."

Smith declined to comment on whether Amazon has held talks with Microsoft to provide support for Passport, saying only that "there have been conspiracy theories" about Microsoft approaching the company.

Microsoft's Sohn said he hadn't heard whether Microsoft also was negotiating with Amazon, but added that even with the AOL deal he hopes Microsoft can still strike a deal for Amazon to incorporate Passport.

But Amazon's relationship with Microsoft may be chillier now that the e-tailer has accepted such a sizable AOL investment, according to Raymond James' Benyola.

"The odds are low that the two will strike a deal now," he said. "$100 million is a pretty good incentive for Amazon to turn down any offers from Microsoft."

Among other things, Amazon owns patents on coveted e-commerce features such as its 1-Click ordering feature, its affiliates program and its recommendation tools. The company has aggressively defended its intellectual property. It sued Barnes&Noble.com over its 1-Click technology and won a preliminary injunction.

Amazon has licensed the technology to partners including Toys "R" Us, Borders Group and Apple Computer. The company said Monday's deal with AOL did not include its 1-Click patent, although the terms do not preclude such an agreement in the future.

"There's a lot of different shapes that this agreement can take," said Amazon's Smith. "We've been working with them for five years. Who will say what this will turn out to be?"

News.com's Jim Hu, Rachel Konrad, Greg Sandoval and Wylie Wong contributed to this report.