RealNames deal signals another Microsoft-AOL showdown

Microsoft's investment in a little-known Web directory today is the latest in a series of actions indicating that the software giant views America Online as its arch enemy on the Internet.

In taking a 20 percent stake in RealNames, a company that substitutes short "keywords" for more complicated site addresses, Microsoft is targeting AOL's basic philosophy of simplifying the Internet for the masses. The move follows other conflicts with AOL, most notably a bitter fight over instant messaging technology last year.

The tactic is nothing new at Microsoft headquarters in Redmond, Wash.: Identify the leader in a key field, create a similar technology aimed at the same customers, and eventually take away its business with marketing prowess and leverage of the ubiquitous Windows operating system. Microsoft has continued this pattern, which began with IBM and Apple Computer in the PC market, through the legendary browser wars with Netscape Communications and now the fight for control over the Internet itself with AOL.

In typical fashion, Microsoft is again raising the issue of industry standards on the keyword front. As it has done with browsers and instant messaging, the company is arguing for a common technology standard for all to use--which, coincidentally, could slow AOL's growth juggernaut and help Microsoft catch up.

Although AOL's keyword feature is used on its proprietary subscription service, it could lose market share if the practice becomes widely popular on the public Web with a Microsoft-backed standard. And it could be prohibitively costly for AOL to translate its own keyword system into such a standard at a later date.

"Once (Microsoft) has identified something that's not a competitive advantage, their strategy is to immediately level the playing field," said Josh Walker, an analyst at Forrester Research. "They've shown that...they feel comfortable in competing in that environment because of their size and their ability to innovate."

Leading the charge on this front is a name well-known among previous adversaries: Yusuf Mehdi, director of Microsoft's consumer group. Mehdi steered the browser campaign against Netscape and has been a central figure developing his company's instant messaging product, which is facing off against nearly 100 million registrants using AOL's Instant Messenger and ICQ services.

"I would not be surprised if AOL came around...I believe they'll embrace the RealNames Internet keywords standard as a way for them to do it broadly across the Web," said Mehdi, who is pushing for support of a standard being developed by the Internet Engineering Task Force (IETF).

An AOL spokesman declined to comment on Microsoft's deal with RealNames.

Although the investment extends an existing relationship that has embedded RealNames keywords into Microsoft's Internet Explorer browser, the deal is a direct shot over AOL's bow. AOL has pioneered the keyword concept, making it a distinguishing way to navigate its subscription-based online service.

Widespread adoption not a guarantee
Still, it is not at all clear that this technology, which has already been introduced by major portals, will take off across the Web. In addition, Microsoft must tread carefully in its business practices, mindful of antitrust concerns heightened by its federal lawsuit. By taking only a minority stake in RealNames, Microsoft may blunt criticism that it is cornering the market on a potentially powerful tool for navigating the Web.

"Microsoft decided to invest in this company to become the controller of Internet key names," said Anne Thomas, an analyst at Patricia Seybold Group. "Their option was to own RealNames, or to invest in them and develop their own standard. Perhaps it was a better chance for them to become the industry standard rather than the Microsoft standard."

Antitrust experts said today's investment does not appear to raise legal concerns.

"The issue is to what extent if they include that feature would consumers be dissuaded from using other search engines," said Mark Schechter, a partner at Howry Simon Arnold & White and a former antitrust attorney at the Justice Department. "As long as they are not creating impediments to using alternative search engines, they're probably not going to have a problem with that."

The RealNames system is similar to the America Online system of keywords, allowing Web surfers to type in a simple phrase or brand name instead of a complicated Internet address. Thus typing "Ford Explorer" would point directly to a page on Ford Motor's Web page dealing with the Explorer vehicle.

Executives for the company--and now presumably Microsoft--have grand designs for the software, calling it a second-generation Web navigation system that could effectively replace the "www" system in place today. Familiar Web addresses will still exist and be sold by companies like Network Solutions and its rivals, but most consumers would ultimately use simpler keywords to visit Web sites, RealNames hopes.

It may be easier than it sounds. Although the keyword system has long been a familiar feature inside the AOL service, the concept has not yet taken off on the Web. Several portal services, such as AltaVista, Disney's Go.com and MSN have integrated the concept into their own search features, but it is still far from challenging the more familiar URL system.

That's where Microsoft comes in. "The relationship with Microsoft is important if you want to change the behavior of (computer) users," said Keith Teare, RealNames CEO. "You couldn't really believe that the URL would be replaced by keywords unless that relationship was in place."

The relationship will be most powerful as the RealNames system is integrated more tightly into the Internet Explorer browser. Already, IE supports a basic version of the technology; typing "cars" into the browser will point to the Cars.com Web site, for example.

Microsoft will now boost its support of the technology, adding advanced features into the browser's navigation bar that will tap directly into target sites' search databases.

This kind of navigation and search power, if widely used, could dramatically change the way users navigate the Net. But Teare says he isn't worried about ceding control of what he calls the Web's new interface to Microsoft.

The software giant won't control RealNames through a simple 20 percent stake and does not have a seat on the company's board of directors, he said. Moreover, the company is actively seeking partnerships with AOL and subsidiary Netscape, which would give those companies the same power as Microsoft.

"We see ourselves as a platform and Microsoft and Netscape more as applications developers," Teare said. "We don't tell them how to develop their user interfaces."

It remains to be seen how Microsoft would respond to such sharing.