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AOL eyes gains in Windows XP turf war

The Net giant is working overtime to ensure that the next version of its online software ships this fall with almost every new PC running Microsoft's forthcoming operating system.

AOL Time Warner is working overtime to ensure that the next version of its online software will ship this autumn with almost every new PC running Microsoft's Windows XP operating system.

Such placement could help the company more easily move its customers to the newer version of its software and combat the prominent placement of Microsoft's rival MSN service, analysts say. AOL's aggressive efforts have sparked a war of words in the already contentious relationship between AOL and Microsoft executives.

The media titan's America Online division claims more than 30 million subscribers. The deals with PC makers would ensure prominent placement for AOL 7, the upcoming version of its software, on both the desktop and the Start menu of Windows XP, said sources within the company. Microsoft's rival MSN online service boasts 6.5 million subscribers.

Top computer makers are negotiating about where AOL's software would be placed on or accessed from Windows XP, according to sources close to AOL and three computer makers. AOL also may be stepping up its long-standing practice of compensating PC makers for either bundling the software or offering a bounty for subscribers gained through the bundling.

In addition, Compaq Computer late Thursday said it would continue to feature AOL on the desktops of consumer PCs it sells. MSN, however, would have prime placement on the Start menu in Windows XP.

PC makers and AOL would not discuss current or future financial arrangements, but John Buckley, spokesman for the online service provider, acknowledged the deal brokering. "What AOL has sought is to be able to compensate OEMs (original equipment manufacturers) for promotional rights that Microsoft has taken for free," he said. "Of course Microsoft doesn't like that. No monopolist likes competition."

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AOL spokesman John Buckley says AOL on the desktop gives consumers more choices with Windows XP. (4:23) 
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Microsoft executives countered that AOL is being heavy-handed with PC makers. "The stuff AOL is doing now is just limiting market choice. It's unbelievably egregious," Microsoft CEO Steve Ballmer said Thursday at the company's financial analyst meeting at its Redmond, Wash., headquarters. Chairman Bill Gates said AOL is "trying to get OEMs to delete the features of Windows."

AOL 7 is expected to ship ahead of Windows XP's scheduled Oct. 25 launch. AOL is beta testing separate version 6 and 7 software packages for Windows XP. AOL 7 beta is designed to run on Windows 2000 or XP, but not earlier Windows versions such as 95, 98 or Me. AOL's Buckley said the official release version of AOL 7 will be available on Windows 95, 98, Me, 2000 and XP.

Dulles, Va.-based AOL stepped up its PC maker licensing deals after Windows XP bundling negotiations collapsed with Microsoft. AOL also hopes to take advantage of changes Microsoft made to Windows licensing that would allow competitors, such as AOL or RealNetworks, to have icons on the Windows XP Start menu.

Battle on all fronts
The backroom deal-making comes as competition heightens between Microsoft and AOL. Besides butting heads in areas such as instant messaging and online access, AOL and Microsoft are facing off in the e-commerce arena 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 bargaining point for controlling how consumers and businesses use the Internet. Both companies are working to recruit major e-commerce retailers to use their respective technologies.

But online service access and icon placement in Windows XP has become ground zero for the battle between the companies. Changes in Windows XP could also fuel additional growth in MSN subscribers. In Windows-licensing changes made this month, Microsoft agreed to let PC makers remove either Web browser--Internet Explorer 6 or MSN Explorer--from the operating system's Start menu. But if MSN Explorer is removed, PC makers must include a separate icon for the online service. This means MSN has a solid foothold on the Start menu.

"Clearly there's value to that real estate," said Mark Mooradian, an analyst at Jupiter Media Metrix. "Plugging in a computer and seeing that icon there is clearly valuable in today's marketplace."

AOL also has been negotiating to keep an icon for its service on the Windows XP desktop. Microsoft had planned to ship the new operating system with virtually no icons on the desktop, but backed away from that position with the change in licensing. PC makers now can choose which icons, if any, will go on the desktop.

While Microsoft included AOL software with every version of Windows shipped for about the past five years, AOL brokered separate deals with major PC makers. Among them: Compaq Computer, Dell Computer, Gateway, Hewlett-Packard, IBM and Toshiba.

"The key point here is the first impression the user gets," said Guernsey Research analyst Chris LeTocq. "AOL wants an icon on the desktop, and preferably a pop-up message that guides the user directly to AOL. Not only is this an offensive strategy for AOL, but also defensive."

Two PC makers said they did not expect their current financial arrangements with AOL to change. Those deals range from cash up-front at time of registration to bounties on new subscribers based on how long they stay with AOL.

LeTocq said the cash incentives could be "a significant portion of the margin on each PC. In fact a PC vendor that puts AOL on the desktop will get significantly more margin than their competitor. The question becomes, can a PC OEM afford not to put AOL on the desktop?"

Two PC makers said they would likely put AOL on the Start menu as well as the desktop. Another said it currently offers both AOL and MSN on the desktop but had made no final plans for the Start menu.

"Getting carriage on the desktop and how the placement will work is part of the discussions with the OEMs," said a source close to the discussions.

While AOL works to ensure placement for AOL 7 on Windows XP, the company publicly downplays the operating system's significance to gaining new subscribers.

"We're very comfortable with our position in the marketplace," AOL spokeswoman Kathy McKiernan said soon after the Microsoft negotiations collapsed. "If we had been able to come into terms with Microsoft that made sense, that would have been good. But we weren't, and that's just fine, too, because bundling on Windows is no longer a meaningful source of AOL subscriptions."

John Corcoran, an analyst from CIBC World Markets, said that in the long run, it would be more difficult for AOL to continue its pace of growth. The more people who use the service, the more difficult it will be to continue its rate of new subscriber additions. Thus, AOL will have to turn over every stone to find potential subscribers, including new Windows XP users.

"Once you get as big as AOL is, it will be important to generate subscribers through every single channel because the law of numbers will eventually work against you," Corcoran said. The Windows desktop is "a pretty good place to be because there are a lot of Microsoft desktops out there and (the number is) growing every day."'s Scott Ard contributed to this report.