AOL, Microsoft learn to just get along

What were we fighting about?

The failure to find an answer to that question likely brought the long and complex feud between Microsoft and AOL Time Warner to an end. Although the software giant and the publishing conglomerate have fought in court and in the marketplace for years, the shifting industry landscape has made the two rivals unlikely allies again.

In many ways, the Microsoft-AOL rivalry is about two companies that tried to take on each other and failed. The duel was set, but someone always got lost on the way to the fight.

When AOL bought Netscape Communications in November 1998, for example, the online service provider was worried about being marginalized on the desktop by Microsoft. At the same time, the combined AOL and Netscape, in conjunction with Sun Microsystems, also planned to create a parallel software universe that would develop servers and software for consumer-electronics devices to challenge Microsoft.

What happened? Netscape's share of the browser market continued to plummet. Meanwhile, iPlanet, the software venture between AOL and Sun, largely dissolved. AOL laid off its iPlanet employees, and the remaining operations and intellectual property were absorbed by Sun.

In October 1999, AOL invested $800 million in PC maker Gateway as part of an effort to directly attack Microsoft. AOL became the default ISP on Gateway PCs, and the two companies said they planned to launch a series of consumer-electronics devices.

In November 2000, the companies unveiled the Touch Pad, a space-age home Internet terminal that ran the Linux operating system. Less than three months later, Gateway scrapped its CEO and, subsequently, its line of consumer electronics. Gateway has since began to resurrect its consumer electronics line.

Microsoft, meanwhile, hasn't exactly put the nails in AOL's coffin. In January, it reported that it had 9 million subscribers to its MSN service, well below the 32 million global subscribers that AOL reported. Analysts say the unit has racked up huge losses for years.

Despite the years of acrimony, the new alliance seems to fit the needs of both parties. Digital music will likely be an early area for cooperation. Apple Computer and RealNetworks have already charged into the market for online music delivery. Microsoft has a stellar record for selling products to middlemen such as PC makers, but a weak one for selling straight to consumers.

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With AOL, Microsoft can worry about building the back-end software and leave the marketing and artist issues to AOL. Similarly, AOL won't have to worry about corralling software developers anymore.

The $750 million settlement also gets rid of one of the last significant remnants of the Microsoft antitrust trial, which is rapidly becoming little more than the source of trivia questions. (Quick: Name the judge who ordered the company to be split.)

Agreeing to iron out the kinks in instant messaging interoperability also will help allow the technology to proliferate.

Most likely, this week's agreement won't mark the beginning of a new dynasty of cooperation. In 1996, then-AOL Chairman Steve Case and then-Microsoft CEO Bill Gates decided to drop a dispute and team up together on the desktop. AOL subscriptions grew and Internet Explorer began to eat away at Netscape's share.

The cooperation lasted less than two years. Still, for the time being, the deal made sense. So far, this latest agreement does too.