Thursday, October 29, 1998

America Online says Internet contract hinged on Windows

By TED BRIDIS Associated Press

WASHINGTON - A senior executive with America Online adamantly disputed claims Wednesday by Microsoft Corp. that AOL distributed Microsoft's Internet software because it was better technology.

Instead, David Colburn, AOL's senior vice president, supported the government's charge that Microsoft won the important 1996 deal because of its influence as the maker of the hugely popular Windows operating system.

Under the deal, AOL agreed to distribute Microsoft's Internet browser rather than rival Netscape's in exchange for adding to AOL's online service convenient access into Windows.

"It was a close call on the technology, but what put it over the top was the distribution on the desktop," Colburn said.

A browser lets people view information on the Internet.

The contract is important because Microsoft, whose Internet Explorer browser wasn't as popular in early 1996 as Netscape's, was able to ensure distribution of its software to AOL's roughly 13 million customers of AOL.

In one of the most significant business trials of the computer age, the government contends that Microsoft illegally wielded the monopoly power it got from its dominant Windows product to expand into new markets, such as for Internet software, and thus crush Netscape.

Documents unsealed so far in the antitrust case reveal that Microsoft and Netscape aggressively courted AOL Chairman Steve Case in late 1995 and early 1996. Both companies realized the huge untapped market potential in AOL, the world's largest Internet provider.

But Netscape enjoyed one advantage: Microsoft, which had had launched its own MSN online service, also was AOL's competitor at the same time it was trying to win its browser business. AOL's Case was furious that Microsoft planned to offer millions of Windows 95 customers easy access to MSN by including its software in Windows.

"For the first time, we were facing a competitor, MSN, that was going to be on the desktop at no cost," Colburn recalled Wednesday, describing Microsoft's advantage as "tremendous power."

Netscape's chief executive officer, James Barksdale, playfully wrote e-mail to Case in October 1995 portraying their two companies as the Allies battling the Axis powers of World War II.

"If we fight them together we can win," wrote Barksdale. "The enemy of my enemy is my friend." He called Case "Franklin D." and signed the e-mail: "Your comrade, Joseph Stalin."

By early January, Case was on the phone with Microsoft Chairman Bill Gates warning that AOL was "on a path to close with Netscape before the end of the month."

Gates then wrote an e-mail to other Microsoft executives: "He said he views us technically as behind Netscape but credible enough to do a very good job. ... I said (Microsoft's browser) will be free to him."

Microsoft contends it ultimately won AOL's business because it was willing to customize its browser to work better with AOL's own software.

Microsoft's lawyer, John Warden, confronted Colburn on Wednesday with pretrial testimony in which Colburn said, "At the time, we felt that Microsoft was the best technological solution for us."

Colburn responded that was true for AOL's current software. But he argued that in 1996 more than half of AOL's customers used an older version of Windows that didn't work as well with Microsoft's browser software.

The government has charged that Microsoft wanted AOL's business so badly it was willing to include AOL in Windows at the expense of its own online service, which has since proved an unqualified flop.

Barksdale, who ended five days of cross-examination Tuesday, testified that Case had explained to him Microsoft's offer to include AOL in Windows "was worth a lot of money to them."

Under the contract, made public Wednesday, Microsoft agreed to pay AOL $500,000 in promotional fees and up to $1.6 million for AOL customers who switched to use the company's Internet software.