NOW it's war: Competition between Microsoft, AOL at its height

Thursday, August 9th 2001, 12:00 am

By: News On 6

SEATTLE (AP) _ There was a time when it seemed software giant Microsoft Corp. and media conglomerate AOL Time Warner could, if not be friends, at least come to some sort of peace accord.

But now, as the software maker and the Internet provider increasingly head toward the same corporate goal _ making money off paid Internet services _ the kid gloves have come off.

The occasional partners and longtime rivals are fighting a bitter battle for what both see as a vast and virtually untapped market. Through secure systems that would know a person's identity on the Internet, including passwords, credit card information, perhaps even personal calendar, both companies see a future of making money on everything from developing digital pictures to listening to music.

``This is kind of a fight to the death between the two of them,'' says Rob Enderle, an analyst with Giga Information Systems. ``To win, neither one of them wants the other one to be around.''

In the East: AOL, valued at $226 billion.

Home to the nation's most popular Internet service and some of the country's best-known media holdings, the New York company is taunting Microsoft with a powerful weapon: Microsoft's ongoing antitrust case.

Referring to Microsoft as often as possible a ``desktop monopoly'' and to itself as a victim, AOL wants computer makers to feature its e-mail service rather than Microsoft's and is lobbying lawmakers to legally force Microsoft to let that happen.

In the West: Microsoft, with a market value of $394 billion.

Maker of the dominant Windows desktop operating system and second-most popular e-mail service, the Redmond company also isn't afraid to cry foul at AOL's considerable strength _ especially when it comes to AOL's dominant instant messaging and e-mail system.

Most recently, Microsoft has taken jabs at AOL's customer base with an ad campaign aimed at getting Internet access users to switch _ and get three months' free service.

The heart of the battlefield is the desktop computer, home to Microsoft Corp.'s forthcoming Windows XP.

With the new desktop operating system, due out in October, Microsoft plans to add many of the Internet-ready features that will pave the way for its paid Internet services called .NET. This includes Windows Messenger, its version of instant messaging, and a system for holding passwords and other personal data called Passport.

AOL, which already has an Internet service that includes electronic commerce and other members-only services for tracking expenses and other personal preferences, also has plans to release a system for holding passwords and personal data on the Internet.

AOL also is lobbying hard for lawmakers to block Windows XP's release based on antitrust concerns, and is offering computer makers monetary incentives for placing its products on the computer desktop _ and removing Microsoft's.

Calling that anticompetitive, Microsoft has said it will force computer makers who feature AOL's products on computer desktops to also feature Microsoft's MSN service.

Neither side is willing to back down. Microsoft executive Jim Allchin recently vowed to go forward with Windows XP as planned, despite concerns from Washington lawmakers and from those involved in the federal antitrust case against Microsoft.

AOL Vice President John Buckley accuses Microsoft of trying ``to redesign the Internet with Microsoft as a gatekeeper,'' and says, ``There is no way we are going to back off.''

Microsoft responds that AOL mischaracterizes its technology.

``I would say that AOL ... seems to be focused more on politics and lobbying to compensate for a lack of ability to innovate on their product,'' says spokesman Vivek Varma.

Both companies also are quick to point out that they work together on some fronts, such as making Windows compatible with AOL's Internet service.

But that's not enough to offset the bad blood, analysts say.

``When you see company strategies revolving very much around P.R. campaigns and legal strategies, it usually means things have gone pretty bad,'' says David Smith, vice president of Internet strategy for Gartner Group.

For other technology companies, this battle couldn't come at a worse time. The industry is in a deep slump, and many hope Microsoft's new operating system will spur an upswing in personal computer purchases.

But Enderle warns that both companies are so intent on killing the other that they may unintentionally kill the whole market by alienating customers who fear AOL and Microsoft's new products won't work with each other, or who just don't understand what's being offered.

``The reason to buy gets buried underneath (this bickering) ... and in the end these folks go out and buy a VCR instead of a computer,'' Enderle says.

As the war of words rages on, analysts also fear that consumers will choose between which company is likes _ or dislikes _ most, and not which product is best.

But most industry watchers believe that eventually the two companies will be forced to cooperate better, for the sake of their many overlapping customers.

``AOL needs Microsoft and Microsoft needs AOL,'' says Billy Pidgeon, an analyst with Jupiter Media Metrix. ``I think they'll always cooperate and always be competitors.''

In the immediate future, however, neither side seems willing to give peace a chance.

``There's no short-term likelihood that we'll sit around singing 'Kum-ba-yah,''' Buckley says.