Microsoft-AOL settlement - a win-win?

In the first quarter, 55.8 per cent of worldwide shipments came from PC makers not among the top five, according to research firm Gartner. Under Thursday's deal, these builders will get AOL discs when they order Windows. "This could be pretty big for AOL," said Roger Kay, an analyst at IDC.

As for the two headline-grabbing elements of the settlement - the $750m payment and the dropping of the anti-trust suit - Microsoft and AOL can each claim to be the winner. AOL can use the funds to pay off some of its $26.3bn in debt and Microsoft can cross off its to-do list one of many nagging lawsuits.

The company has settled with nine states and the US Department of Justice over claims that Microsoft abused its monopoly power. Two states have appealed that settlement. The Bush administration said this week that it won't help Microsoft in that battle.

Sun Microsystems has its own anti-trust case against Microsoft, as does defunct operating system maker Be. A Sun representative declined to comment on the AOL settlement.

"Microsoft has been very pragmatic in putting its anti-trust issues behind it," said Rich Gray, an anti-trust lawyer in Silicon Valley who's tracked Microsoft anti-trust battles for years. "What will be interesting is to see if they settle with Sun. That's a bit more of a grudge match."

Jupiter Research analyst Michael Gartenberg said the agreement is a win for both AOL Time Warner and Microsoft.

"Microsoft gets to put probably the biggest of the anti-trust and anti-competitive lawsuits behind it while simultaneously using this as an opportunity to drive things forward like Internet Explorer and Windows Media," he said. "AOL and Netscape are vindicated. They are walking away with a significant amount of cash."

Gartenberg said AOL also benefits from Microsoft distributing its software while losing little by potentially adopting Microsoft's media technology. "There is very little downside for them to accept the media technology because it's not a business they are in in the first place."

Gartenberg said it remains to be seen what the deal means for companies that produce media software in competition with Microsoft.

"AOL has not announced any change in its technology architecture," Gartenberg said. "The real question is, in the future, which technologies AOL will opt to use. That will ultimately determine the impact of this deal."

As for AOL's licence of Internet Explorer, Gartenberg said the impact will be minimal. "There isn't anyone else in the browser market. I guess the Opera guys are sort of left out."

Despite AOL's seven-year contract to use IE in its flagship service, Parsons was vague about the future of Netscape beyond maintaining it as a subsidiary under AOL. He said AOL is continuing to evaluate Netscape for its value but pledged AOL's support for IE.

Gates and Parsons were not specific about the timing of the settlement. Parsons said there was "no magic in the timing", adding that Gates called him six to eight weeks ago to discuss a potential agreement.

The deal comes just weeks after Steve Case ceded his role as chairman of AOL Time Warner. Case said in January that he would step down this month. Case remains on the board of AOL Time Warner.

Despite the deal with Microsoft, AOL will continue to do business with companies such as RealNetworks and others, Parsons said, stressing that the deal with Microsoft is not exclusive. "We'll work with all of the players in the market who are trying to find ways to bring what we produce and create in this company to consumers... in a secure way."

As for instant-messaging interoperability, Gates did not offer any specific timeline for allowing their rival services to communicate. The deal is more of an agreement to hold discussions rather than a technological roadmap.

"We've created an overall framework for us to have a very focused discussion on IM interoperability," Gates said during the call.

The deal was announced after the stock markets had closed. In after-hours trading, Microsoft shares were down about 13 cents to $24.27 and AOL shares were up 43 cents to $15.29.

Ian Fried and Jim Hu writes for CNET News.com.