May 29 (Bloomberg) -- Microsoft Corp., the world's largest software maker, agreed to pay AOL Time Warner Inc. $750 million to settle antitrust charges over Internet browsers, clearing the way for the longtime rivals to cooperate on fighting piracy.

Microsoft and AOL Time Warner, the world's largest media company and owner of the top Internet service, will develop programs to cut down on the theft of movies and music over the Web and will collaborate on ways to deliver instant messages.

The Redmond, Washington-based software maker is trying to resolve its legal disputes, and AOL Time Warner needs cash as the New York-based company tries to reduce its $26.3 billion in debt. Both were ready to compromise because they each want to boost online music and video sales, which have been hampered by piracy concerns, investors said.

``It's good for both of them,'' said Bill Rutherford, who manages about $25 million at Portland, Oregon-based Rutherford Capital Management, which owns Microsoft shares. ``$750 million doesn't mean anything to Microsoft. It means something to AOL, but more important is that they get this issue behind them.''

Microsoft, which had $46.2 billion in cash and securities and no debt as of March, was found guilty of illegally protecting its Windows monopoly for personal-computer operating software. It develops Internet Explorer, now the most popular browser, and runs the No. 2 U.S. Internet service.

AOL Time Warner filed a lawsuit against Microsoft in 2002 seeking billions of dollars in damages for crushing the rival Netscape Navigator browser program in the 1990s. AOL Time Warner acquired Netscape after the U.S. government filed its antitrust suit against Microsoft. The court said Microsoft had waged a campaign to curb distribution of Netscape Navigator to keep it from posing a threat to Windows.

Bitter Rivals

Microsoft shares fell 9 cents to $24.31, and AOL Time Warner gained 48 cents to $15.33 at 6:25 p.m. after the settlement was announced.

Microsoft and AOL Time Warner's America Online, which once worked together to distribute the Internet service through Windows, have become bitter enemies in the past several years.

Microsoft has invested billions in its competing MSN Internet service and has seen America Online as its main competition. MSN offered discounts for customers switching from America Online and provided those customers with software tools to help forward their e-mail and move their address books from America Online.

The two agreed in 1996 to put America Online software in Windows, enabling Windows customers to easily sign up for the AOL Internet service. In exchange, America Online used Microsoft's browser. During the partnership, which expired in 2001, America Online's subscribers swelled to more than 29 million and Microsoft took the lead in the browser market.

Failed Talks

The companies held talks to extend the agreement and failed to agree on terms, amid rising competition and intensifying legal issues. One stumbling block was a dispute over whether America Online would let clients access audio and video through its service coded in a Microsoft software format.

Now, Microsoft will give AOL Time Warner a long-term license to use its Internet browser and audio and video software, as well as distribute AOL Time Warner's Internet service to some PC users, Microsoft said in a statement.

The companies will work together on initiatives to promote software and security mechanisms for playing music and movies on the Internet, an area where media companies have been reluctant to invest because of piracy concerns. The two will collaborate on software that protects content from theft.

They will look for ways to make their instant-messaging software, which lets users send quick e-mails, work together.

Many Changes

``A lot has changed in the last few years,'' Microsoft Chairman and founder Bill Gates said in a teleconference. ``We have some shared goals in terms of how we can evolve the digital- media market.''

Gates called AOL Time Warner Chairman and Chief Executive Richard Parsons ``six to eight weeks ago'' to ask for a settlement, Parsons said.

Parsons may have been willing to accept because he's under pressure to raise cash and reduce the company's debt, investors said. Standard & Poor's said last month it might lower the company's BBB+ credit rating.

George Gilbert, who helps manage about $340 million in technology stocks at Northern Trust Bank and holds shares of both companies, said he had estimated that AOL Time Warner might have gotten at least $1 billion in damages if it hadn't settled.

``Dick Parsons' primary objective is to bring the debt load down,'' he said.

`Major Holdup'

Parsons says he acted out of a desire to end the legal wrangling and the need to control piracy to enable AOL Time Warner to sell its programming on the Internet.

``The major holdup of the onset of that evolution is piracy,'' Parsons said. ``Until we can help figure out how to create an environment that is secure,'' AOL Time Warner isn't ``going to be able to expand the market.''

The agreement to cooperate signals an end to a rivalry that stifled innovation and investment in the Internet, said Jonathan Zuck, executive director of the Association for Competitive Technology, a trade group that supported Microsoft's antitrust fight against the government.

The two ``have got a common interest in the growth of Internet services'' so that ``the differences they had are dwarfed by the interests they have in common,'' Zuck said.

Microsoft pledged to make sure AOL Time Warner's America Online will work well with its Windows operating system that runs more than 90 percent of PCs. Microsoft will provide AOL Time Warner with technical information and involve the company in development of the next version of Windows.

Microsoft also will provide AOL Time Warner support from engineers with access to the programming code underlying Windows and let an AOL development team work at Microsoft's headquarters. The companies will create an executive council to resolve issues.

Last Updated: May 29, 2003 19:48 EDT