Has Microsoft Met Its Match?

AOL could be the one company to offer it a real court battle

In the heavyweight slugfest between AOL Time Warner Inc. (AOL ) and Microsoft Corp. (MSFT ), AOL usually gives as good as it gets. The one exception: Web browsers. AOL's Netscape browser is used by 21.4% of home users, while 89% use Microsoft's Internet Explorer. But what AOL hasn't won in the marketplace, it's trying to win in the courts. Piling on top of the Microsoft case being pressed by nine state attorneys general, AOL on Jan. 22 filed its own Microsoft antitrust action.

While AOL stands to gain from a court ruling that could bring billions of dollars in damages, it takes on risks as well. In court, Microsoft could turn the tables and accuse AOL of antitrust behavior. And, even if AOL wins, its declaration of war against Microsoft could provoke the software powerhouse to battle AOL even more ferociously.

Yet, it appears the rewards are bigger than the risks. In AOL, Microsoft faces a more determined foe than the Justice Dept., which signed off on a settlement on Nov. 2 that has been criticized as being too weak. Vying with Microsoft for potentially huge emerging markets, ranging from Web services to interactive television, AOL stands to gain both strategic advantages and a financial windfall with a courtroom win. "This is not someone whom Microsoft can buy off with a cheap settlement," says Edward J. Black, president of the Computer & Communications Industry Assn.

AOL has a strong case. Coming on the heels of a District of Columbia Court of Appeals ruling on June 28, 2001, which held Microsoft a monopolist in its actions against Netscape, AOL has had much of its work done for it. "AOL has a good chance of prevailing by piggybacking on the findings of the D.C. Circuit," says Alan J. Meese, visiting antitrust law professor at the University of Virginia.

If AOL wins, the spoils could be rich. In addition to the monetary damage award, AOL is seeking a ruling that could wind up requiring Microsoft to offer its Windows operating system without Microsoft's browser and other applications such as its instant messenger and its Passport personal authentication service. If Microsoft were unable to leverage its dominance in the PC operating system to take advantage of these new products, AOL's competing services could get a big leg up. Microsoft scoffs at AOL's legal gambit as an attempt to gain advantage in the marketplace. Says Microsoft spokesman Vivek Varma: "This is just the next legal tactic in their business plan."

AOL, however, may not end up with much of an advantage if a judge merely requires Microsoft to unbundle its browser from Windows. The number of consumers who use Netscape's browser actually declined by 5%, to 15 million, between May and October last year, according to Jupiter Media Metrix Inc. "The problem is the market has changed so dramatically [that] it's not clear an injunction is going to change the proportion of Netscape and Microsoft browsers at this stage," says Lawrence Lessig, a law professor at Stanford University.

What's more, AOL may be inviting antitrust trouble of its own. During the trial, Microsoft could lob a counterclaim against AOL for behaving unfairly in markets it dominates. "AOL has not been labeled a monopolist so far, but that day may come," says Richard Doherty, director of research at Envisioneering Group. AOL rules the instant-messaging realm, with 41.7 million home users, vs. 18.5 million for Microsoft. And AOL refuses to make its technology compatible with others.

While the payoff is uncertain for AOL, it's more likely to be rewarded than punished for seeking its day in court. Still, the suit raises the stakes in what is shaping up to be an all-out struggle for dominance of the next phase of the Internet.

Corrections and Clarifications In "Has Microsoft met its match?" (Information Technology, Feb. 4), the percentages of users of competing Web browsers add up to more than 100 because many people use more than one browser.

By Catherine Yang in Washington with Jay Greene in Seattle

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