News > Technology
Microsoft to pay AOL $750M
Tech titans settle Netscape lawsuit, set seven-year licensing pact for AOL to use Internet Explorer.
May 30, 2003: 10:25 AM EDT
By Paul R. La Monica, CNN/Money Senior Writer

NEW YORK (CNN/Money) - Microsoft will pay $750 million to AOL Time Warner to settle an antitrust lawsuit filed by AOL on behalf of its subsidiary Netscape last year, the companies said Thursday.

The two companies also set a seven-year licensing agreement that allows AOL Time Warner to use Microsoft's Internet Explorer browsing technology in its flagship Internet service provider service without having to pay royalties. AOL Time Warner is the parent of CNN/Money.

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CNNfn's Chris Huntington reports on the key details of the $750 million settlement between AOL Time Warner and Microsoft.

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The settlement is part of what appears to be a series of new collaborations between the two companies, which have been bitter rivals in recent years.

Microsoft and AOL said, for example, that they will work together to make their AOL and MSN instant messaging services work more smoothly together, and that they agreed to fight digital piracy and come up with ways for Internet users to legally download copyrighted content.

"While our companies will continue to compete, I'm pleased that we've been able to resolve our prior dispute, and I'm excited about the opportunity to work together collaboratively to make the digital decade a reality," Microsoft Chairman Bill Gates said in a statement.

The world's largest media company and Microsoft, the biggest software maker, have squared off on several fronts in recent years. New York-based AOL Time Warner sued Redmond, Wash.-based Microsoft in January 2002, alleging Microsoft had competed unfairly to cripple AOL's once-dominant Netscape browser.

"Our agreement to work together on digital media initiatives marks an important step forward in better serving consumers and protecting the interests of all content businesses," AOL Time Warner Chairman Richard Parsons said in the statement. "We look forward to others in the media and entertainment industries joining together with us to help to advance the digital distribution of content to consumers while maintaining copyright protection."

Shares of both AOL Time Warner (AOL: up $0.45 to $15.30, Research, Estimates) and Microsoft (MSFT: up $0.25 to $24.65, Research, Estimates) advanced Friday. Microsoft dipped slightly in after-hours trading Thursday following the announcement, but AOL Time Warner's stock rose 3 percent in after-hours trading, according to Instinet.

David Joyce, an analyst with Guzman & Co., said that the settlement could provide a short-term pop to AOL's stock price but is not a huge development in the broader scheme of things as AOL still faces concerns about declining subscriber growth in its dial-up business.

"$750 million is a decent chunk of change, and AOL Time Warner is trying to pay down debt, so this would help a little bit from that perspective," Joyce said. "But with all of AOL Time Warner's issues, the antitrust case was not front and center."

During a conference call, Parsons confirmed that AOL Time Warner would use the proceeds from the settlement to pay off part of its debt.

For Microsoft, the $750 million payment hardly dents its cash hoard of more than $46 billion.

However, Friedman Billings Ramsey software analyst David Hilal said that Microsoft will probably need to take a 5-cent-a-share charge to its fiscal fourth-quarter earnings as a result of the settlement. Analysts currently expect Microsoft to earn 24 cents a share for the quarter, not including charges.

One other consequence of the settlement is that it may lead to a further phasing out of Netscape now that AOL has agreed to cooperate more closely with Microsoft. "Netscape is less and less of a priority for AOL Time Warner, and this is just another step in the slow sun-setting process of Netscape Navigator," said Hilal.

In response to a question during the conference call about Netscape's fate, Parsons said that AOL Time Warner had no plans to shut down or get rid of the unit.

AOL and Microsoft were not the only two companies impacted by their announcement. Their newfound cooperation in digital media had some investors in RealNetworks (RNWK: Research, Estimates), whose RealPlayer competes with Windows Media Player, concerned since AOL has a partnership with RealNetworks. Shares fell 3 percent in after-hours trading.

But Parsons was quick to point out that AOL's agreements with Microsoft are not exclusive kinds of arrangements and that AOL will continue to do business with RealNetworks.

Analysts quoted in this story do not own shares of AOL Time Warner or Microsoft, and their firms do not have investment banking relationships with either company.  Top of page

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