Life Yet for a Microsoft- AOL Deal?

The on-again, off-again talks between America Online and Microsoft Corp. belie the simple truth that both companies still need each other, despite their public posturing.

“They are two gigantic companies that are both partners and competitors, but they’re really more partners,” said Henry Blodget, an analyst at Merrill Lynch Global Securities in New York. Neither company, Blodget said, could afford simply to walk away from the other, regardless of the weekend breakdown in talks designed to extend their fragile alliance.

Tapping into AOL’s 29 million Internet users is critical to Microsoft’s plan to shift its products--ranging from instant messaging to Windows Media Player--to the Web. If AOL software doesn’t work smoothly on the new Windows XP operating system, Microsoft probably will see sales skid.

AOL, by contrast, still depends upon Microsoft’s Internet Explorer browser, which many believe is superior to AOL’s own Netscape Navigator. And though the Dulles, Va.-based Internet company, a unit of AOL Time Warner Inc., has tried to play down the importance of bundling its software into Windows, such an arrangement would be a major source of growth forthe nation’s No. 1 Internet service provider.

“They still need each other,” said Neil MacDonald, director of research at Stamford, Conn.-based Gartner Group. “They’re just too stubborn to admit it.”

MacDonald predicted that the two companies will pick up negotiations again, if they haven’t already done so behind the scenes.

“They would both be better off by cooperating,” MacDonald said. “The problem is now you have egos involved, and neither side wants to back down.”

Spokesmen for both companies insisted Monday that this time, talks will not resume. “We’re done,” said AOL’s John Buckley.

The chief issues being discussed were whether AOL would link its instant-messaging system to other such programs; whether an AOL link would be included on Windows XP; and whether Microsoft’s Windows Media Player, which can be used to listen to music online, would be supported on AOL, which currently has an exclusive deal with RealNetworks Inc.

For consumers and customers, the breakdown won’t trigger any immediate or noticeable changes. Over time, competition could lead to lower prices and more choice of products. But analysts warned that consumers also could become the casualties of a take-no-prisoners war in which the companies design software and products that don’t work well together.

Each company blamed the other for the breakdown in talks.

Microsoft officials said AOL tried to use the negotiations to embarrass the software giant as it awaited a ruling in its appeal of last year’s court order that it be split in half. They noted that AOL briefed several congressional staffers in March and made a presentation before the National Assn. of Attorneys General, claiming that Microsoft was using the same anti-consumer tactics that got it into regulatory trouble in the first place.

AOL officials insisted that the timing of the talks was unrelated to the pending antitrust ruling. They said their complaints to regulators and lawmakers were triggered by Microsoft’s upcoming roll-out of Windows XP, which is set to be released in October.

Likewise, the companies disagreed on why the talks broke down.

AOL officials said Microsoft was demanding that it dump the RealNetworks’ player and use Microsoft’s instead. Microsoft blamed the impasse on AOL’s refusal to make its instant-messaging system compatible with rivals’ systems.

But each company’s effort to portray the other as a dangerous monopolist strikes many as a bad case of the pot calling the kettle black.

Noting that both AOL and Microsoft have been unusually open about discussing the private details of their negotiations, analysts speculate that each is trying to make the other look bad in the eyes of government leaders.

That might not be difficult. On Capitol Hill, both companies are increasingly viewed with skepticism.

“We’re not buying either side hook, line and sinker,” said a congressional staffer who has listened to officials from the two companies bash the other. “They both have dirty hands.”