AOl/Microsoft Settlement Could Cement Microsoft's Internet Dominance, AAI's Lande and Hawker Say in Press Release


AOL Time Warner and Microsoft entered into a settlement yesterday that ended their antitrust suit in a way that benefits both companies but is likely to harm competition and consumer choice. Before this settlement Microsoft dominated the web browser market, but it lacked control over the distribution of digital music and other multimedia content over the Internet. After this settlement Microsoft is well on its way to erecting a tollbooth on the Internet through which all multimedia content must pass. Consumers will be caught in a vice grip, both when they enter the Internet and when they try to download multimedia content from it.

AOL filed its antitrust suit because of Microsoft's anticompetitive behavior in the market for Internet browsers. This is the same activity that the Department of Justice challenged in its well publicized 1998 complaint. A unanimous decision in 2001 by the U.S. Court of Appeals held that Microsoft had violated the antitrust laws by illegally attempting to maintain its Windows operating system monopoly by destroying Netscape as an effective browser perceived to be a potential competitor to Windows. The Department of Justice subsequently entered into a settlement with Microsoft that the American Antitrust Institute and many others have criticized for doing nothing to restore competition to the browser market.

Since AOL's Netscape Navigator's browser had been the main victim of Microsoft's anticompetitive behavior, AOL had the right to file its own antitrust case against Microsoft and ask for damages and other relief that would restore competition to the affected market. Moreover, since Microsoft had already been found guilty of engaging in anticompetitive behavior, its liability was not in question. The question from consumers' perspective was whether AOL would succeed in restoring competition to the Internet browser market.

Sadly, nothing in the announced settlement does anything to lessen Microsoft's monopoly grip on the browser market. Instead it gives AOL Time Warner $750 million in cash and announces joint activity that is likely for three reasons to cement Microsoft's power over the Internet.

First, it gives AOL a 7 year royalty-free license to use Microsoft's browser. Although Netscape Navigator has been dying for years as a result of Microsoft's anticompetitive behavior, this agreement puts the final nails into its coffin. The settlement does nothing to increase the availability of competing browsers to consumers.

Second, the agreement sends a general signal that these two Internet giants have changed from competitors to partners. Fierce rivals in both the courtroom and the marketplace have in many respects become cozy. Closer examination of the now-private details of this new alliance will have to be undertaken, but it appears that AOL has effectively told the Internet community that it will not aggressively seek out technology that will help prevent or undermine Microsoft's dominance. Instead it will cooperate with Microsoft, and this can only act as a disincentive for software developers who want to create competing technologies. What chance does a software developer have of selling its web browser to AOL/Time Warner, the world's largest Internet Service Provider, when AOL/Time Warner can use Microsoft's Explorer for free?

Third, this settlement will help Microsoft dominate the digital rights management and with it the distribution of multimedia content on the Internet. The agreement provides that Microsoft's technology for encrypting and securing a variety of types of media content now will be used by the Internet's largest service provider. Although it appears that AOL Time Warner is not required to use Microsoft technology exclusively, this signals other media content providers that Microsoft's technology is well on the road to being dominant, so they also should use Microsoft's proprietary digital rights management software to ensure that AOL subscribers will be able to access their content. It also signals developers not to attempt to make competing encryption products - Microsoft already is in the process of locking up this market.

Before yesterday's settlement Microsoft dominated access to the Internet. After this settlement Microsoft is well on its way to dominating access to multimedia content on the Internet. Consumers will have no choice but to use Microsoft's products both coming and going, and website developers, music companies, and movie studios will have no choice but to use Microsoft's proprietary standards. They will all be caught in the middle, at the mercy of a monopoly whose power is growing.

The precise terms of the settlement are private. We urge the Department of Justice Antitrust Division and the State Attorneys' General to scrutinize it carefully to determine whether it is anticompetitive.