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March 13, 1996

Microsoft Gets Big Boost on Internet

By PETER H. LEWIS

What a difference a day makes in cyberspace.

When the smoke cleared Tuesday, America Online's software partner of choice turned out to be Microsoft -- not Netscape Communications, which seemed to be the favorite a day earlier.

The surprising shift demonstrated Microsoft Corp.'s continuing ability to use its market power in the computer industry to push aside a rival. And it gave America Online Inc. yet another big partner in its bid to increase its lead in the on-line services industry, while expanding into the broader Internet market.

A day after it announced a licensing agreement to adopt Netscape Communications Inc.'s popular Navigator software for browsing the Internet's World Wide Web, America Online said Tuesday that it would make Microsoft's rival program, Internet Explorer, its primary software for browsing the Web.

Netscape's Navigator will be offered as an option, America Online explained to a surprised industry Tuesday, but it will not be integrated directly into the millions of software packages that America Online sends to customers. That special status will be reserved for Microsoft's Explorer software.

In return, Microsoft agreed to integrate America Online's network-access software into all future versions of its industry-dominant Windows 95 operating system -- one mouse click away from the button for Microsoft's own, competing MSN on-line service.

That quid pro quo was agreed to late Monday night, according to people familiar with the deal. The agreement was signed only hours after America Online had helped give a 15 percent lift to Netscape's stock price by agreeing to license Netscape Navigator.

Tuesday, as word of the Microsoft-America Online deal spread, Netscape's stock fell $1, to close at $45.25.

American Online's stock, which soared on Monday, was up again Tuesday, to close at $55.50, up $7.125.

Microsoft Windows is the dominant operating system software for personal computers Tuesday, controlling more than 100 million computers, and it was a bargaining chip that Netscape could not match. By clicking on the America Online icon on the Windows 95 screen, a computer user with a modem will get immediate access to the America Online information service.

Analysts said the inclusion of an America Online access button in Microsoft Windows, along with Monday's announcement of an alliance between America Online and AT&T's new Internet access business, could easily help America Online double in size within a year.

The company, based in Vienna, Va., currently has 5.5 million subscribers.

Meanwhile, Compuserve Inc., a unit of H&R Block and the No. 2 on-line service with 4.3 million subscribers, is expected to announce Tuesday that its new Wow on-line service aimed at families and computer novices will use Microsoft's Internet Explorer software exclusively.

Compuserve had said earlier that Explorer would be the primary software for its older Compuserve Information Service, which is intended for a more professional clientele.

Friday, in what was seen as a setback for Microsoft, Compuserve said it too had licensed Netscape Navigator for the Compuserve Information Service. But Compuserve executives clarified Tuesday that Navigator would only be offered as an option for the older service and that Microsoft's Explorer would be the preferred browser.

People familiar with the negotiations between Microsoft and Compuserve said that an access button for both Compuserve services would also be integrated into Windows 95 and future Microsoft operating system products, right next to the America Online button.

But analysts said the real winner was America Online.

"This story is more about Steve Case than it is about Bill Gates or Jim Clark of Netscape," said Mark R. Anderson, principal of the Strategic News Service, an electronic newsletter, referring to the chairmen of America Online, Microsoft and Netscape, respectively.

"Microsoft is licensing at no cost or low cost in an attempt to gain market share for its browser software, and I doubt there will be any alliance partner who will say no," Anderson said.

Case and Gates said Tuesday that no cash changed hands in the deal, and both men said that they would remain aggressive competitors in the race to sign up customers and information providers for their on-line services.

But the alliance clearly soothes bad feelings between America Online and Microsoft, and removes one potential headache for Microsoft. Last year Microsoft came under investigation by the Justice Department -- in part, at America Online's instigation -- for including the MSN network-access button on the Windows 95 screen, without including access buttons for other, rival on-line services.

Case of America Online had been the loudest critic of Microsoft's use of its operating system software to sell access to its own on-line service.

"We argued that there ought to be a level playing field, and now there is one," Case said Tuesday. Gates played down the antitrust aspect of the deal Tuesday, saying the Justice Department had not been actively pursuing the issue since last year.

Microsoft's own plans for MSN have also changed since last summer. Several months after it inaugurated its MSN service as a competitor to America Online, Microsoft revamped the on-line service to be more of a pure Internet access service.

And at an Internet briefing Dec. 7, Gates referred to Netscape as one of his company's most formidable competitors.

"Very important for us in competing with them will be growing our browser share," Gates said at that briefing, referring to the software needed to navigate, or browse, the Internet's popular World Wide Web. "That's a metric that I will look at on a very regular basis and see what it is that we need to do."

What Gates apparently decided that Microsoft needed to do was get its Web browser onto as many PCs as possible. At the end of the day Tuesday, Microsoft had agreements making its Explorer the preferred choice on the two largest on-line services, which together have nearly 10 million subscribers, and which are both beginning major expansions overseas.

"This represents a major inroad in the Internet browser business for Microsoft, and it hurts Netscape," said Gene DeRose, president of Jupiter Communications Inc. of New York. "But it is a mistake to characterize things simply as Microsoft versus Netscape. The key thing is the realization that AOL is in the driver's seat, right in the middle of all these deals."

"AT&T realized that it was just as important to provide its customers with access to AOL as it was to offer access to the Internet itself," DeRose said.

In the last two days, America Online has struck deals to make its software available to potentially tens of millions of new customers, through AT&T's Worldnet Internet access service and Microsoft's Windows operating system.

As for Microsoft, some analysts noted that while the company appeared to have the upper hand Tuesday, Netscape remained the dominant software among computer users who surf the Internet.

"It may seem like Microsoft has the browser of choice, but it remains very much a choice between it and Netscape's," said Peter Krasilovsky of Arlen Communications Inc. of Bethesda, Md.

And Netscape executives, who were said to be piqued by Tuesday's startling turn of affairs, were quick to put on a positive public face.

"When the dust settles a week from now, the fact of the matter is that every AOL customer will be pointing and clicking and downloading anything they want," said Mike Homer, Netscape's head of marketing. "Our expectation is that a vast majority will download Navigator, because that's what they do on the Internet today."

"Their customers are demanding Netscape," Homer said of America Online. "That's the reason they are licensing from us and paying us a lot of money. All the positioning around primary choice and secondary choice and most important partner is, frankly, just a bunch of marketing hype."


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