Microsoft Trial Update: AOL Exec To Testify About Microsoft Pressure

WASHINGTON, D.C. -- America Online Inc. signed a deal to use Microsoft Corp.'s Internet Explorer because of the software giant's promise to include the online service with Windows 95, said David Colburn, America Online's vice president of business affairs.

Colburn, who will take the witness stand Wednesday as the government's second witness, said in written testimony released Tuesday that America Online continued to strike a series of browser agreements with Microsoft over the past two years to ensure the company received exposure to users of the Windows operating system.

In a deal signed March 12, 1996, AOL agreed to use Internet Explorer as its default browser in its client software, while Microsoft agreed to bundle AOL in Windows and promote in an "Online Services" folder.

AOL would only be allowed to ship a secondary browser, such as Netscape Communications Corp.'s Navigator, when a third party-provider, distributor or corporate customer required it, Colburn said. Even then, the number of third-party browsers AOL would be allowed to distribute would be less than 15 percent of AOL's total browser shipments, he said.

"Microsoft attempted to secure exclusive distribution and promotion for Internet Explorer, with no or few exceptions or promotion of a competitive browser," Colburn said. "AOL ultimately agreed to these restrictions in order to obtain bundling with Windows...."

In its antitrust trial against Microsoft, the government has accused the Redmond, Wash. software behemoth of using its monopoly power in the operating systems space to gain market share in other technologies, such as the Internet.

Colburn in his sworn testimony said AOL - which now has 13 million users - needed to strike the browser deal with Microsoft and gain a presence on the Windows desktop to counteract the fact that Microsoft was bundling Microsoft Network, AOL's competitor, into the operating system.

While AOL felt both Netscape and Microsoft browsers were equals technologically, "the willingness of Microsoft to bundle AOL in some form with the Windows operating system was a critically important competitive factor that was impossible for Netscape to match," he said.

After the Microsoft deal was signed, AOL attempted to continue to work with Netscape, Colburn said.

In one agreement, Netscape agreed to distribute America Online's Instant Messenger chat software, but "the restrictions in the Microsoft agreements prevented AOL from compensating Netscape through distribution or promotion of its browser on the AOL service."

In September 1997, AOL and Microsoft struck another deal that allowed AOL to have a presence on Internet Explorer 4.0's "Channel Bar," which if clicked would take a user to a referral page that included promotions for Internet Service Providers.

"AOL was concerned that Microsoft's purpose in doing this was at least in part to dilute the benefits that AOL bargained for in the March 1996 agreement," Colburn said.

The agreement prohibited AOL from promoting Netscape Navigator within AOL Web sites and from compensating Netscape for marketing, distributing and promoting AOL content, Colburn said.

AOL signed another deal this month with Microsoft that will give the company more visibility on Windows 98, he said. When a Windows user starts a new computer, a welcome screen will show four links, which include an Internet Referral Server. Because of worries that the visibility of the Online Services folder from the original agreement would be further, reduced, AOL signed the new deal, Colburn said.

"AOL continued to believe that it needed to have as close to comparable exposure as possible to whatever Microsoft online services Microsoft was seeking to promote."

Overall, AOL would not have signed a browser deal with Microsoft if the software firm had not been willing to bundle and promote AOL on Windows, Colburn said. And AOL would not have accepted the restrictions on its dealings with Netscape if Microsoft had not insisted on them, he added.

While the original browser agreement with Microsoft has a few years left, AOL can choose this year to end the exclusivity provisions in the contract, Colburn said.

While AOL is inclined to license the Netscape browser, AOL will most likely continue to go with the contract because AOL's inclusion in Windows - and the distribution channel that provides - is too important, he said.

Microsoft rebutted Colburn's written testimony in a press release released late Tuesday.

"Mr. Colburn himself has been quoted confirming that AOL's decision to use the Internet Explorer technologies was based in large part on superior technology," said Microsoft's press release, which called Colburn's written account, 'revisionist history."

In his written testimony, Colburn said Netscape was willing to componentize its browser. But Microsoft said it will show evidence to the contrary when it cross-examines Colburn.

According to a quote by Colburn in Kara Swisher's book, "aol.com," Colburn said: "Netscape did not want to change Navigator in any substantial way to accommodate AOL, and wanted Navigator to sit on top of AOL, directing users to the Netscape site as they entered the Web. But AOL wanted to deliver to the consumer a customized browser that was seamlessly integrated into the service... Microsoft was willing to change the browser in any way...."

Microsoft also said that when the original deal was struck in 1996, AOL officials said the major reason they signed the contract was because of the technological advances of Microsoft's technology.

According to Microsoft, AOL chairman Steve Case said during the press conference announcing the deal: "As we walked down that process and learned more about the Microsoft technology strategy, it was clear to us that the modular architecture would make sense in terms of building it seamlessly into AOL."

Microsoft also rebutted Colburn's assertion that AOL struck the agreement because of competitive fears with MSN.

"To this day, MSN has less than 10 percent share compared with AOL's 70-plus percent market share today," the Microsoft press release said. "At the time this agreement was signed, AOL was shipping on the desktop of 90 percent of personal computers, as a result of AOL's direct agreements with AOL."