"As it was reported by the media, Microsoft and AOL could not reach an agreement and the discussion is over," said Tomoyo Nagao, a spokeswoman for Microsoft Japan. "But we still hope to develop the AOL service on Windows XP. We will remain open to AOL and if there is any opportunity, our company is willing to have another meeting with them in the future."
At the heart of the negotiations between the two companies was disagreement over AOL's presence on the new operating system, including the placement of an AOL icon on the Windows XP desktop interface.
For months the two companies had attempted to reach a deal that would have kept AOL's icon on the operating system and worked out issues such as which media player AOL would support and interoperability concerns between both companies' instant messaging applications, said Chris Le Tocq, principal analyst with Guernsey Research, in an interview last week.
"The issue here with AOL and the other online service providers hasn't just been over where would their icons appear," Le Tocq said. "The discussion is really about whether AOL will get an icon in the [operating system] at all."
"I think it will come down to what concession AOL will make," he added.
One of those concessions would have involved AOL altering its relationship with RealNetworks, which supplies the media player on AOL's service. Microsoft has embedded its own media player that is incompatible with the one from RealNetworks, into Windows XP.
Negotiations between the two companies began after AOL's contract with Microsoft expired in January, which has caused much speculation about how the two companies will work together moving forward. AOL had been contractually obligated to support the Internet Explorer browser for the past five years in exchange for its services being included with the Windows operating system.
While interoperability between Microsoft's and AOL's competing instant messaging applications was not an issue in the discussions, both companies said it has become a point of contention between the two industry giants, according to a report in the Wall Street Journal Saturday. Windows Messenger, which allows users to engage in text and chat messaging as well as video and audio conferencing with other Windows XP users, will be bundled with Windows XP when it is released on 25 October. The product combines MSN Messenger and Microsoft's collaboration software NetMeeting.
As the battle for instant messaging users heats up, Microsoft's move to include its own in the operating system gives the company a strong advantage over its competitors, such as AOL. MSN Messenger in March held onto its spot as the number one most used free instant messaging service in the world, Microsoft said last month, citing figures from Jupiter Media Metrix.
A spokesman from Microsoft's Windows XP development team said at the company's TechEd conference, which began in Atlanta Sunday, that AOL's Internet service was never included in early builds of the operating system but is technically equipped to run on the platform.
He also said that users could likely expect to see AOL's logo on versions of the operating system that come pre-installed on a PC from manufacturers. Computer makers such as Dell can still make deals with software and Internet service providers to include their icons in the startup menu, despite the fact that AOL's icon won't be included on the boxed version of the operating system.
Microsoft said it didn't expect the two companies to resume talks anytime soon but analysts say there is more battling to come. Industry research company Gartner Inc. issued a report last week that predicted competition between the two industry giants would only get more heated as Microsoft turns its .Net concepts into reality.
Beginning with Windows XP, which is the company's first operating system to incorporate .Net technology such as its Passport authentication service, Microsoft will begin transforming its operating system into not only a foundation for running applications on a PC but for laying the framework to sell and deliver services across the Web, according to Charles King, an analyst with Zona Research. Those tactics have been viewed as a direct assault at AOL.
"Actually, you could even make the case that Microsoft's .Net initiative is more of a threat to AOL than to any of its operating system competitors," King said last week.