Microsoft on trial: AOL given offer it couldn't refuse

Microsoft's offer to put America Online on every Windows 95 disk was enough for the latter firm to part company with Netscape -- just one day after their marriage, according to testimony by AOL senior vice president David Colburn.

Released late yesterday by the US Justice Department, the statement read: "AOL would not have been willing to negotiate a browser license with Microsoft had Microsoft not indicated a willingness to bundle and to promote the AOL client software in some form with Windows."

Today will be Colburn's turn on the hot seat as he takes the stand in the historic antitrust battle between Microsoft and the government.

In his testimony, Colburn clearly spells out the reasons why AOL cut a deal with Microsoft in March 1996 for Internet Explorer, just one day after signing a deal with Netscape.

The biggest one: Microsoft's offer to create an online folder on the Windows 95 desktop that would contain AOL. Even though Microsoft was viewed as a competitor that had just created the Microsoft Network and linked it to the OS, the opportunity to be bundled and distributed on every copy of Windows 95 was just too great to pass up, according to Colburn.

But there was a caveat: AOL would be greatly restricted from promoting or distributing Netscape's Navigator. Throughout his testimony, Colburn says AOL considered Internet Explorer and Netscape Navigator to be comparable products.

The deal making by Microsoft didn't stop there, according to Colburn. On Oct. 28, 1996, AOL and Microsoft entered into what Colburn called a Promotional Services Agreement, which was modified on Dec 19, 1996. That agreement called for Microsoft to pay AOL 25 cents for each member whom AOL successfully converted to Internet Explorer from another browser.

Colburn added that the agreement called for Microsoft to pay AOL $600,000 if it was able to convert a "substantial portion of its installed base to Internet Explorer by a certain date."

"During these negotiations, I was told that Microsoft had no limitations on what it could spend to gain market share for Internet Explorer," Colburn said, adding that these agreements expanded AOL's obligation to exclusively promote IE.

Colburn listed off several other exclusive agreements AOL entered into with Microsoft concerning the Internet Explorer 4.0 Channel Bar, Microsoft Internet Connection Wizard and the Internet Referral Server.

Colburn concludes his testimony by saying, "AOL would not have been prepared to accept the restrictions on its distribution and promotion of Netscape Navigator had Microsoft not insisted on those restrictions as an element of its licensing agreement."

In a prepared response released today, Microsoft, of Redmond, Wash., said Colburn's testimony is "an attempt at revisionist history regarding the March, 1996, agreement between Microsoft and AOL."

Microsoft added that, at the time of the announcement, AOL said Internet Explorer was technically better than Navigator.