Talks between Microsoft and AOL-Time Warner to ship the AOL Internet service with the next version of the Windows operating system have failed. The plan was sunk by wrangling over legal issues, instant messaging and digital media.
The two companies have been in talks for weeks over bundling the AOL Internet access service in Microsoft's upcoming operating system called Windows XP.
Microsoft has distributed AOL's software with Windows for years, an arrangement that helped make AOL by far the largest Internet access service with more than 29 million customers.
But that previous distribution deal ended in January and talks to strike a new one assumed new urgency in the past weeks as Microsoft nears its deadline for completing work on Windows XP, which it has promised to customers in October.
In exchange for including AOL on Windows XP, Microsoft had pressed the company to make its instant messenger (IM) product - software that lets users type messages to each other in real time - operable with its own IM service, said a source familiar with the situation.
Microsoft also wanted AOL to support its digital audio and video technology. AOL now only supports technology from RealNetworks, Microsoft's main competitor in digital media.
Microsoft had also asked AOL to enter into a "mutual legal release" under which legal claims by the companies against each other would be dropped and they would agree to avoid legal action in the future, the source said.
The source added Microsoft had agreed claims by Netscape, the browser software company bought by AOL that was the source of the US government's antitrust case against Microsoft, would not be covered in a legal release deal.