You might have seen the news that Microsoft will pay AOL $750 million to settle AOL’s antitrust lawsuit. AOL acquired Netscape in 1998 and sued Microsoft in early 2002 for playing dirty to obtain market dominance.

The deal makes sense from an economic perspective for obvious reasons. AOL’s fortunes are sinking, it has a mountain of debt, and the payoff is pocket change for Microsoft, which has $46 billion in the bank. But there are a couple of other interesting things about the deal.

First: it is the last step in Netscape’s humiliation. Microsoft’s unfair tactics – well, I think most of the claims are bunk, but let’s imagine that Netscape was on the ropes in 1998 and it was all Microsoft’s fault. AOL bought Netscape at a time when AOL was flush with cash and owner of the largest base of Internet users on the planet. More than half the world’s Internet users relied on AOL software – powered by Microsoft Internet Explorer. AOL was frightened by Microsoft and had every reason to pour money into its Netscape division to eliminate its reliance on Microsoft software. AOL had the motive and the opportunity to place Netscape Navigator in the hands of 33 million captive Internet users. I expected new AOL software powered by Netscape Navigator in short order after AOL’s contract with Microsoft expired in 2000.

But when it filed the unfair competition lawsuit, AOL had done nothing to convert its software to rely on Netscape code. As I wrote on January 24, 2002, the reason had nothing to do with Microsoft. The real reason was that Netscape Navigator was and is a cruddy piece of software, bug-ridden and far behind Microsoft Internet Explorer in stability and features, and AOL couldn’t afford to alienate its users by giving them unstable software.

Today’s deal with Microsoft cements Internet Explorer in place as the engine driving AOL software royalty-free for the next seven years. Netscape is now officially and forever scorned by its corporate owner, dismissed as unworthy.

Second: AOL and Microsoft agreed to “work together” on their instant messenger services. If AOL and Microsoft allow their programs to talk to each other, that’s bad news for competing services (especially Yahoo) if AOL and Microsoft instant messengers remain closed to the other programs.

Third: AOL and Microsoft agreed to collaborate on extorting money from you for multimedia downloads protected by “digital rights management.” That’s two very big, very smart, very powerful companies agreeing to take aim at your wallets. The future looks expensive.

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