Updated from 4:51 p.m. EDT

Microsoft ( MSFT) and AOL Time Warner ( AOL) settled a high-profile antitrust suit , taking the opportunity to say they were working together on development of digital media distribution systems.

The companies said late Thursday that Microsoft would pay AOL $750 million to settle an antitrust lawsuit that America Online had brought in January 2002. The suit, which claimed Microsoft acted anticompetitively in harming its onetime Net browser rival Netscape, was filed just six months after an appeals court affirmed the software giant had broken federal antitrust statutes.

But rather than talking about the litigation, the chairmen of the two companies spent a Thursday evening conference call with reporters talking about their planned cooperation in developing and popularizing technology for securely disseminating entertainment and information in various digital forms.

With Microsoft's software and AOL Time Warner's content, "We can begin to make a real positive statement and step in the direction of creating a world where content can be distributed digitally to consumers," AOL Time Warner Chairman and CEO Dick Parsons said Thursday.

The agreement marks a victory of sorts for both sides at a time when each company could use a bit of good news. For Microsoft, the deal removes the potential overhang of defending a costly and time-consuming lawsuit. It also gives the software colossus a high-profile media industry ally as it seeks to develop systems that companies might use to distribute music, video and documents in digital media.

"This is the broadest and most comprehensive license we've ever done with our rights management software and our media software," Microsoft Chairman Bill Gates said on Thursday.

For AOL Time Warner, besieged by a long stock market slide, the fresh cash will help Parsons in his push to slash debt and open up new revenue sources for the company's content.

Music, theatrical video, television and text all will ultimately be distributed in digital form, said Parsons on the call, but the major delay in that evolution has been piracy. Until the company has the capability to securely distribute content across multiple platforms, "we aren't going to be able to really expand the market and explore the new opportunities that this technology puts at our feet," said Parsons. "That's what this is about."

Ahead of the news, both stocks fell a penny, with Microsoft finishing at $24.40 and AOL at $14.85. After the release of the news, AOL added 39 cents in postclose trading, while Microsoft slipped a dime.


In unveiling Thursday's settlement, the companies pledged to take steps designed to ensure their products work better with each other. Those moves include granting AOL a royalty-free, seven-year license of Microsoft's Internet Explorer browser -- extending a license already in place -- and giving AOL greater access to early versions of new Microsoft software. (Parsons said the company wasn't disbanding the unit behind the Netscape browser.)

The companies also said they agreed to "explore ways to establish interoperability between AOL and MSN Instant Messenger networks," though they offered no specifics and declined to put a timetable on their efforts. So-called IM interoperability has been a goal of software industry players for some time, but little progress has been made.

But much of Wall Street's interest in the deal will lie in the digital media area. To that end, the companies said they agreed to let AOL Time Warner use Microsoft's Windows Media 9 Series and future software for creating, distributing, playing back -- and controlling access to -- high-quality digital media.

Though Gates said the agreement with AOL Time Warner would speed up the development of a secure digital-distribution system acceptable to content creators, he cautioned, "We're talking a number of years before it's super-widespread." Microsoft will be shipping server software enabling digital rights management this fall, he said.

A potential AOL-Microsoft linkup is only the latest development to shake the nascent online music business. This week, the Rhapsody online music service launched an offering that will allow members who pay a monthly fee to download songs for 79 cents apiece. The move came as RealNetworks ( RNWK), a shareholder in the rival MusicNet online music service it owns in conjunction with three major record labels, launched Rhapsody as a replacement for MusicNet. And only last month, Apple ( AAPL) got the ball rolling by offering 99-cent downloads without a monthly fee.

How the AOL-Microsoft thaw affects RealNetworks' relationship with AOL will surely be on investors' minds in coming days. Parsons noted that its agreement with Microsoft wasn't exclusive, and said AOL Time Warner would continue to work with RealNetworks. On Thursday, RealNetworks dropped 38 cents during regular trading before falling a further 16 cents to $8.61.