Microsoft Corp. agreed Thursday to pay AOL Time Warner US$750 million to settle an antitrust suit over allegations that the software giant used strong-arm tactics to make its Internet Explorer the dominant Web browser, displacing AOL's Netscape.

Under the settlement, AOL-Time Warner also gets free license to Microsoft browsing software for seven years. Microsoft also would license its digital media technology to AOL, as well as work with the company to promote digital media initiatives.

The agreement resolves a lawsuit AOL filed against Microsoft in January 2002 on behalf of its subsidiary, Netscape Communications. The complaint was one of several private antitrust lawsuits still pending against Microsoft over anticompetitive behavior.

AOL had alleged in the lawsuit that Microsoft used anticompetitive business practices to ensure the dominance of its Internet Explorer browsing software over Netscape's software. AOL argued that Microsoft made deals with computer manufacturers and others to shut out Netscape and quash competition.

Netscape, which once dominated the Web browsing market, now commands less than 5 percent market share, according to several industry measures. Microsoft's Internet Explorer has gained more than 90 percent of the market.

The settlement comes less than two months after Microsoft chairman Bill Gates called AOL Time Warner chairman Dick Parsons to talk about ending the 18-month-old lawsuit, Parsons said in a conference call Thursday with Gates and reporters.

"It just seemed to me that the opportunity to do something smart for both companies - good for both companies and ultimately good for consumers and our industry - was present, so you take it," Parsons said.

The settlement also allows AOL to license Microsoft's digital media and digital rights management technology, which is designed to prevent illegal copying and downloading of digital music, movies and other content.

But it does not require AOL to use that technology nor to use it exclusively. AOL now relies on Seattle-based RealNetworks Inc., a Microsoft rival, for viewing digital media online, and both AOL and RealNetworks said they will continue to work together.

The companies also will explore how to integrate their popular instant-messaging networks to allow users of one company's service to use the other's. There is no schedule for when that will happen, Gates said.

Microsoft will also provide technical information on its current and future Windows operating systems to AOL to ensure that AOL products perform well there.

AOL shares surged more than 4.1 percent, or 61 cents, in after hours trading, after the deal was announced. They closed at $14.85 on the New York Stock Exchange, down 1 cent. Shares of Microsoft were off 1 cent to $24.40 a share on the Nasdaq Stock Market, and dropped another 5 cents in the extended session.

Analysts said both companies have much to like - debt-laden AOL Time Warner will receive a huge sum of cash, while Microsoft is able to remove a major legal burden, while also giving its digital rights management technology a public relations boost.

"It just kind of shows to me that AOL and Microsoft will have the same kind of relationship that (Microsoft has) with IBM," said Matt Rosoff, an analyst with Directions on Microsoft, a Kirkland, Wash.-based research firm. "They're not necessarily archenemies and will cooperate in certain areas."

Moreover, AOL scored a major victory with Microsoft's agreement to distribute AOL-branded Internet service software with the Windows operating system to smaller hardware manufacturers. The deal potentially expands AOL's reach to tens of millions of new computers annually, and helps AOL compete against Microsoft's MSN Internet service, said Richard Doherty, director of the research firm Envisioneering Group in Seaford, N.Y.

Ultimately, as Gates noted, the agreement provides a groundwork for the world's largest software company to collaborate with one of the world's largest entertainment companies in the emerging world of digital media.

"It's a forward-looking agreement," Gates said. "I was impressed with the fact that they are looking forward, and I'm very happy with what we've come up with here."

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