PC Makers in Middle of Desktop Bounty Hunt

Microsoft changes the rules as AOL offers OEMs up to $125 per registration in its war for desktop real estate.

When new computers ship with Microsoft's Windows XP this Fall, desktop space will go to the highest bidder - and AOL is willing to pay handsomely. In a letter sent to partner OEMs, AOL looks to extend upon current agreements to secure exclusive desktop rights. Adding a new twist to the saga, Microsoft responded to AOL's moves late Monday, revealing that PCs shipping with any desktop icons must include one for MSN Internet as well.

Microsoft initially decided to ship Windows XP with only the Recycle Bin on the desktop, citing usability studies that found too many icons confusing and obtrusive. Even My Computer and Network Places would lie in a newly expanded Start menu. But after repeated complaints, the software giant modified its policy to return control over lucrative desktop real estate to PC manufacturers.

It is no surprise that AOL is quickly taking advantage of this concession by brokering deals directly with OEMs.

As first reported by BetaNews, the threat posed by a clean desktop was immediately evident to AOL, as the company heavily relies on the exposure for signups. America Online service has shipped with Windows since 1995, but after talks to renew a deal with Microsoft disintegrated last month the Internet giant was forced to explore other options.

AOL's OEM program involves a "bounty" for registration, and sometimes an additional revenue share if the user continues on with the service.

While only recently publicized, this tactic is nothing new to neither AOL nor competitor MSN. AOL has long focused on the out of box experience, and for years has paid to be the primary Internet provider in Windows. Changes in the once cordial relationship AOL enjoyed with Microsoft, however, have brought about an "either or" requirement imposed on PC vendors.

Microsoft spokesperson Vivek Varma downplayed Redmond's involvement in such exclusionary practices, telling BetaNews that "Like AOL, we may enter into co-marketing deals with OEMs to promote MSN to mutual customers. Unlike AOL we will not pay OEMs to exclude competing Internet access offers."

No matter how it's accomplished, AOL has demonstrated the desire to preserve its place on new PCs.

Contrary to Washington Post reports, AOL deals with each OEM individually, making for a wide array of bounty offerings and convoluted agreements.

According to internal documents viewed by BetaNews, the amount AOL pays its partners largely depends, and is occasionally tiered, on registration volume. The higher the number of signups, the more money PC makers receive.

Budget computer manufacturer eMachines is involved in such a tiered bounty with AOL. If monthly registrations lie between 5000 and 7500, eMachines receives $35 at 240 days, and an additional $10 for each 2500 monthly increase thereafter.

Bounties are also based on the length of the included AOL service. For example, a new PC with 3 months of AOL demands a higher payout than that with 6 months, because there is less incentive to continue past 90 days.

The documents additionally detail revenue splits with certain partners, which kick in at a specified date and survive until user cancellation.

Compaq recently confirmed a decision made last year to provide AOL prime placement on the Windows XP desktop while relegating MSN to the Start Menu. But as of early this summer, AOL's deal with Compaq involved no up front bounty, only a $4.25 monthly revenue share beginning at 120 days.

Dell seemingly holds the largest deal, with an immediate $70 bonus upon registration and $3.50 per month once the 120 day mark is reached. In exchange for the hefty bounty, Dell guarantees a minimum commitment of 200,000 signups. Similarly, Toshiba receives a lesser $65 initial bounty and $1.50 revenue share.

Despite assuring the Associated Press it has not settled on a partner for XP, Hewlett-Packard currently receives up to $110 at 360 days for AOL registrations and a $2.50 revenue share if the company surpasses 265,000. Users who sign up through HP's Direct Shopping Channel net the computer maker $100 at month 13.

Apple's deal with AOL is on a monthly basis with no revenue share, but pays a lump sum of $125 at the 90 day mark. IBM and Sony have struck similar terms, but for a much smaller $35 and $25 bounty, respectively.

Gateway has taken a different approach, working solely on a 50 percent profit share with the Internet giant. Because Gateway includes 12 months of AOL, the profit share does not begin until month 19. But with AOL service priced at almost $24, Gateway takes away $12 per registration, per month.

Deal structures are likely to change with AOL and Microsoft upping the ante as Windows XP nears its October release. No matter what the outcome, it is clear both companies feel they are in the right. AOL contends Microsoft is squelching competition by forcing the display of MSN. Microsoft on the other hand, claims AOL is limiting consumer choice by paying OEMs to hide certain features.

Seeking neutral ground, a few PC makers have promised to feature both Internet services simultaneously, but exact placement will undoubtedly revolve around expected revenues. After all, this is business and money talks.

AOL did not return repeated requests for comment by press time.

Craig Newell contributed to this report.