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How music labels, Hollywood studios and consumers answer that question could determine whether the software giant dominates digital media the way it does Web browsers or desktop productivity applications, say analysts. The Redmond, Wash.-based company is engaged in a tried-and-true tactic of giving away highly valuable technology as a means of getting a foothold in an emerging market. The strategy, which was instrumental in Microsoft's victory in the so-called browser wars, is being replayed in the digital media market.

The stakes may be as high; analysts see digital media, like the rise of the Web, as driving the next great wave of PC sales. Microsoft, not surprisingly, wants to make sure Windows becomes a "preferred platform" for using digital media," said Directions on Microsoft analyst Matt Rosoff.

After a relentless decade-long climb to more than 35 million global subscribers, the number of America Online users has slipped for the first time. Analysts believe the drop in subscribers, however minuscule, could foreshadow a gloomier future for an AOL that has been unable to make the transition to high-speed broadband from its domination of the slow-speed dial-up access market.

Figures from Jupiter Research show that AOL holds slightly fewer than one in three U.S. dial-up subscribers, but just one in 30 broadband accounts. Brooks believes the drop in subscribers was softened by broadband customers who hung on to their AOL accounts to retain e-mail addresses. With consumers becoming more comfortable with broadband, many will flee AOL, he said.

Microsoft nearly doubled its losses from the Xbox video game console in the December quarter, according to a regulatory filing on Friday, as the unit that makes its Office software closed in on Windows as being the company's most profitable.

In a quarterly report with the U.S. Securities and Exchange Commission, Microsoft said it posted operating income of $1.97 billion in the December-ended quarter in its Windows-centered business unit on revenue of $2.44 billion. That was down from income of $2.11 billion and revenue of $2.68 billion a year earlier.

Microsoft. must file a reply on Monday in a lawsuit filed last month against it by Sendo Ltd., a Birmingham , England-based mobile phone developer. Sendo formed a partnership with Microsoft in October 1999 to help develop e-mail- and Internet-enabled mobile telephone handsets based on Microsoft's Stinger operating system for use by cellular carriers worldwide.

The U.S. District Court for the Eastern Division of Texas granted Microsoft one extension to reply to the lawsuit, but the case docket shows that the court did not grant a second extension. Jon Murchison, a Microsoft spokesman, confirmed that the company would file its response Monday.

The United Kingdom announced late Friday that it has signed up to participate in Microsoft Corp.'s recently announced Government Security Program, which gives it access to Windows source code and prescriptive guidance on security assurance.

Earlier this month Microsoft said it had formed a new global initiative to provide governments around the world with access to Windows source code under the new GSP security initiative, which is designed to "address the unique security requirements of governments and international organizations throughout the world."

Microsoft and Vodafone have struck a deal to offer mobile MSN Hotmail and MSN Messenger services to Vodafone's 13.2 million UK customers. The service, based on text messages, allows users to send and receive Hotmail email and chat with MSN Messenger contacts on their mobiles. There is no subscription fee but users do have to pay the cost of sending a text message, which is around 10p. The revenue from the service will be shared by Microsoft and Vodafone.

The service is planned to go live in May and will benefit the 7.4 million UK-based Hotmail users. The announcement is part of a broad Microsoft campaign to link up with mobile operators.

Chipmaker AMD will launch its 64-bit server and workstation processor, the AMD Opteron, on April 22 in New York City. The launch date synchronizes the alternative to Intel's 64-bit Itanium family with the first general release of a 64-bit Windows server operating system. AMD's Opteron processor is built to use the same x86 instruction set that AMD and Intel 32-bit processors use. The approach contrasts with Intel's decision to use an entirely new instruction set for its Itanium processors. AMD's chips will perform better with 32-bit applications, which Intel must run with an emulator that extracts a performance penalty. Intel's 64-bit processors have been on the market since mid-2001. Shortly after AMD's launch of its first generation of 64-bit processors, Intel is expected to roll out its third generation of Itanium chips.

MSN 8 Sets Precedent as First Internet Software Product Ever Backed by the Seal. Microsoft and Good Housekeeping magazine today announced that MSN 8 Internet software is now backed by the Good Housekeeping Seal. The Good Housekeeping Seal stands as the most recognized and trusted consumer insignia in the United States and has been granted to high-quality products for nearly 100 years. Today's announcement marks the first time an Internet software product has earned the Good Housekeeping Seal.

Microsoft will be investing an estimated Lm20 million in Malta over the next three years, an investment which was likely to disappear if Malta did not join the European Union, Justice and Local Government Minister Austin Gatt said yesterday. Among other forms of investment, the agreement caters for the setting up in Malta of the first technology centre of excellence in the region, giving access to source-codes.

The Malta government will also be enrolled in a security programme, and the island's 70,000 students will be offered software at give-away prices. Calling it a "fantastic deal", Dr Gatt said Microsoft had chosen Malta from an analysis of the 10 countries aspiring to EU membership in 2004.