Battle lines drawn for control of Net

Both Microsoft and AT&T had been criticized for their slowness to accept the Internet, and both have played effective catch-up with major mergers and investments. Microsoft's buying power is further enhanced by its special relationship with billionaire financier and company cofounder Paul Allen. That could make for some long odds against the AOL-Sun-Bell camp where financing is concerned.

"This is all part of Microsoft's strategy to get involved in all the layers, not just their traditional markets," said Matt Page, director of Internet consumer research for Strategis Group, a telecommunications consulting firm.

AT&T, however, has yet to prove that it can master the Internet market. Its WorldNet ISP service, once thought to be a natural winner because of the telecom giant's consumer base, has never lived up to expectations. And historically, AT&T's track record in mergers has been nothing to brag about.

Specifically, AT&T's attempts to unseat AOL in the past have been poor, said Abhishek Gami, an Internet analyst at William Blair. The phone company offered neither better services nor features, he said.

It is also important to remember that the medium AT&T is most focused on right now is the telephone, not the Web. The quickest way for the long distance giant to get back into local phone service is through two-way cable technology.

"The No. 1 priority of AT&T, exponentially, is local telephony. By the year 2004, AT&T's local telephone customers, and associated revenue, are expected to outnumber broadband Internet customers by a factor of 4 to 1," said Harris of Kinetic Strategies. He said AT&T plans to launch a trial of telephone service over cable lines in the next month in Fremont, California.

Nevertheless, the addition of Microsoft to the AT&T-TCI camp has instantly created a number of issues with profound impact for the Web: Where will Microsoft Network fit into the portal question? Will it be possible for @Home and Excite, through the newly merged company's close relationship with TCI, to cut off the other portal players? Will the branding of such PC online stalwarts as AOL and Yahoo be as powerful with new Web surfers using digital cable TV boxes?

"It's a question of who will get to be the front-end for the customer," Gami said. "Customers will probably break into two camps: Ones who are looking for faster speed or ones who are looking for better ease of use and service."

Publicly, the leading Web portals play down the AT&T-Microsoft deal and the potential divisions it implies. But such questions are clearly not far from their minds.

"From our perspective, it doesn't change the landscape," Yahoo president Jeff Mallett said, adding his company's customer loyalty is much stronger than that of any telecommunications usage. "I say it's a deeper relationship because it's a media relationship."

Forrester Research analyst Bruce Kasrel believes that AOL will flourish because of its lead in paying subscribers. "Eventually cable companies are going to say, 'We've ridden cable modems long enough--it's time to start looking at AOL's customers."

AOL, not surprisingly, agrees. "We have a brand name, and AT&T isn't as recognizable," chief financial officer J. Michael Kelly said. "Yes, they have a brand in telecommunications, but I'm not so sure it's transferable to TCI and MediaOne for the Internet space."

Of course, it doesn't hurt that AT&T owns both those cable companies--a situation that makes partnerships with the Baby Bells and their rival DSL high-speed technology all the more important for AOL and other portals. But that may be easier said than done.

Although AOL views itself as a potential catalyst to bring the Bells together for a single broadband coalition, Kelly said the task has been more difficult one than for the cable operators. "US West and BellSouth have national aspirations of their own. The cable companies don't," he said. "I think the [telcos] act more like natural competitors than allies."

Which is exactly what was supposed to happen under telecom deregulation. But the same laws that freed up this market also allowed AT&T to go on its merger rampage of the last year.

That's why many analysts believe that the new world will be mapped largely by the massive infrastructure needed to carry its content. Whether today's alignments will last even until tomorrow is anyone's guess but, at least on paper, the advantage seems to be weighted decidedly in favor of the AT&T axis.

"These are the No. 2 players being opposed by the No. 1 players," Ryder said. "What else is new?"

News.com's Jeff Quan, Dawn Kawamoto, Jim Hu, Beth Lipton, John Borland, Corey Grice, and Aimee Male contributed to this report.