January 10, 2000 4:40 PM PST

Merger drops a bomb on Microsoft

America Online's surprise acquisition of Time Warner was a frontal assault on Microsoft's ambitions to become a major content player, capping a year-long series of battles between the two technology companies.

By enlisting Time Warner's vast arsenal of assets, AOL has gained a commanding lead in the race to deliver content across an array of media. Analysts say the move may further weaken Microsoft's already-wavering commitment to content and hasten the company's return to its software roots.

"AOL is a content company, Puppet masters: Who controls the Net and Microsoft is a software company," said Jon Puricelli, an analyst with A.G. Edwards. "This solidifies it. Microsoft shouldn't try to be a content company; these two companies shouldn't be competing in the least bit.

"Microsoft's content plays are too far afield from its core competency. They don't do it very well and don't know how to do it," he added.

The Time Warner merger is the first major AOL counterattack since Microsoft aligned itself with another chief rival, AT&T, through a $5 billion investment that drew new battle lines over control of the Internet. AOL has been searching for allies to strengthen forces against that axis of power, which includes the massive cable operations obtained in AT&T's earlier purchase of TCI.

On the technology front, Microsoft introduced instant-messaging software to challenge America Online's market-leading AOL Instant Messenger and ICQ applications. The two companies spent much of last year squabbling over their messaging systems.

Earlier last year, AOL moved in on one of Microsoft's key technology turfs by acquiring Netscape Communications and its Communicator browser. But AOL has maintained consistently that it is committed to content and would not diverge into technology.

Even with the Netscape acquisition, for example, AOL insisted that its focus was on content and branding rather than on technology, and that the main target of the acquisition was the Netcenter portal site, which has heavy daytime traffic.

For its part, Microsoft ended the year renewing its own commitment to Web content, heralding changes to its Microsoft Network portal site and a rate hike to its MSN Internet service.

Microsoft recently has indicated, See related story: Mapping MSN's changes however, that its involvement with MSN will be focused on driving demand for its software and services. The company reiterated that view today.

"This merger further illustrates how competitive and dynamic this entire industry is," Microsoft spokesman Tom Pilla said. "It also demonstrates how different people can view the market and the Internet and how divergent the paths between AOL and MSN have become.

"We think this can be seen as net positive for Microsoft because it clarifies that Microsoft is a great software and services platform company that will work with any media company that wants to put its content on the Web," Pilla added.

Microsoft's efforts in Web content and Internet access have long been exercises in frustration. Despite vehement pledges of commitment from top executives, MSN has lagged far behind competitors Yahoo and AOL in content, and AOL in access.

Microsoft sold its city guide, called Sidewalk, see news analysis: MSN: From content to
software salesand has conceded that its efforts in content will likely wind up serving its software business.

For its part, aside from fiercely guarding its lead among instant messaging applications, AOL has taken a hands-off approach to its technology acquisitions, leaving the development of the delayed Communicator browser to its Netscape unit.

"The acquisition of Netscape was purely a media play," said Jupiter Communications analyst Ross Rubin. "I'm frankly surprised that they have kept their technology assets this long; ultimately I would expect to see Sun (Microsystems) take over the venture. They haven't done anything with the browser.

"They are not interested in furthering You've got Time WarnerNetscape's technology, as opposed to Microsoft, which is very interested in furthering the technology but less interested in content," he said.

Still, analysts don't expect Microsoft to throw in the content towel just yet.

"They'd never do that," said Puricelli. "They will continue to do battle. They're still losing money on all their Internet properties, but as a medium for them to distribute software, MSN remains a good thing for them to have."

Other analysts see a silver lining for MSN and other content aggregators, including Web giant Yahoo.

"When you have a deal like this, Microsoft is foreclosed on some content but there's still a lot of content out there," said Michael Kwatinetz, an analyst with Credit Suisse First Boston. "And content providers would be a lot less interested in going to AOL under a deal like this and a lot more interested in going to a Microsoft or a Yahoo."

 

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