The week in review: AOL, Microsoft in messaging donnybrook

Battles raged all week, with Microsoft releasing numerous software fixes to punch a hole in AOL's blockade, and AOL installing further fortification. While the giants clashed, observers noted the irony of Microsoft's arguing for open standards at the expense of a company trying to preserve its franchise.

Higher ground
Then AOL upped the ante, recruiting a cohort of powerful allies. First, the online giant announced an alliance with Apple Computer to develop instant messaging products that allow for "seamless" communication between Mac users and the AOL Instant Messaging service.

Next it formed an advisory group including AOL chief technology officer Marc Andreessen, Apple interim chief executive Steve Jobs, Sun Microsystems' Bill Joy, and RealNetworks' Rob Glaser, among others.

By the end of the week, Microsoft went in for high diplomacy, sending a letter asking AOL chief executive Steve Case to open the online giant's proprietary systems.

AOL says it intends is to isolate users of its Instant Messenger and ICQ programs for security reasons, but Microsoft charges that excluding users of MSN Messenger and a beta version of Yahoo's instant messaging software risks splintering the fast-growing market. There's also suspicion that front-running AOL is trying to shield its large and valuable user base--many of whom don't subscribe to AOL's Internet access service--from commercial rivals just entering the market.

Ups and downs
Compaq announced a second-quarter loss of 10 cents a share, set plans to lay off as many as 8,000, and predicted more turmoil in the third quarter as it deals with changes in its distribution model. Newly appointed chief executive Michael Capellas intends to embrace direct sales.

During the second quarter, Compaq retained its position as the world's leading PC maker, but Dell may take over the top spot soon. Fueled by a growth rate that has topped 70 percent at times during the past three years, No. 2 Dell recently passed its Texas rival in British sales and is on the verge of capturing the U.S. market. A switch in the domestic rankings could come by next quarter.

Compaq filed suit against the low-cost PC manufacturer Emachines, but South Korean parent Trigem Computer rebuffed Compaq's patent infringement claims, contending Emachines has a license from IBM. Separately, Compaq is in talks with Big Blue about making Alpha processors based on the latter's copper chip technology.

Internet service provider EarthLink terminated its contract with PC maker Microworkz, which had been bundling free online access with its low-cost machines. The industry pioneer is facing a mounting backlash that now includes a business partner in addition to many disgruntled users.

Not yet
San Francisco City officials stopped short of requiring AT&T to immediately open its cable networks to competing Internet access providers--something two other municipalities already have done. On a 9-2 vote, the Board of Supervisors granted the transfer of the city's cable franchise to AT&T and approved Ma Bell's merger with Tele-Communications Incorporated with some minor conditions. But "open access" requirements could be imposed in the future.

The Clinton administration is drafting a plan to create two broad, FBI-controlled computer monitoring systems designed to protect the nation's key data networks from interlopers. The proposal calls for software monitoring of nonmilitary government systems and networks used in the banking, telecommunications, and transportation industries. "Fidnet" would aim to prevent disruption of government and economic activities by foreign interests or terrorists, but critics say the sweeping plan could lead to a surveillance infrastructure with grave potential for misuse. After Fidnet's disclosure, the administration said it will conduct a legal review of the privacy implications.

A leading Congressman complained of collusion between officials from the Justice Department and the nonprofit assuming control of core Internet functions, criticizing discussions about Justice's ongoing antitrust investigation into dominant domain registrar Network Solutions. Rep. Tom Bliley (R-Virginia) leveled his charges in letters sent to Attorney General Janet Reno and Esther Dyson, interim chair of the Internet Corporation for Assigned Names and Numbers (ICANN).

Separately, 13 new domain name registrars will voluntarily give ICANN $1 for each sale of a name ending in ".com," ".org," or ".net," helping the nonprofit stave off financial crisis. ICANN had planned to collect the fee from all of the 50-plus new domain name registrars expected to come online through next year, but abandoned the idea one day before a House subcommittee hearing in which lawmakers were expected to scrutinize it. Arch-foe Network Solutions is not among the charitable.

The same committee heard stunning testimony on the benefits and risks of online pharmacies, a hot topic as Internet pharmacies become a growth market. Investigative TV journalists explained how a 7-year-old child, a man dead for 24 years, and a neutered cat ordered drugs over the Internet. The FTC has recommended stricter monitoring.

A bill signed by California Gov. Gray Davis will allow unique electronic codes--so-called digital signatures--to serve like pen-and-ink signatures, making it possible to enter into legally binding contracts over the Internet. All manner of e-commerce transactions are expected to flourish; Charles Schwab and E*Trade Group, the two biggest Internet brokerages, may well be among the first to benefit.

Slower
Outdated infrastructure is hampering the introduction of high-speed Internet service in least a dozen rural and low-income states, according to a new study. In a few states, such as New Hampshire or Arkansas, the network equipment needed to support DSL Net access is practically nonexistent.

Meanwhile, CNET News.com has received a stream of reports from across the country detailing intermittent DSL outages over the last several weeks. Readers claim they have frequently lost service with their "always-on" systems, stranding them offline for hours at a time.

America Online signed a deal with GTE to use the local phone company's network to bring DSL service to its dial-up customers in 17 states in the western United States.

Dell Computer will begin bundling one year of Internet service with all home PCs, having launched its own Dellnet ISP. But Dell is a bit late to this market, as many PC rivals--including fellow direct seller Gateway--are already offering similar deals. The PC maker also announced a new e-commerce site.

Faster
Intel will next week release its fastest Pentium III and Celeron processors, which will reach 600 MHz and 500 MHz respectively. The following week, the first computers built around the new Athlon processor from rival AMD--formerly called the K7--will appear at competitive speeds.

Now that a specification to prevent the proliferation of illegal digital music has finally been adopted, the question remains: Which device makers will support it? Established companies like Diamond Multimedia and Creative Labs have agreed to implement the standards, but small manufacturers looking for market share have little incentive to do so.

Despite a three-year campaign to rule the streaming media market, Microsoft is still playing second fiddle to RealNetworks. Real boasts 70 million unique registered users, compared with an estimated 30 million to 35 million for Microsoft. The vast majority of streaming content available on the Net comes in RealNetworks' format.

Meanwhile, Apple aims to catch up to both companies with a new initiative called Quicktime TV, unveiled last week at a trade show. In essence, Apple would help people create their own television stations by providing QuickTime software and selling transmission time for broadcasting everything from garage-band concerts to cooking lessons.

New plans
Apple announced it is investing $100 million in Samsung to help boost production of flat-panel computer displays. The move is intended to ensure Apple has an adequate supply for products such as the forthcoming iBook portable.

Ambitious companies are investing hundreds of millions of dollars to win contracts for the building and maintenance of "data centers" that bring top-level Web sites like Yahoo to the average user. The $2 billion segment is driven in part by the inability of most large companies to maintain the equipment needed to support a sophisticated Web site on their own premises, and could reach nearly $15 billion by 2003.

IBM introduced a new high-end storage system that mimics many of the features of sophisticated corporate servers, and said it will purchase Mylex as another step in its effort to reinvigorate its storage business. The acquisition also burnishes the capabilities of IBM's increasingly vital Technology Group.

Oracle officially entered the fast-growing market for business-to-business purchasing with the announcement of Oracle Exchange, an online marketplace for office supplies, books, computers, and even temporary staffing. The saber rattling should be a wake-up call for smaller pioneers such as CommerceOne and Ariba.

Seeking new opportunities and a break from the traditional bureaucracy of larger firms, a growing number of executives are leaving for new and more challenging Internet-related services start-ups. The services industry--growing by leaps and bounds--has been particularly hard hit.

Linux seller Red Hat had offered several open source programmers the opportunity to participate in the initial public offering of the company's stock, which likely will take place in the next two weeks. However, at least a dozen people who were invited to participate were rejected by E*Trade, the electronic trading company helping with the IPO, causing ill will.

Also of note
Martha Stewart became the latest to join the IPO craze, teaming up with Kleiner Perkins Caufield & Byers ... Ticketmaster Online-CitySearch will shorten its name to CitySearch ... Paul Maritz, the No. 3 executive at Microsoft, is giving up day-to-day management responsibilities at the software maker, fueling speculation that he may leave the company ... The Justice Department is studying the possibility of Microsoft's breakup, should the court rule against the software giant in its landmark antitrust trial ... EDS reported positive second-quarter earnings, signaling a quicker road to recovery, as the services giant continues to benefit from its restructuring plans.