The week in review: AOL's message in a copyright battle

AOL this week scrapped a search engine that finds links to downloadable music files. The company developed the search engine one month ago and posted it on the Web site for Winamp, a Web-based MP3 player developed by AOL subsidiary Nullsoft.

The feature presented links to sites that let people download MP3 files. Since the search engine was unable to distinguish between copyrighted files that are illegal to download and others, AOL decided to drop the service.

The decision could mark another culture clash between new and traditional media, analysts say. AOL is in the process of acquiring media giant Time Warner, which also runs several record labels under its Warner Music Group. Now that the companies are merging, AOL must walk a fine line when developing new Internet services to make sure they don't threaten Time Warner's existing businesses.

However, a new Napster-like program piggybacks on AOL's popular instant messaging service, allowing groups to trade music and other files. The Aimster software draws on AOL Instant Messenger's buddy lists to create a group of people authorized to swap files. The software then uses Gnutella's open-source technology to make connections between people on the buddy lists.

There was little interest in swapping shares of AOL Latin America on their first day of public trading. Shares rose 44 cents, or about 6 percent, to $8.44 by the close of regular trading Tuesday. The lackluster performance was no surprise to analysts, as tepid demand caused the company to postpone the share sale a week before and to lower the offering price.

Optimism and pessimism
Cisco Systems reported that fourth-quarter profits rose 69 percent, the networking giant's strongest quarter in four years. Separately, the company announced that executive vice president Don Listwin will leave the company to head the newly merged Phone.com and Software.com.

Dell Computer edged past Wall Street earnings estimates but reported sales of $7.67 billion, below expectations. Sales placed through Dell's Web site accounted for half of the company's revenue.

Following earnings that narrowly topped analysts' estimates, Applied Materials predicted that an upswing in the chip cycle will last through next year, with continued sales growth in the coming quarters.

However, after reaping the rewards of a cyclical rebound in the semiconductor industry for much of this year, investors grappled with when--not if--the next downturn will arrive. Many analysts and stock pickers already have concluded that the notoriously cyclical industry has peaked, and that it's time to do a little profit taking. Others argue that the industry remains healthy and that a recent correction merely reflects a more rational evaluation of the stocks.

Influential Merrill Lynch analyst Henry Blodget downgraded a number of Net stocks in an effort to differentiate the sinkers from the floaters. Blodget's downgrades included 24/7 Media, Barnesandnoble.com, Buy.com, DoubleClick, eBay, eToys, iVillage, Pets.com, Quokka Sports, Safeguard Scientifics and Webvan.

Blodget continued to be optimistic about AOL, FreeMarkets, Homestore.com, InfoSpace, Inktomi, MyPoints.com and Yahoo, all of which have "buy" ratings.

Somebody may be watching
Microsoft, Sun Microsystems and Netscape Communications battled two different security problems this week: one that exposes a computer's contents and another that makes computers vulnerable to a complete takeover. The vulnerability in Microsoft's products could make an emailed Word attachment a potent Trojan horse, an application that does something unexpected and potentially malicious.

AOL plans to scrap a customer-tracking feature in a software product that speeds file downloads, as the online giant faces a lawsuit claiming the offering can be used to eavesdrop on consumer habits. A lawsuit filed in June alleged that AOL subsidiary Netscape's SmartDownload product can send information about user downloads to the company.

The Justice Department will hire a major university to conduct an independent analysis of the FBI's Carnivore email surveillance system. The team report will be made public, and a review team of top department officials will ask privacy and law enforcement experts to comment before making a final recommendation to Attorney General Janet Reno.

Price check
For the second time in just over a month, Staples.com issued online coupons that allowed Web bargain hunters to stock up on free or deeply discounted merchandise.

Bargain hunters, many who troll Web message boards for these types of deals, pounced on the site and began ordering goods. The company caught and canceled all but a fraction of the orders before they were shipped.

Amazon had its own pricing glitch woes. A number of consumers upset by Amazon's response to a recent pricing glitch have taken their complaints to the Federal Trade Commission, and legal experts say they may have a legitimate case.

Such examples show how the speed of e-commerce can often make a small glitch turn into a thousand-dollar error.

Today and tomorrow
Palm launched two new products intended to keep ahead of start-up Handspring. Palm released the M100 and a new version of the Palm VII. The M100 features a redesigned case with changeable face plates in fashion colors, in a marketing plan borrowed from cell phone maker Nokia. The device appears to be aimed squarely at Handspring's Visor, a low-priced gadget that has been steadily gaining market share against Palm in the past few months.

Netscape announced the second preview release of its Web browser, mimicking some of its competitors' tricks and serving a few of its own. The latest release brings Netscape a step closer to technological parity with Microsoft, which released its own version 5 browser 17 months ago.

Advanced Micro Devices posted a technical manual on the 64-bit processor Sledgehammer geared at recruiting software developers to the project. Its most ambitious project to date, AMD's chip will run software designed for 32-bit processors, such as Intel's Pentium III and AMD's Athlon, as well as software for 64-bit chips, a class of processors that includes Sun's UltraSparc, Compaq's Alpha and Intel's upcoming Itanium.

It's a deal
Broadband service provider NorthPoint Communications inked an agreement with Verizon Communications to merge their digital subscriber line (DSL) businesses to form a new broadband communications company. Also on the communications front, Covad Communications announced that it has created a new subsidiary to manage a broad international expansion, highlighted by a new partnership with Japanese communications giant NTT.

Wireless Internet software provider Phone.com and Web messaging software maker Software.com will merge in a stock pact worth $6.4 billion. The combined company plans to develop application software for the delivery of email, voice mail, mobile instant messaging, and wireless Internet access for Internet Protocol (IP)-based networks.

Broadcom will pay roughly $1.2 billion in stock for Silicon Spice, which makes chips enabling telecommunications gear to handle voice, video and data over a single network. The deal is Broadcom's largest ever.

Amazon formed a 10-year partnership with Toysrus.com to develop a new co-branded e-commerce site for toys and video games. Amazon, which sells toys as well as books, CDs and kitchenware on its site, said it also plans to create a co-branded baby-products site with Toysrus.com.

Also of note:
Al Gore's selection of Joseph Lieberman as his vice presidential running mate was warmly received by high-tech industry advocates...Former Disney Internet executive Patrick J. Naughton was sentenced to nine months in home detention for crossing state lines with the intention of having sex with a minor he contacted by email...Shares of McData tripled in first-day trading, propelling the maker of switches and software used in storage area networks to a market value of $9 billion and nearly making its founder the newest tech billionaire...The family of late guitar legend Jimi Hendrix has won a battle in cyberspace, as a U.N. arbitrator awarded it the rights to the Internet domain name Jimihendrix.com.