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AOL, wireless firms appear to be on collision course

A cold war is brewing between the Net giant and many of the biggest mobile phone companies, wireless industry insiders say.

A cold war is brewing between Net giant America Online and many of the biggest mobile phone companies, wireless industry insiders say.

The wireless carriers are spending billions of dollars to upgrade their networks for high-speed Internet access. Many of them see the dividends on this investment coming in the form of substantial control over their Net subscribers--becoming something that looks very much like a wireless version of AOL.

But their quest appears to be on a collision course with America Online's own wireless ambitions, as well as the loyalties of its 22 million subscribers. America Online needs the cooperation of these carriers to bring its services to the airwaves. So far, phone companies' worries about AOL's competitive power has kept these deals to a minimum, creating a simmering tension now underlying the two camps' relationships, insiders say.

"(The wireless carriers) clearly see AOL as a threat," said Jane Zwieg, executive vice president of Herschel Shosteck Associates, a wireless consulting firm. "Basically, (wireless phone companies) are a pipe, but they're resisting that."

As they spend billions upgrading their networks and acquiring other companies, wireless companies are seeking new revenue streams that justify the high cost.

Britain's Vodafone, for example, has purchased U.S firm AirTouch Communications, merged operations with Bell Atlantic to create Verizon Wireless, and is buying Germany's Mannessman in the largest corporate merger ever. Other companies have followed suit with their own acquisition strategies, putting the industry as a whole on the hook for billions in both network upgrade and purchase costs.

Although the companies are enjoying a surge in revenues from voice services, wireless carriers see wireless Net access and potential revenues from e-commerce and Web content as new sources of profit.

But in order to do this, many of them believe they need to keep as much control of their customers' Web experience as possible. They're building front-door, portal-like pages and charging millions for prime placement. And even companies such as Sprint, which has been among the most open in allowing access to a wide range of content, are spending heavily to brand themselves as subscriber's first point of contact with the wireless Net.

The problem is that AOL has built its business around the same idea. And that could become a source of conflict as the lines dividing the two camps grow thinner.

"America Online owns subscribers," said Alain Rossmann, CEO of Phone.com, the company that provides Web software to many of the world's wireless carriers. "That puts them in direct conflict with the carriers."

Vodafone CEO Chris Gent has been one of the wireless executives most upfront about the need to hold AOL at arm's length.

"We want our portal and our customers with it. We'll be happy to do deals with AOL and others, but at one step removed," Gent said in a recent interview with wireless publication RCR. "We want to control the customer interface. We won't surrender this ground."

For its part, America Online says it's more than happy to partner with everyone it can--as long as it retains its position as customers' primary contact. Simply providing access to AOL content, email, and ultimately instant messaging services over wireless links is enough, executives say. At least for now.

"I think necessarily at that stage when people are jockeying for position, people will worry about all kinds of scenarios," said Dennis Patrick, who heads AOL's wireless division. "But we see there is plenty of opportunity, plenty of room for both sides."

AOL has signed a deal with Sprint PCS to allow access to AOL content, and Patrick said his company is negotiating with many other carriers.

The tension is likely to expand when AOL makes a more concerted effort to have its hugely popular instant messaging services carried on the wireless networks. In Europe, wireless short text messaging has proved wildly popular, providing a significant source of revenue for the wireless carriers.

AOL already has cut deals with wireless phone makers such as Motorola and Nokia to have its instant messaging service built into the handsets. But the service has not yet been picked up by many mobile phone carriers.

Some analysts have speculated that if AOL is kept off the wireless networks long enough, it could set up its own wireless phone service using network time purchased from smaller companies. Or, it may buy its own wireless company.

Patrick said the company "never says never." But this isn't a particularly attractive option, he added.

"It's a mistake for either side of the business equation to underestimate the other guy's job," Patrick said. "It's not a business we're anxious to get into."