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AOL, Gateway in far-ranging pact

America Online will invest $800 million in the PC maker in a broad and complicated pact that links the two companies' products and services.

America Online will invest $800 million in PC maker Gateway as part of a far-ranging deal to jointly market products and services.

As part of the pact, AOL will become the de facto Internet service provider (ISP) for Gateway customers. Its flagship service will marketed alongside Gateway.net, Gateway's Internet access service, on all Gateway computers.

AOL serve as the fulfillment center for Gateway.net, performing billing, network, and content functions. Until today, UUNet helped with this work for Gateway.net, which has 600,000 subscribers.

The deal, a first between the two companies, further calls for the development of a cobranded online software store. The companies also will jointly market high-speed Internet services and so-called information appliances, among other initiatives.

Gateway and AOL Gateway's earnings jump will share profits generated from any subscriptions related to the alliance, according to a Gateway spokesman.

The partnership should open significant opportunities for both companies. AOL has not directly participated in the wildly popular "PC-ISP" deals, for instance, under which consumers buy bundled computers and Internet service, typically for a substantial discount. Gateway in turn gains a powerful ally in its efforts to develop a successful "information appliance," spartan hardware devices that deliver limited but easy-to-use services.

America Online executives noted during its earnings call that its deal with Gateway is not exclusive, however. That means it can explore similar deals with other PC manufacturers looking to use AOL's network infrastructure.

Meanwhile, the agreement's far-reaching ramifications may prove troublesome for Microsoft both in terms of its MSN ISP service and its efforts to establish a foothold in the information-appliance market.

As part of the agreement, America Online said it will invest $800 million in Gateway over the next two years, in a combination of cash and equity securities. Gateway will receive $180 million in AOL stock and has agreed to spend $85 million to market Gateway products and services with America Online's brands.

"We look forward to working with Gateway across a full range of initiatives, including the joint development of next-generation devices and other products and services, including broadband, that will make the medium more accessible and more valuable to consumers," said Bob Pittman, America Online's president and chief operating officer.

"AOL will use its infrastructure and expertise to operate Gateway.net," Jeff Weitzen, chief operating officer of Gateway, said in a conference call. Although the services will share a similar backbone, AOL and Gateway.net will differ from the user perspective.

AOL's previous "PC-ISP" agreements have involved Prodigy, MSN, and CompuServe, which is owned by AOL. (The company has made an undisclosed investment in PC maker Emachines.) The growing popularity of these deals potentially threatens AOL's ability to snare new customers for its premier branded service, although its CompuServe division has grown substantially because of these deals.

An AOL spokesman said it is still too early to tell whether AOL will participate in rebates or free access deals with Gateway. Gateway currently gives away a free year's worth of ISP service with select computers, as does rival Dell.

The one-year free deals offered by Gateway and Dell are emerging as one of the most popular type of PC-ISP bundles, according to Stephen Baker, an analyst with PC Data.

Gateway, of course, gains a substantial investment and a partner in the device market. Like many PC companies, Gateway is trying to devise a strategy to tap the growing market for Internet appliances. The company is working on devices that will use software from Amiga, the multimedia computer company Gateway owns.

But while it's attractive, the device market also is fraught with risks. Many observers have speculated that hardware companies will have to hook up with service providers to make money on appliances. Under the new alliance, Gateway will begin to market devices for the "AOL Anywhere" strategy.

"There's clearly a possibility that Amiga will play a part in this marketplace," said Weitzen.

AOL home networking equipment and Internet devices will reach market "within the next few months," the company said. Sun has also agreed to partner with AOL on these devices.

An AOL alliance may not guarantee success, but it could alleviate the risk.

The agreement will extend to other projects as well. AOL and Gateway will open a cobranded software store and market certain training programs. The companies also will explore offering broadband services.