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AOL lights up with TV deals

America Online's stock surges after the company announces four partnerships to help develop its AOL TV services.

Internet service provider America Online today announced four partnerships to help develop its AOL TV services.

The partnerships are with DirecTV, Hughes Network Systems, Philips Electronics, See related story: The new world orderand Network Computer (NCI).

As previously reported, the online giant hopes that its AOL TV product will bring interactivity to the television experience while extending AOL services through television. The company said it plans to keep many of AOL's services for AOL TV while adding new features to enhance the television experience.

Financial terms for the partnerships were not disclosed.

The battle to connect consumers to the Internet through devices other than personal computers is heating up. Just last week software titan Microsoft invested $5 billion in AT&T, giving the company the right to provide an additional 2.5 million to 5 million set-top boxes running Windows CE to power AT&T's cable systems with next-generation broadband services. Microsoft previously had an agreement with AT&T to provide 5 million set-top boxes.

AOL also is planning to release non-PC devices such as screen phones to allow people to connect to the Internet.

"We anticipate that AOL's powerful brand will drive the acceptance and value of interactive television," said Barry Schuler, president of AOL's Interactive Services Group, in a statement.

DirecTV is the country's leading digital television service provider, with more than 7 million subscribers. The company will collaborate with AOL on a new service that combines digital satellite television programming from DirecTV with AOL TV's interactive television Internet service.

Hughes Network Systems, the world's second largest manufacturer of the DirecTV system and a subsidiary of General Motors, will design and build the dual-purpose AOL TV/DirecTV set-top receiver. Hughes plans to leverage its industry-leading convergence expertise in the product's design.

Philips Electronics, a provider of set-top boxes, will produce an advanced set-top box enabled for AOL TV.

The Hughes box will be powered by an Intel Pentium MMX processor while the Philips box will contain a MediaGX processor from National Semiconductor. The design win for National can be seen as a validation of the company's strategy, announced last week, under which National said it would get rid of its PC processor business to concentrate on "system-on-a-chip" processors like the Media GX, which integrate graphics and modem functions into the same piece of silicon as the processor "brain."

The selection of these chips also will likely give some additional life to the argument that processors built around the Intel "X86" architecture will find a home inside set-top boxes. So far, the dominant players in this segment are companies like MIPS, whose chips are built around a RISC-based architecture. National and other companies, however, have said that the X86 chips are a better choice because they are compatible with most existing PC software.

NCI will provide the software platform for the AOL TV service. NCI's TV Navigator software will enable the Philips and DirecTV System set-top boxes to display a range of Internet-based television services and content for both dial-up and satellite set-top boxes.

NCI is a privately held company with several major investors, including Oracle and Netscape Communications (a subsidiary of AOL). NCI's Connect Server will manage and administer the AOL devices connected to the network.

AOL added that the technologies provide an open Internet platform scalable to support additional information appliances that will be developed in the future.

The company said the set-top boxes will be connected to AOL through built-in 56K modems over standard phone lines and will be enabled for digital subscriber line (DSL) connectivity as well.

"As consumers want to extend that interactive experience to connected non-PC devices, we will continue to deliver [our services] as connected interactivity becomes available on platforms like the television," AOL president Bob Pittman said in a statement.

Shares of AOL surged in afternoon trading, climbing 8.13 percent, or 10.44 points, to 138.75. The stock also got a boost after Morgan Stanley Dean Witter's influential Internet analyst Mary Meeker raised AOL's outlook to "strong buy" from "outperform."

AOL's stock had retreated over the last two weeks as investors waited to see how the company would position itself with a broadband strategy in light of the furious bidding for cable operator MediaOne by Comcast and AT&T. Many industry experts speculated that AOL needed to partner with Comcast to push a viable "cable strategy."

AOL already is scheduled to roll out DSL with regional phone companies Bell Atlantic and SBC Communications. Analysts agree that it is still too early to tell which access technology--cable, wireless, DSL, or satellite--will emerge as the winner in providing broadband services.

Still, today's announcement of AOL's partnerships has investors cheering that AOL will be a front-runner in the race to bring the Internet home through alternative access devices such as televisions.