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The week in review: AOL, Gates ahead of the game

America Online stuns its high-tech rivals by purchasing media giant Time Warner, redrawing a competitive landscape which seemed bleak for AOL just months ago, while Bill Gates steps aside as Microsoft's CEO to reshape his company's strategic direction.

America Online stunned its high-tech rivals by agreeing to purchase media giant Time Warner, a move that redraws a competitive landscape which seemed bleak for AOL just months ago.

Combining AOL's online services with Time Warner's vast media and cable assets, the new company will boast almost unparalleled resources in a world where networked data and entertainment are rapidly converging. AOL Time Warner, as the new powerhouse is to be called, can tap TV programming, Internet content and networks, not to mention tens of millions of subscribers who have proved they're willing to pay for these rich resources.

Expected to clear regulatory hurdles, the estimated $160 billion purchase would the largest merger in corporate history.

Separately, Bill Gates stepped aside as Microsoft's CEO, in favor of president Steve Ballmer, to reshape his software company's strategic direction.

Just last May, AOL was widely seen as one of the losers when AT&T unexpectedly shouldered past Comcast to buy cable company MediaOne for $60 million. Efforts to sign DSL agreements as a strategic alternative to cable haven't been all that successful: One year after inking a landmark venture for high-speed Internet access with Bell Atlantic, AOL has yet to offer widespread consumer service.

But Monday's deal, negotiated haltingly albeit secretly, turned the tables. This time Microsoft appeared the odd man out, its ambitions of becoming a major "content" company now thwarted both in terms of creation and delivery.

Time Warner too has yet to deliver on its latest Web strategy, after finally abandoning its much-criticized Pathfinder site. And its new strategy--offering hub sites aimed at vertical areas of interest such as entertainment and finance--is not based on a financially proven model.

Ironically, not long ago media giants like Time Warner--along with the Net's early adopters, analysts and others--were writing off AOL as an industry force. Saddled with lawsuits over dial-up connections and widely ridiculed for its strategy of inundating the public with disks to get new users to sign up, AOL was all but left for dead. But with more than 20 million subscribers, it is not only the largest dial-up ISP but nearly synonymous with the Web for much of the general public.

Rivals scrambled to assess just how the deal would affect their businesses. Should AT&T, Microsoft or Excite@Home want to compete head-to-head with the new AOL Time Warner, they'll have to step up the pace of acquisitions or partnerships to fill in their strategic gaps--or retreat, according to some industry analysts.

Of course, merging such resources is easier said than done, and some analysts worried that AOL will no longer be a "pure-play" Internet company, tossing aside the stellar growth and stock gains many Net firms have enjoyed over the past year. AOL fell more than 10 percent the day after the deal's announcement.

Microsoft's turn
Three days later, Gates resigned as the only chief executive Microsoft has ever known, in favor of president and longtime friend Steve Ballmer. Gates will remain as chairman, and fill the newly created post of chief software architect.

At the same time, high tech's richest company unveiled an initiative called Next-Generation Windows Services, broadly understood as an attempt to create an Internet operating system. Many thus viewed the handover as the first step in a grand strategy to revitalize Microsoft.

Nonetheless, the changing of the guard takes place at a tumultuous time. Wednesday, news surfaced that the Department of Justice is proposing a breakup of Microsoft to help resolve the antitrust case pending against the company. Ballmer bristled at what he called irresponsible and deliberate government leaks.

New friends
Elsewhere, Microsoft and Compaq invested $100 million in Digex, while Kohlberg Kravits and Roberts plowed $200 million into Intermedia, the majority owner of Digex. In addition, a consortium of banks committed $400 million in funding to Intermedia. Corporate users have yet to fully embrace application service providers--service companies that will host and manage software applications remotely--but major technology powers and others are busily lining up as many relationships as possible and using their wallets to win friends.

IBM beefed up plans to embrace Linux across its line of server computers, improving how well Linux and Big Blue's AIX operating system work together and contributing more of its own software to the collective Linux development effort. IBM's increasing fondness for the operating software raises the prospect that its vast services business could encroach on the turf of smaller Linux companies.

NextLink Communications agreed to acquire Concentric Networks in a stock deal valued at about $2.9 billion. The move is representative of a larger trend for firms to become "integrated communications providers," or companies that can offer any type of telecommunications service to a wide range of customers, especially the largely untapped market of the small and medium-sized business customers.

3Com plans to transform its voice-over-Internet telephone system for small and medium-sized businesses to service large corporations and business telecommuters. The move effectively closes the book on a failed joint venture with Siemens. The duo teamed in 1998 to develop telephony products for corporate networks, but began to scuttle the partnership this summer after 3Com bought a company that builds telephone systems to shuttle phone traffic over data networks.

New users
Leading auto manfacturers General Motors and Ford Motor announced marketing alliances with the world's biggest Internet companies, AOL and Yahoo. GM was also said to be in negotiations with Bell Atlantic to provide wireless services in new vehicles. Automakers are reinforcing their Web sales and trying to retain customers after they make purchases, while online firms stand to gain additional traffic and advertising.

Taking advantage of an apparent security breach in CD Universe's database, a hacker posted links to potentially thousands of customer names, addresses and credit card numbers after purportedly failing to extort money from the online music store. eUniverse, which owns CD Universe, acknowledged that a portion of its customer data had been stolen, and said it had notified the FBI after the hacker attempted blackmail. The FBI shut down the hacker's site, the company said.

DVD players that act more like a PC should be hitting the market soon. This quarter, Samsung will unveil a $499 product with graphics capabilities as good as current game console systems; the device is expected to be capable of accessing the Net. DVD players were one of 1999's most popular consumer electronics items, meaning companies offering Internet access devices--such as AOL and WebTV--as well as PC companies offering simplified Web browsing terminals may be facing a formidable new competitor.

Major PC makers will begin selling Windows 2000 systems on Jan. 24, nearly three weeks before Microsoft formally unveils the new operating system. Widely thought to be the most important software development project in the company's history, Windows 2000 is designed to power, enhance and augment all of the company's other software and Internet offerings.

New beginnings
After missing estimates for the last two quarters, Intel easily strode past expectations for the fourth quarter by reporting record earnings of $2.4 billion. The increase came from stronger-than-anticipated processor sales, the effects of cost-cutting programs and profit from the sale of stock. Although many analysts believe 2000 will be another strong year for Intel, some think profit growth may begin to slow as the high-tech industry moves away from PC-based computing.

Yahoo also reported exceeded analysts' expectations, as holiday advertising and e-commerce revenue soared, and announced a 2-for-1 stock split. But shares dipped as investors seemed disappointed the leading portal fell short of so-called whisper numbers. Some asserted the AOL-Time Warner merger pressures Yahoo to pull off an acquisition of its own. Executives maintain the company will remain an independent platform for bandwidth and content.

Scientific-Atlanta and PowerTV began serious discussions about taking PowerTV public, probably by the second half of the year, according to several people familiar with the two companies' intentions. With the perception that S-A is losing some momentum as Time Warner and other cable companies start to look at rival equipment suppliers, the timing may be right for disengaging PowerTV from its parent. The IPO successes of Liberate and others also have helped spur S-A's management into action.

Also of note
Sega of America reported continued strong sales of its newest game consoles, but the company continues to lose money and faces the prospect of upcoming Sony and Nintendo products leapfroging the Dreamcast system ... Critical Path is teaming up with Japanese giants NTT Communications and Mitsui & Co. to create a joint venture aimed at bringing Web messaging to the Asian market ... The construction industry is rapidly building an online presence, as venture capitalists and executives aim to tap a potentially lucrative e-commerce niche ... chief executive Jonathan Bulkeley resigned after only one year of heading up the online bookseller ... A little more than a week after Baan's CEO jumped ship, chief financial officer James Mooney left too ... A hacker tapped into the universal registry operated by Network Solutions and changed at least nine Net addresses, including Atlanta's Emory University, redirecting users to the Web site of a New Jersey company called, which claimed it too was a victim ... AOL quietly relaunched its home page, revealing a makeover that includes a Web-based version of its popular instant messaging software.