The week in review: AOL, Gateway in far-reaching pact

Unveiled the same day each company announced quarterly earnings, the deal calls for AOL to become Gateway's de facto Internet service provider and for joint marketing of such information appliance devices as email readers and Internet TV set-tops. Eventually, the duo will try to sell consumers all their home computing needs--broadband Internet service, set-top boxes decked with AOL software, PCs, standard AOL service, and even third-party products.

AOL anon
AOL will serve as the backbone for Gateway.net, performing billing, network, and content functions. UUNet previously handled some of this work for the PC maker's ISP, which has 600,000 subscribers. Gateway and AOL will share profits generated from any subscriptions related to the alliance.

The deal further calls for the development of a cobranded online software store, and the non-exclusive agreement provides for AOL's investing $800 million in the PC manufacturer.

The match appeared sensible to industry analysts, as Gateway is trying to move beyond the low-margin PC business and AOL aims to ensure its programming will find multiple outlets. (Over the past year, the leading ISP has been diligently striking DSL distribution deals with telcos.) Since nobody is sure what kinds of non-PC devices people will wind up using, or what kind of software will power them, such an alliance both increases marketing power and mitigates against expensive product flops in the years to come.

The agreement may mean trouble for Microsoft efforts to establish a foothold in the information-appliance market and also for its underachieving MSN Internet access service.

Y2K on cue
The long-predicted computer sales slump caused by the Year 2000 bug finally appears to have arrived, but not exactly as envisioned. In warning fourth-quarter profits will fall short of expectations, IBM illustrated that computer makers focusing on back-end systems are taking a hit, while those selling personal computers are surprisingly seeing an upturn. The news overshadowed a favorable earnings report; Big Blue's stock fell by 20 percent.

Separately, IBM retreated from an announcement that it will sell its entire consumer PC line via the Internet beginning January 1. Customers will be able to buy Aptiva systems at a handful of OfficeMax stores. The flip-flop highlights the struggles traditional PC manufacturers have had in coming to grips with so-called direct sales.

Dell Computer warned its financial results for the third quarter will be hurt by a rise in memory prices owing to shortages caused by September's Taiwan earthquake. The company said it would combat some of the price hikes by reducing the amount of memory it puts in its PCs.

Leading chip manufacturer Taiwan Semiconductor Manufacturing Corporation said demand is sweeping past projections and the company has boosted output in response to fast-growing orders from PC makers. The clamor is largely independent of September's earthquake in Taiwan, according to the president of the company's North American operations, who suggested it means PCs are thriving.

Newcomers
Networking equipment newcomers are reaping the spoils of a stock market obsessed with everything Internet, often at the expense of established firms. Sycamore Networks, whose initial public offering priced at an upwardly revised 38, shot to 270 on its first day of trading before falling back.

Nortel agreed to buy Clarify, a maker of software that automates corporate sales and customer service needs, in a stock deal valued at $2.1 billion. The deal comes at a time when the customer relationship management (CRM) software market is consolidating quickly. Last week PeopleSoft and Clarify rival Vantive agreed to merge in a stock-for-stock deal worth about $433 million. Oracle and SAP are also rapidly developing their own lines of Web-based sales and customer service software.

SBC Communications unveiled a three-year, $6 billion effort to make it a top provider of high-speed Internet access. SBC, Bell Atlantic, and US West are further turning their attention back to television, planning to provide on-demand videos and other services. The Baby Bells previously rejected the business but have been stung by cable companies' move into the phone business. Executives say they'll have the networks to back up their ambitions this time around. The moves demonstrate phone companies' shift away from traditional voice services toward advanced data and video services.

Business models
Amazon.com customers have access to illegal weapons along with a host of other controversial items on the company's auctions and zShops marketplace. Their presence stands in marked contrast to the public image the company has worked to cultivate.

Separately, the retail giant filed suit against Barnesandnoble.com, alleging that the rival book and music e-tailer illegally copied Amazon's patented 1-Click technology, which allows users to make a purchase with one click of the mouse and spares having to reenter shipping and billing information. The move comes at a time when an increasing number of e-commerce companies are trying to defend their online positions by patenting not just their technologies but also their business plans.

Microsoft announced a joint portal venture with telecommunications giant Telefonos de Mexico, marking yet another effort to reinvigorate the company's struggling MSN brand and establish a credible international Web presence. Ironically, traffic to top-tiered Web sites, including those that belong to America Online, Yahoo, and Microsoft, was flat or in decline last month. Most industry analysts are not making a fuss over the September figures.

The software giant's quarterly results once again topped analyst expectations, largely because of strong sales of personal computers, and Microsoft said it will release a final version of the much-delayed Windows 2000 operating system to manufacturers before the end of the year. Excluding one-time gains, net income totaled $2.19 billion, or 38 cents per share, compared with a split-adjusted profit of $1.52 billion, or 28 cents a share, for the same period last year. Revenue climbed to $5.38 billion from $4.19 billion a year earlier, but Office 2000 sales in the United States were lower than expected.

Getting permission
Web sites must get parental permission before collecting personal information from preteens in most cases under new rules issued by the Federal Trade Commission. Privacy groups have been lobbying for stricter legal protections for all computer users, but the Clinton administration favors industry self-regulation.

U.S. candidates were edged out in elections for three board seats on the influential Internet Corporation for Assigned Names and Numbers, a blow for American businesses. ICANN's purview includes deciding who can sell domain name registrations and how to settle trademark fights. In the future it also will decide whether to create more domains, such as ".firm." This week's closely watched vote was the first step toward replacing ICANN's appointed 9-person board with an elected 18-member board.

Also of note
Palm Computing's popular handheld computers will come with color screens in the first half of next year, but the company now aims to convince corporate buyers to purchase Palm-branded devices, server software, and third-party services for creating a networked workforce ? Apple moved to assuage a pricing flap by honoring prepaid orders for new Power Mac G4 computers placed before October 13 ... Time Warner launched a redesign of its corporate Web site, but its primary Internet strategy remains unresolved, while AltaVista inadvertently offered a glimpse of a major site overhaul ? RealNetworks reported its first profit, a dramatic turnaround from last year's high-profile wrestling match with Microsoft ? Encyclopedia Britannica was immediately overwhelmed on the launch of its Web site.