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AOL moves on Internet TV

After protracted negotiations, the online giant says that it has acquired NetChannel to expand its service into the TV realm.

In a move to expand its service into the television realm, America Online announced, along with its most recent quarterly earnings report, that it has acquired NetChannel, a struggling Web-based television company.

Speculation that such an acquisition was in the works had been circulating for months, replete with all the twists and turns of an on-again, off-again relationship.

Terms of the final deal were not disclosed, but sources said the purchase price is likely to be less than $45 million.

AOL said it will use NetChannel's programming experience and technology to develop AOL-branded interactive content for television. The online giant's television service will offer features such as chat and online shopping.

"For us, the acquisition brings us people with programming and product-creation experience for what we believe will be a leading market," said Bob Pittman, America Online's president and chief operating officer. He noted also that AOL's push to get into Web-based television fits in with the company's larger goal--its "AOL Anywhere" strategy--of running its service on a number of platforms.

AOL's first step in achieving that goal is to get a better understanding of the TV market and its potential, Pittman said. He added that the online giant is not yet ready to make any announcement regarding a timetable for when its new service and products will be rolled out.

Sources, however, said that AOL hopes to launch its service by mid-1999.

Philip Monego Sr., NetChannel's president and chief executive, said in a statement that AOL will be the "perfect home" for its technology. Monego could not immediately be reached for comment on the negotiations that led to the completion of the deal.

Sources said that AOL entered into acquisition talks with NetChannel back in November of last year, and that, at that time, the online giant agreed to fund NetChannel with loans until the deal was completed.

An offer was made in December 1997 to buy the company for $65 million, with the deal calling for NetChannel to build AOL's interactive television service, for AOL to run the service, for Thomson Consumer Electronics to build the TV set-top boxes, and for Network Computer to supply the technology, sources said. They noted also that AOL originally had wanted to roll out the boxes and the service by Christmas 1998.

Although the deal with AOL originally was expected to close in early January, things were delayed as the negotiations began to break down, sources said. In late January and early February, AOL had to concede that the Christmas 1998 roll-out was unlikely. According to sources, a major point of contention was the state of the service NetChannel offered.

NetChannel, which had 10,000 subscribers, provided Internet access via cable to television viewers and used Thomson's RCA boxes. Neither the set-top boxes nor the NetChannel service included digital TV capabilities, or tight integration between the Internet and television--features that AOL insisted upon, sources said. The boxes apparently lacked a TV tuner, which would allow for such integration.

AOL said that, as a result, it no longer wanted to inherit the NetChannel service, and requested a restructuring of the deal that would allow it to pay $45 million rather than acquire what it deemed an inferior service, sources said.

Pittman acknowledged that AOL had changed its mind about the NetChannel service.

"Clearly, we were not interested in the service," Pittman said. "We were interested in acquiring the group of folks who had real hands-on experience in programming and development."

Then, in late March, Miles Gilburne, AOL's senior vice president of corporate development, went to Pittman and the company's CEO, Steve Case, to have them sign off on the NetChannel acquisition. But the executives said the price was too high, sources said.

With the deal appearing to have fallen apart, NetChannel told its employees to pack up their belongings because the company was considering filing for reorganization under Chapter 11 bankruptcy laws. But later that day, Case called Monego and said he would have an offer on the table within 24 hours. According to sources, however, that offer never arrived.

Negotiations eventually resumed, and AOL reiterated that it did not want to acquire NetChannel's service. In April, NetChannel shut down its service in the United States and sold its European subsidiary to cable and telecommunications company NTL, which continues to operate the NetChannel service in the United Kingdom. That move likely served as served as a catalyst for closing the deal.