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Saying yes to AOL, saying no to Microsoft

CNET News.com's Charles Cooper writes that the sale of AT&T's broadband empire is about a lot more than cable television--and it may also tip the rivalry between the industry's online giants.

"Follow the money," Watergate source Deep Throat urged Woodward and Bernstein as they sleuthed around Washington, D.C., in 1972. It's good advice for these more modern times as well, especially when it comes to reading Microsoft's ever-calculating mind.

The storyline here focuses on Microsoft's behind-the-scenes involvement in the imminent sale of AT&T Broadband, a much-coveted enchilada with some 13.7 million subscribers. This collection of cable companies, assembled by Chief Executive C. Michael Armstrong during the headier days of irrational exuberance, has also become the focus of keen attention from America Online.

AOL already offers a broadband version of its service, which is carried over Time Warner's pipes. But with coverage in only 20 cities, the company desperately wants to expand its network across the country. Cable rivals, who have no incentive to help AOL conquer the world, have so far refused to allow its service to run over their networks.

Now consider what happens if AOL acquires AT&T Broadband. The company would then control a sprawling cable empire with about 25 million subscribers; many of AOL's current 32 million subscribers, who still rely on dial-up, would doubtless trade up to the faster connection.

After several false starts, Microsoft's MSN online service has rebounded strongly, but the company is eager to offer MSN--and the software company's interactive television services--via high-speed lines. Can you envision Steve Ballmer making a sales call to Steve Case to pitch him on using Microsoft products and services through an AOL broadband network? Lots of luck.

That's why the sale of AT&T Broadband to AOL would signify more than the usual disposal of a big corporate asset: It could very well tip the balance of power in the competition with Microsoft.

Microsoft isn't directly part of the bidding. What with the trustbusters still watching the company's every move, this is not the time to even dream about making a play for a cable network. Even a John Ashcroft-led Justice Department would be forced to put its foot down in opposition to any such move.

So instead, Microsoft has pursued the next best option by backing proxies as it serves as a passive investor. The objective here is to prevent the nightmare scenario in which AT&T Broadband falls into AOL's clutches. That means backing Cox Communications and Comcast, which have separately put in bids for the unit. (Despite Armstrong's inability to make a go of his cable empire, you have to congratulate him for getting in the middle of a bidding war between Microsoft and AOL.)

Which side should you root for in this battle of behemoths? The announcement of the winning bid could come as early as the weekend. I've heard sales figures in the $40 billion to $70 billion range. But it's a fluid situation. What a choice! It's a bit like forcing a Brooklyn Dodgers fan to choose between the New York Yankees and the New York Giants. In one scenario, AT&T could even choose to retain its cable television unit until the market improves. Maybe that would be the best for the rest of us.

In the aftermath of its merger with Time Warner, AOL has amassed a worrying concentration of power. And if it adds AT&T Broadband to the family, other content providers would be excused for worrying about being on the receiving end of a diktat when it came to terms and conditions.

The only solace is that the Federal government has already stepped in to make sure AOL doesn't overstep its boundaries. The company had to open its cable network to other ISPs before regulators would agree to the Time Warner merger. I haven't heard of any egregious Godfather threats, so in the meantime: so far, so good.

When it comes to Microsoft, I just can't summon up the same benefit of the doubt. The company got away with murder in the antitrust case brought against it by the Justice Department and the associated states. But that had more to do with the flabby nature of the charges and the inability of the presiding judge in the trial to restrain himself from impeaching his own credibility than it did with Microsoft's purity of spirit.

Microsoft's offenses don't (yet) merit a draconian breakup in my book, but left unrestrained, the company's appetites will lead to no good, especially in this next incarnation of the Internet Age. With control over more and more access points, Microsoft's already formidable ambitions in online commerce and entertainment will be that much more harder to block.

And that's the ace kicker in this debate.