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With Merger Deal, AOL Threatens Microsoft on High-Speed Internet Access
By Michael J. Martinez   Associated Press
SEATTLE — It's not as though America Online chairman Steve Case and Microsoft Corp. chairman Bill Gates are best friends — far from it.

They have competed in online services, Web browsing software and instant messaging. Now, they and their partners could go head-to-head in high-speed cable Internet access as well.

Last year, Microsoft poured $5 billion into AT&T; Corp. and an additional $3 billion in other telecommunications companies as part of a broad strategy to invest in high-speed Internet access.

It seemed Microsoft was positioned perfectly to offer software and Internet content over cable Internet hookups — until Monday, when AOL announced its merger with Time Warner, the second-largest cable provider in the United States.

Once again, AOL and Microsoft — via their partners — could be in competition in a new area of technology, the next generation of high-speed, or broadband, Internet services.

"This deal will certainly give Microsoft some pause," said Andrew Bartells, senior research analyst with the Giga Information Group. "Microsoft may have been thinking that AOL was being slow with regard to broadband, but AOL just caught up in a hurry."

The vast majority of Internet users, whether they use AOL or another dial-up service, access the Internet at a top speed of 56,000 bits per second — about the time it takes to download a page of text, but no pictures, from the World Wide Web. Internet access through cable TV lines, already available in a number of U.S. cities, is up to 53 times faster.

With faster access, Internet users could download TV shows and movies in seconds instead of hours. Information could be presented through complex graphics instead of simple text.

Both AOL and Microsoft will now compete to see how many homes their high-speed partners can reach.

"With the way the cable industry is structured, you might see cities that are primarily AT&T; customers, using Microsoft's software, or Time Warner's customers, using America Online," said Lisa Pierce, a broadband analyst with Giga.

The Time Warner acquisition also gives AOL a new way to deploy its upcoming AOL-TV set-top boxes, introduced last week at the Computer Electronics Show in Las Vegas. AOL-TV will compete directly with Microsoft's WebTV, which, despite being the first Internet set-top product, has yet to catch on in great numbers.

In fact, AOL's dominance in the consumer market may force Microsoft and AT&T; to focus more on business customers, according to Gartner Group analyst Brett Azuma.

"Microsoft and AT&T; have a great reputation in the business space, and their software is designed for the kind of connectivity that business users want," Azuma said. "AOL, on the other hand, has a strong consumer following. They may end up in different areas of the market."

Competition is nothing new to America Online and Microsoft. Noting the growing popularity of AOL, Microsoft launched a competing service, the Microsoft Network, in 1995. It failed to catch on, and today has 3 million subscribers to AOL's 20 million.

The two companies offer competing e-mail services and competing instant messaging software; Microsoft has the edge in free e-mail, while AOL's instant messaging products are the de facto standard on the Internet.

Microsoft also competed aggressively with AOL subsidiary Netscape Communications Corp. over browser software used to view pages on the World Wide Web. Netscape essentially lost the battle, though it now forms the base of the U.S. Department of Justice's antitrust suit against Microsoft.

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