Masters Of The Universe Play Rough: AOL-Sony Deal Is Blow To Microsoft

Communications Today, May 16, 2001

By Bruce Sullivan, bsullivan@pbimedia.com

Let the games begin. The battle for the hearts and minds of Internet denizens is on and AOL Time Warner [AOL] has struck the first blow against archrival Microsoft [MSFT].

On the eve of Microsoft's Xbox gaming system unveiling at the E3 trade show in Los Angeles, AOL Time Warner announced a deal with Sony [SNE] linking America Online's Internet service with Sony's popular PlayStation2 game machine. Cool.

"The bottom line is, I think it's very good for AOL," CIBC World Markets Internet Equity Analyst John Corcoran told Communications Today.

The Internet war, which began as the fight for control of consumers' personal computers, has basically left two big combatants standing: AOL and Microsoft. Microsoft has won control of the desktop operating system and browser; AOL is the dominant dial-up access provider.

Now the two giants, whose combined market capitalization is about $650 billion, are competing for future control of consumers' broadband access through not only PCs and gaming devices, but televisions, cell phones, PDAs, Internet appliances and other gadgets not even invented.

"It's all about these companies battling for broadband access to the home. Because once they have that they can sell a variety of offerings, including content, music, advertising ... connectivity, games, movies, etc.," Corcoran said.

"So this is a real push in the direction of meaningful convergence in the home for the first time, sort of phase two of the Internet's development," Corcoran added.

Since AOL and Time Warner completed their $109 billion merger earlier this year, Wall Street has closely scrutinized AOL Time Warner for any signs of weakness.

"So far, they've held up very well," Corcoran said. "The company cannot afford to cede any access devices to its rival."

Neither AOL nor Microsoft could be reached for comment.

The Bottom Line

Both Microsoft and AOL Time Warner have turned in relatively strong financial results this year, while most other tech companies have been struggling. If they can do well during an economic downturn, what will they be like when the economy picks up steam again? Will someone have to draw a Line of Demarcation around a globe and give half the world to each company, like Pope Alexander VI did with Spain and Portugal in 1493? >TK Energis [ENGSY]: British Telecom [BTY]: