July 30, 1999
Tech Week
AOL Shows a New Face
In Cable, Message Fights
By JASON FRY and TIMOTHY HANRAHAN
THE WALL STREET JOURNAL INTERACTIVE EDITION
TECH CEOs are on their best behavior when addressing Congress, shareholders or what's-the-Net? crowds on the lunch circuit: They smile and tell jokes and preach about the wonders that emerge when government leaves business to the free market and talk how you, the consumer, are the one to determine whether they live or die.
But let something get under their skins, and it's different: The government needs to rescue them -- right this moment -- and the consumer runs a distant second to stroking the corporate ego.
At the moment, no company is behaving more wretchedly in this regard than America Online Inc., which is having a corporate nervous breakdown over the twin issues of open access to cable-TV lines and open access to instant-messaging on the Web.
What makes that sad is that for years AOL's success has been the poke in the eye that the digerati so sorely deserve. AOL thrived by staying relentlessly focused on offering people a simple way to get on the Internet. Sneering tech poohbahs kept telling everybody that "simple" meant "stupid." Any moment now, the hoi polloi were going to wise up and decide it made more sense to join some anonymous local ISP and mix and match a shell account with their own browser and plug-in software. Instead, people kept opting for a straightforward way to get Net access: At last count, nearly 18 million of them use AOL.
AOL also showed itself to be a foxy street fighter. In March 1996, at the dawn of the browser wars, AOL adroitly played Microsoft Corp. and Netscape off against each other and emerged clutching a browser deal with each. AOL users could pick whichever one they wanted, and Microsoft and Netscape executives were forced to wince and smile through the photo ops. And then last fall, AOL won one for the common man, acquiring a much-diminished Netscape and forging an e-commerce alliance with Sun Microsystems Inc. Steve Case and Co. had not only gone toe-to-toe with Microsoft and survived, but also earned the respect and admiration, however grudgingly given, of Silicon Valley's rulers.
This should not be forgotten: Anyone who thinks getting on the Internet shouldn't require an engineering degree owes Mr. Case a huge thank you -- as does anyone who hates being talked down to by the mansion class of Woodside. But that being said, in recent weeks AOL has shown a much uglier face, throwing twin tantrums about issues that have put it on the opposite site of the fence from consumers.
First comes the issue of open access to cable-TV systems, most obviously the massive system being rammed together by AT&T Corp. AT&T's $116 billion acquisition binge has given consumers their brightest hopes yet -- after years of waiting -- that some company might actually show up and offer them a speedy home connection to the Internet. Not only is AT&T racing to provide that service via cable modem, but the threat it poses has the phone companies actually moving seriously to offer consumers fast access via DSL.
1San Francisco Transfers Cable System to AT&T, Will Revisit Open-Access Issue (July 27)
2Lobbying Move in Cable Fight May Pay Off for AOL Coalition (July 15)
3AT&T CEO Says Firm Will Appeal Internet-Access Ruling in Florida (July 15)
4FCC's Hands-Off Position on Access Is Complicated by Hands-On Officials (July 7)
All to the good -- except that a number of municipalities, egged on by GTE Corp. and AOL's openNet Coalition, as well as by anti-everything consumer groups -- have adopted or proposed regulations requiring that AT&T open its cable lines to competing Internet-service providers.
AOL has a valid concern: that AT&T will offer customers its own Internet-access service as part of a package deal, but charge extra to add competing services such as AOL's. But this is putting the cart far before the horse. Yes, there are potential problems for consumers with AT&T's amassing such power over high-speed access, and the FCC will have to watch this issue carefully in the years to come. But there's a more fundamental problem with high-speed access that's hurting consumers right now: They can't get anybody to sell it to them.
For years now, the FCC has been frustrated by that and looking for a way to hurry things along. The current small-government era kept it from intervening and adopting incentives and regulatory spurs for rolling out high-speed access; now, sensibly enough, the agency is refusing to intervene and eliminate the rewards of the one company that's actually taking risks to deliver that access. Despite what tomorrow may bring, today the FCC is correct in not letting the perfect be the enemy of the good -- and more importantly, in not letting the perfect be the enemy of consumers.
Moreover, whoever said cable modems are the wave of the future? The vast majority of speed-starved consumers are agnostic on the question and will gladly fork over $60 a month to the first person who arrives with a high-speed link, no technological questions asked. Remember DSL? AOL certainly does. When it isn't busy coaching lobbyists and bawling at the government to save it, it's making deals to ensure its online service is offered with telecommunications companies' DSL lines. It's struck such deals with the likes of GTE, Ameritech Corp., SBC Communications Inc., and Bell Atlantic Corp., and others are in the works. Instead of shrieking at the FCC, AOL ought to be making sure the telephone companies move at Internet speed.
Then there's the farcical instant-messenger fight pitting AOL against Microsoft -- and against its own bedrock philosophy, if one still exists. AOL's fear with cable-access is that AT&T, given a dominant position in the market, will block other Internet-service providers from accessing its network. Well, AOL ought to know: After all, that's exactly the tack it's taking to defend its dominant position in instant messaging.
5AOL, Apple Team Up to Offer Instant-Messaging Service (July 30)
6Microsoft and AOL Show No Signs of Retreat in Spat Over Messaging (July 29)
7Web Rivals Attempt to Open Up AOL's Instant-Message Service (July 26)
8AOL Blocks Microsoft's Instant-Messaging Software (July 25)
9ZDNet: AOL Sets the Stage for Battle Over Instant-Messaging's Future (July 23)
10Microsoft Unveils Message System Compatible With America Online's (July 23)
AOL's ICQ and Instant Messenger (AIM) have become wildly popular, with nearly 80 million users. AIM in particular has provided a way around poky, clogged corporate e-mail systems and become the gotta-have-it social lifeline for the well-heeled teen tribes of America.
It's also caught the eye of none other than Microsoft, which recently introduced MSN Messenger, an instant-messaging service that can communicate with users of AIM as well. AOL charged that Microsoft was breaking into AOL's network and then tweaked its servers to shut MSN users out. At which point Microsoft found a way around the lockout, AOL headed them off again, and so on. (Users of instant-messaging systems from Yahoo! and Prodigy have also found themselves unable to reach AIM users.)
All of this would be very amusing, if AOL weren't so far up on the same high horse it once delighted in knocking snotty tech companies off.
For the most part, AOL's strategy has been to stress security concerns while making the right noises about working with industry-standards organizations on setting ground rules for instant messaging. Hence AOL Interactive Services chief Barry Schuler's making the rounds talking about how AOL would begin actively participating in a working group of the Internet Engineering Task Force on the problem -- a step Microsoft, Yahoo and Prodigy have been urging AOL to take.
That suggested the posturing -- and the games between AOL and Microsoft programmers -- might soon cease. Yet at the same time, AOL has shown an uglier face. It has set up its own advisory group with executives from the likes of Apple Computer Corp., Novell Inc., and RealNetworks Inc., which suggests it is considering a larger standards fight that would buy it even more time to amass market share. (One presumes that if a coalition emerges from this group, AOL won't call it openNET.)
Along those lines, Mr. Schuler told ZD Network News that AOL is eager to work with companies on issues of interoperability, and is merely maintaining controls to ensure consumers using its service have a good experience. If that reminds you of the disingenuous consumers-first cant that Microsoft employees have been spouting in the antitrust trial, it should. For indeed, Mr. Schuler told ZD that if Microsoft wants access to AIM users, it could license that access in much the same way AOL struck deals to get an icon in Windows.
And there, finally, is what this is all about: AOL is all grown up and has a hammerlock on a market of its own, and it wants to stick it to Microsoft for the years of slights and bullying and bad behavior it had to endure. Is there a lovely justice in Microsoft having to grit its teeth and endure sudden software tweaks, endless standards debates and wide-eyed protestations of innocence when it wants to enter a new market? Yes -- of course there is. (Not to mention the amusement value of Microsoft being pious about open standards.) But there are also those caught in the middle: People who want to communicate with friends and colleagues without worrying about grudge matches between fabulously wealthy companies short-circuiting the process. They're called consumers. Remember them?
Hardware and Software
The test-and-measurement unit of Hewlett-Packard Co., an $8 billion-a-year division that the company is planning to spin off next year, will be renamed Agilent Technologies, H-P said (see article11).
Paul Maritz, once considered in the running to succeed Chairman Bill Gates and President Steve Ballmer at the top of Microsoft Corp., is giving up most of his operational responsibilities, becoming the latest senior executive to opt for a less-pressured role at the software company (see article12).
Apple Computer Inc. said it will invest $100 million in South Korea's Samsung Electronics Co. to ensure a steady supply of flat-panel screens for its portable computers (see article13).
Advanced Micro Devices Inc., looking to reduce financial pressures, is considering seeking a partner to take a stake in a new $1.8 billion chip factory in Dresden, Germany (see article14).
Texas Instruments Inc., aiming to expand its menu of semiconductors for portable devices, said it will acquire Unitrode Corp., a firm with expertise in chips that control power consumption, for $1.2 billion in stock (see article15).
Internet and Online
AOL said it sold a 20% stake in its Canadian online service to Royal Bank of Canada for US$60 million, as part of a broader marketing deal (see article16).
Frank J. Petrilli, recently passed over for the top job at newly public TD Waterhouse Group Inc., joined rival E*Trade Group Inc. to oversee the company's core securities business (see article17).
Telecommunications and Cable
Deutsche Telekom AG has offered to acquire British wireless operator One2One for $11.98 billion and a deal could be reached within a week, according to people familiar with the discussions (see article18).
British Telecommunications PLC agreed to acquire the 40% it doesn't already own of mobile-phone operator Cellnet for $5.01 billion, giving the phone giant full control of the United Kingdom's second-largest wireless-services company (see article19).
Cox Communications Inc. agreed to acquire the cable-TV assets of Gannett Co. for $2.7 billion, continuing the fast pace of consolidation in the cable industry (see article20).
NTL Inc., backed by the financial firepower of France Telecom SA, agreed to acquire the residential cable-television business of Cable & Wireless Communications PLC for $9.94 billion in stock and cash, plus the assumption of debt (see article21).
Initial Public Offerings
Chemdex Corp. saw its shares surge 70% from the its IPO price. The price of $15 for the Internet broker of laboratory supplies had already been increased twice (see article22).
Shares of Web-hosting firm Digex Inc. gained 31% in their debut (see article23).
Shares of Drugstore.com Inc. soared in the first day of trading, rising as high as $70 from an $18 offering price before closing at $50.25 (see article24).
Shares of Net2Phone gained 77% in their first day of trading Thursday, following the Internet telephony firm's $81 million IPO (see article25).
Earnings
AT&T Corp. narrowly beat earnings expectations and reported steady revenue growth, citing its investments in wireless communications and cable TV (see article26).
Baan NV reported a second-quarter loss in line with expectations following cost cutting. , It was the fourth straight quarterly loss for the Dutch company, which is in the middle of a painful restructuring (see article27).
Compaq Computer Corp. reported a second-quarter loss of $184 million, or 10 cents a share, and laid out plans to slash operating expenses as it struggles with lower-than-expected computer sales (see article28).
EBay Inc. said acquisition costs and other one-time items led to a 70% drop in second-quarter profit, though the Internet-auction company's business bounced back from a costly service outage (see article29).
Electronic Data Systems Corp. said second-quarter earnings rose 8.4%, in line with analysts' expectations, as its U.S. business rebounded from a downturn earlier this year (see article30).
EToys Inc. posted a narrower-than-expected loss for its first quarter as a publicly traded company on a 20-fold increase in sales over the same period last year (see article31).
Frontier Corp. said second-quarter net income dropped 19%, roughly in line with Wall Street's expectations following the telecom company's warning late last month that intense price competition would hurt earnings (see article32).
MCI WorldCom Inc. met Wall Street's earnings expectations for the second quarter, saying that cost-cutting and explosive growth in data and Internet traffic offset declines in its wholesale business (see article33).
MindSpring Enterprises Inc. reported a loss, but topped analysts' expectations because of increased revenue generated by the company's core business of providing consumer Internet access (see article34).
Qwest Communications International Inc. saw its sagging stock rebound after reporting second-quarter results that topped expectations (see article35).
Sony Corp.'s profit fell sharply in the first quarter, squeezed by the Japanese yen's rise and tighter margins on electronic goods such as television sets and stereos (see article36).
Storage Technology Corp. reported results in line with analysts' expectations, but warned that second-half results will be weaker than expected (see article37).
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