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To: Frank Ellis Morris who wrote (145781)	10/25/1999 7:45:00 PM
From: jhg_in_kc	Respond to of 176387

TO ALL: WHERE DOES THIS LEAVE DELL? NILES ON GTW/AOL INTERNET APPLIANCES. (FROM THE AOL THREAD) Internet: AOL/Gateway Pact: Huge -- Simply Huge Staff Writer: Eliot Walsh (10/25/99) America Online (NYSE:AOL - news) and Gateway (NYSE:GTW - news) are sitting pretty high on the hog. Shares of both companies have jumped in the last few days in response to news of a large distribution deal between them ? but possibly the greatest benefits of the relationship have less to do with net ad sales and subscription growth than with the imminent explosion of Internet-anywhere appliances. After the close Wednesday, both companies released stellar quarterly results, with AOL beating estimates, growing profits 268% over the year-ago quarter, from $50 million to $184 million. Meanwhile, Gateway topped analyst consensus estimates by a penny per share, boasting 20% revenue growth and 38% earnings growth. But the true icing on the cake was a strategic alliance in which AOL agreed to invest $800 million in cash and stock in Gateway, in exchange for the ?migration? of all of its Gateway.net ISP subscribers (of which there are currently 600,000). The companies will split the resulting subscription revenue, leaving AOL with one less ISP rival to worry about, and leaving Gateway with an estimated additional $0.07 per share in earnings. America Online will also be pre-loaded on all new Gateway computers, as it is on new Dell (NASDAQ:DELL - news) and IBM Corp. (NYSE:IBM - news) machines, and Gateway will commit $30 million to market its products on AOL. Down the road, the two companies plan to develop wireless and broadband Internet access for use in tandem with portable networking appliances. And that, according to analyst Dan Niles of Banc Boston Robertson Stephens, is the primary significance of the deal. A ?Monster? Market The two companies will now stand in the choicest position to capture a major share of what Niles calls a ?monster? market: the incipient Internet appliance market. Internet appliances are typically specialized devices with embedded Internet capabilities built into them. They particularly represent Sun Microsystems? (NASDAQ:SUNW - news) vision of the IT future, and not coincidentally, Sun has a strategic relationship with AOL. ?PCs, as stand alone entities, are going to cease to be all that important to the consumer,? says Niles. ?They need information.? And as the value of the boxes themselves declines, the ease of getting information will grow, he continues. That?s where Internet appliances come in. Niles believes that in the future, transferring information through the Internet will be akin to the way we communicate with voice now. Particularly with the advent of Third Generation, or 3G wireless communications, e-mail, stock quotes, and video communication will be as ubiquitous and accessible as payphones and wireless phones are today. ?If you think about it,? he says, ?cell phones are a $300 billion market; PCs are a $100 billion market. And as the demand for information grows, the Internet appliance market is going to dwarf the PC market.? That?s why he believes that the Gateway-AOL deal, the first such deal between an ISP and a box-maker, ?will become an ever-tightening relationship going forward.? The vision also dovetails with America Online?s ?AOL Anywhere? initiative, through which the company intends to make its services available to consumers over the TV set and the wireless phone ? as the name says, Anywhere. JP Morgan analyst Daniel Kunstler writes in an October 21 report, ?Gateway is investigating ways to leverage its Amiga technologies to design Internet access appliances to enable AOL?s ?AOL Anywhere? strategy. Overall, we view this as a very positive move, and we expect that Gateway will be able to leverage it to continue to grow its market share and its revenues faster than the rest of the market.? Who else but AOL could offer a PC maker such enormous scale towards the build out of Internet appliance networks? ?That?s easy,? says Niles. ?Microsoft (NASDAQ:MSFT - news) . While they?re behind in the race, one thing they do have is a huge balance sheet.? It?s fair to say that Microsoft won ?t be resting on its laurels, but for now, AOL and Gateway appear to have an advantage in bringing the Internet out of the PC. Bottom Line: The AOL/Gateway deal bodes very positively for the near future; most analysts upped their revenue estimates significantly because of it. But if the growth of Internet appliances is as big as Niles, AOL, Gateway, Microsoft and others think it is, the strategic alliance formed this week will have tremendous aftershocks as we move towards a more fully integrated world of connectivity.