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To: Pamela Murray who wrote (9313)	1/14/2000 12:07:00 PM
From: Pamela Murray	Respond to of 18366

Friday January 14 11:09 AM ET Microsoft, AOL on Collision Course By TED BRIDIS Associated Press Writer WASHINGTON (AP) - Did Bill Gates underestimate Steve Case? Weeks after the last time America Online Inc (NYSE:AOL - news). surprised the technology industry by purchasing Internet pioneer Netscape, Gates confided he wasn't worried the $10 billion deal among his biggest rivals might pose serious risks for Microsoft's future. ``AOL,' Gates said, according to handwritten notes from Microsoft's own files, ``doesn't have it in their genes to attack us.' Now, a year later, America Online's appetite has grown, fueled by the market's unfathomable surges in technology stocks, toward its $145 billion merger with Time Warner Inc (NYSE:TWX - news). Case, one of the world's few executives to already beat Gates head-to-head, will become the new billionaire chairman of the combined company. The stunning deal gives Case's AOL Time Warner Inc. the ideal weapon to challenge Microsoft where it considers itself most vulnerable: a vast network of high-speed Internet lines that can deliver to consumers a promising new generation of software and information that don't require Windows, Microsoft's lucrative flagship operating system that runs most of the world's computers. This fledgling category of software - which already includes word processors, games and digital calendars - isn't installed on a PC using Windows like today's programs. Instead, these programs are delivered and run across high-speed Internet connections, appropriate for almost any device that can connect to the Web. The ultimate promise for many is to remove the industry's intense reliance on Windows, which has earned billions for Gates & Co. Until his recent shopping spree, Case struggled with no ``fat pipes' to deliver to his 20 million AOL subscribers this new generation of bandwidth-hungry software. By comparison, Microsoft's own online service, MSN, has about 2.5 million subscribers. Case, who once wrote e-mail comparing Microsoft to Hitler, is increasingly ready to attack. Microsoft last year invested $5 billion in AT&T, which alone has more than 1 million high-speed Internet customers. ``The really important thing about the Time Warner-AOL deal is, it gives AOL the cable outlet,' said David Smith, an Internet analyst at the Gartner Group. ``It means you have both sides that are armed.' The breadth of the AOL Time Warner combination ``will be forcing Microsoft out as they grow,' said Rob Enderle, a technology analyst for the Giga Information Group. ``Tomorrow, they could do a fairly good job of removing Microsoft as a vendor in the space.' Microsoft, under close scrutiny in Washington as part of the government's ongoing antitrust lawsuit, can't react as aggressively or swiftly as it might prefer, but it isn't sitting still. In a shot across the bow, Gates announced Thursday that Microsoft will refocus its efforts on what he said were the ``next generation of Internet services' being developed during the next two or three years. He compared the revelation to Microsoft's dramatic shift in strategy in 1995, when the company suddenly embraced the Internet. ``We see ourselves today at that same type of inflection point,' he said. ``You haven't seen anything yet,' Gates predicted as he announced his new role as chief software architect. ``The nature of software will be changing. Software will be delivered in many cases as a service across the Internet instead of a software product.' For more than two decades, the technology industry has thrived on the theory that the power of computers increases exponentially over short periods. ``We're going to bet on the equivalent law for broadband,' promised Yusuf Mehdi, director of marketing for MSN. ``We're going to suck up the cycles that you can get on a fast connection into really interesting things - video and audio and interactive television.' Like Case, who surrendered his title as chief executive officer in his new company to be chairman, Gates also elevated his longtime friend, Steve Ballmer, to become CEO at Microsoft but also remains chairman. Tit for tat. And for anyone wondering about the future of Windows, Gates dubbed the new software, ``Next Generation Windows Services.' It's shaping up to be quite a battle. -