Thunder in the Clouds: AOL-TW, DoJ & Microsoft

The gods on mount Olympus have seriously rearranged the furniture this week! The news the first week of Y2K was how quietly the year passed. Apparently the gods had been hunkered down in their bunkers waiting for the predicted disasters to strike. In stunning contrast, this week they came out with lightening bolts and thunder galore!

As everyone on the planet knows by now, AOL and Time-Warner have agreed to merge in a stock swap with AOL's Steve Case leading the combined company. Though the merger of Internet with the mainstream media has been talked about for years (e.g. Web TV, Interactive Television, Cable Modems, etc.) nothing so bold was expected so quickly. This truly is a Y2K-class event, a deal for the new millennium! In this editorial I'll try to summarize why this is such a stunning move and analyze a bit of the fall out from the perspective of us "e-Developers".

First, why is this such a good move for AOL?

• Of all On-Line and Internet players, no company has been so continuously focused on content, content, content. With this merger, AOL gains control of the single greatest storehouse of content and assembly of engines of new content that they could possibly want.
• AOL's customer base has always been the segment of the e-Community least interested in the technology and most interested in the entertainment value of the medium. This consumer segment directly fits the model of the cable TV subscriber and the movie viewer. The merger combines these two market segments, creating great opportunities for economy of support and cross marketing.
• AOL's weakest area has always been access: busy lines and low bandwidth. They've always been late in adopting new technologies: slow to give up on X.25, slow to upgrade to higher speed modems, never getting serious about ISDN access, and slow to (begin to) integrate with the Internet. Acquiring the Time-Warner cable plant and share of RoadRunner suddenly brings them into the forefront of broadband access.

Less clear to me is the value to Time-Warner! Apparently the media company was more fearful of the Internet revolution than I thought. A Wired Magazine article predicting the end to the production of music and video CDs in favor of Internet delivery of MP3 entertainment may be more reality than propaganda. I regularly watch C-SPAN via the Internet while I surf; the bandwidth of RoadRunner easily supports the 100kbps C-SPAN stream in the background with no significant impact on my ability to browse. It doesn't take much imagination to see this and burgeoning MP3 player market destroying the market for "products" like CDs and Videos. Note also a recent review of the Cassiopeia E-105 emphasizing it's video playback ability. This is probably another manifestation of the death of the "product" <http://www.infosecana.com/flinkink/articles/2000-01-06.htm> business model in favor of Internet-base "service" model. It's not just the traditional software "product" that is on the way out!

The fall out of this merger on AT&T is also very interesting:

• AT&T has been amassing extensive Cable TV holdings, viewing the cable as the broadband medium that answers the Baby Bells' dominance over access to your home. This prompted AOL to enter into combat with AT&T over "open access" to the cable, AOL fearing that AT&T would be able to extract exorbitant fees from AOL for access to "their" customers. Suddenly AT&T switches from having a strangle hold on content providers like AOL to being a mere competitor in the access arena with no content of their own! This was a very deft move on AOL's part!
• This is not all down-side for AT&T however. Their stock has gone up since AOL's announcement partly because the deal is a very strong comfirmation of AT&T's cable strategy. The commitment AT&T made to cable last year has been confirmed by AOL's move this year. It's now the telephone companies and DSL proponents that will be feeling much greater pressure to deliver service quickly, before the cable modem locks up the lion's share of the consumer business. (I say "consumer" because I believe DSL has significant advantages for the business customer in terms of reliability, security and guaranteed bandwidth. We'll see before the year's out.)

But the thunder kept rolling! By mid-week the rumor was that the DoJ had come to the opinion that Microsoft should be split up into three companies: media access and content (MSN), applications (Office), and platform (Windows). The rumor suggests that this was leaked to signal that the AOL deal should not get Microsoft 'off the hook'. Just because AOL had absorbed Netscape and now Time-Warner didn't mean that Microsoft wasn't still too big for it's britches. ....or so the rumor goes. And I'd discount it as so much rumor if it wasn't for Microsoft's announcement on Thursday that Bill Gates was stepping down as CEO!

Here's how I read the fall out of AOL's move at Microsoft, in light of the DoJ rumors:

• MSN began as a content play to reclaim the On-Line market for the Windows desktop. AOL had created it's own "virtual" windows environment with their proprietary software and Microsoft wanted to wrestle control back by better integrating On-Line content (and later Internet content) into the native Windows environment. Though it made a good start, MSN has always been behind in the content area, with meager (regional) advantages in bandwidth (ISDN) and Internet performance (via access partner UUNet and massive investment in conversion to Internet standards.) This AOL move hits MSN very hard in both the content and bandwidth areas, seriously upping the ante for Microsoft.
• Referring to the future of Microsoft software business, Gates announced, "It will be leveraged as a service across the Internet instead of as packaged product." This remark and others by Ballmer suggest to me that Microsoft is ready to refocus MSN to be more mainstream in the Microsoft business, functioning as the delivery medium for the new "service model" for software. This is more in line with Microsoft's strengths, the evolution of the technology , and has two sweet side-effects: it distances Microsoft from head-to-head competition with AOL, and it smudges clear lines separating the software development parts of Microsoft's business from the Internet services part making it harder for the DoJ to sell the proposed split-up.
• Finally, the announcement that Gates will focus on architecting an entirely new generation of Windows puts the DoJ, AOL and all competitors on notice that they focus on Microsoft-as-it-is-today at their own peril. Gates has been a genius at re-inventing Microsoft to keep it ahead of each new revolution. His greatest fear is that the DoJ will prevent him from innovating. For him, stagnation is the shortest path to defeat. Anyone attempting to overtake Gates had better lead their target by a hefty margin; he's on the move! If the DoJ doesn't accept this stepping down as CEO as a sufficient "split" in the Microsoft power structure, I think we'll see Microsoft split itself along the lines of a "services company" providing software services over the Internet and a "technology company," building the next generation of software technology and selling it to all service and hardware vendors on an even-handed basis.

Well, that was the week that was, IMHO.... and I stress Opinion. I'm interested in being an editorialist with opinions based on the news and my experience as an e-Developer. Let me know your opinions! Thirty plus years following the Information Revolution has taught me one thing for certain: real experience is more valuable than any other credentials you can bring to the table. As my readers, you collectively hold in your minds more experience than I could ever amass. Share it! Send feedback and join the discussions!

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