War over the future of the Web

A few weeks ago, the name MediaOne Group would have drawn widespread blank stares. Media-industry insiders knew it was the nation's No. 3 cable company, with about five million subscribers and 50 percent control of an intriguing high-speed online service called RoadRunner.

But suddenly a takeover fight between AT&T Corp. (NYSE:T) and cable giant Comcast Corp. (Nasdaq:CMCSA) for MediaOne (NYSE:UMG) is shaping up to be a battle over nothing less than the future of the Internet.

The growing list of companies drawn into the fray include Microsoft Corp. (Nasdaq:MSFT), America Online Inc. (NYSE:AOL) and Time Warner Inc. (NYSE:TWX) Monday another titan, MCI WorldCom Inc. (Nasdaq:WCOM), was said to be eyeing the deal, too. All of them are jockeying furiously to make sure they have a piece of the cable networks that are likely to carry the high-speed Internet traffic of the future.

All the players have enormously Byzantine motives and ties with one another. Here's a guide to the action:

The role of Microsoft
Microsoft is considering teaming up with Comcast to trump AT&T's accepted bid for MediaOne. If that happens, it would be a powerful signal from the world's most valuable company that it is ready to deploy its immense financial resources far beyond the confines of the software industry. Such a move also would cap a six-year effort at Microsoft to dominate the new industry created by the convergence of television and computer technology.

Helping Comcast thwart AT&T's plan to control cable access to more than 60 percent of the nation's homes could do wonders for Microsoft's battered image. In such a deal, Microsoft would get to play the trust-busting hero at a time when its own antitrust trial in Washington is heading into its final phase. Antitrust experts say that because Microsoft is only a minor player in the cable market, federal regulators would have little grounds to block its investment in MediaOne.

Microsoft has already bet big that high-speed Internet services, whether delivered over cable or telephone lines, will be a major source of future growth. But it has been frustrated in its attempt to secure for its Windows operating system a franchise in the new market as powerful as the one it holds in personal computers. Microsoft's WebTV unit has been only a limited success at retail and has scored few major orders from cable operators. And while Microsoft has had some success with Web-based services such as travel, auto and news, its Microsoft Network has lagged behind rival Web "portals" such as AOL and Yahoo.

A MediaOne deal could change all that. Microsoft could get the chance to supply software systems and set-top box technology for both Comcast and MediaOne's cable subscribers, which together total 10 million in the U.S., plus a slice of new revenue-generating services such as software updates, digital delivery of music and video and electronic commerce.

In addition, Microsoft would be likely to gain effective control over RoadRunner, the high-speed Internet service that at present is jointly controlled by MediaOne and Time Warner. Last year, Microsoft spent $213 million for a 10 percent stake in RoadRunner. In addition, Microsoft could stand to gain even more if it were able to secure management rights MediaOne now holds in Time Warner cable systems. Both RoadRunner and the cable systems represent big new markets for Microsoft's Explorer Web browser and operating system.

Ultimately, the bidding war for MediaOne may result in a purchase too rich even for Microsoft. But even if it opts not to bid, Microsoft could still end up ahead. The company has been negotiating a major technology partnership with AT&T, parent of No. 2 cable operator Tele-Communications Inc., and the talks could end up giving Microsoft a bigger role for its interactive-TV software. Last year, Microsoft secured a deal to supply TCI with a type of Windows CE software for some of its set-top boxes, splitting the business with rival Sun Microsystems Inc.

AT&T, since its purchase of TCI, has been reviewing its technology commitments and could be moved to offer Microsoft a larger role if it agrees to stay out of the MediaOne bidding.

The role of America Online
AOL wants little more than to see AT&T's cable rampage stopped. Already galvanized by AT&T's acquisition of TCI, AOL fears that with MediaOne, AT&T could dominate consumer access to the Internet over cable-television lines -- and freeze AOL out of the market. So keen is its interest in blocking such a scenario that AOL has even considered pitching in to help Comcast sweeten its bid. So far, however, AOL's involvement hasn't proceeded further than discussions.

The problem for AOL: If high-speed broadband services catch on with consumers in a big way, that would change the way Internet access is sold. Right now, AOL, with 17 million members, rules the online market, largely by making it easy to get on the Internet: For $21.95 a month, AOL sells consumers a whole package of e-mail, chat rooms, tailored menus to help navigate the Web -- and a telephone connection to the Internet. Since virtually every potential member has a telephone line, the wire is already in place.

But to get online with a cable modem, users would have to add a new wire to connect to the Internet. When cable-modem services like At Home Corp. and RoadRunner, the one MediaOne co-owns with Time Warner, sell the cable connection, they throw in e-mail and other services, making AOL redundant for those customers. Conceivably these customers could use their cable-modem connections to tap into AOL, but they would need to pay AOL's monthly fee on top of the fee for cable service.

AOL knows consumers won't want to pay twice, so it has been fighting the broadband battle on every front. In Washington, AOL is lobbying vigorously for regulations that would force cable operators to sell broadband connections to AOL and other online services. That way, AOL could resell the connections to consumers as part of a complete bundle. At the same time, AOL is supporting a rival technology, digital subscriber line, or DSL, access, which the Baby Bell telephone companies are promoting.

Ideally, AOL would like to see both cable and DSL access thrive, compete with each other and drive down the price of access. AOL sees itself as a media company, profiting primarily from programming, including paid advertising and other types of online marketing. By this thinking, the actual Internet wires, whether telephone or cable lines, are simply a means to an end. That AOL would even consider involving itself in the MediaOne fray underscores how fearful it is that AT&T will one day dominate Internet access.

The role of Time Warner
For Time Warner, the prospect of Microsoft or AOL joining the MediaOne battle raises a critical question: Who will end up owning the chunk of some of its richest assets? MediaOne owns 25 percent of Time Warner Entertainment, a limited partnership comprising Warner Bros., HBO, Time Warner's stake in RoadRunner and most of Time Warner's cable systems, as a result of an investment made back in 1993, when Time Warner needed cash and sold the stake to US West Inc., MediaOne's predecessor company.

Just a week ago, Time Warner insiders were gleeful at the prospect of MediaOne's changing hands. The two companies have had a famously bad relationship from the get-go. At one point, U S West even tried to block Time Warner's acquisition of Turner Broadcasting, on the grounds that it would violate the terms of the partnership. More recently, Time Warner executives have bristled at the role MediaOne has assumed in the operation of Time Warner cable systems: MediaOne has threatened to block lucrative phone deals Time Warner is trying to sign with AT&T and other companies eager to use Time Warner's cable lines to offer local-phone services.

Before Microsoft started circling, Time Warner insiders said any partner was better than MediaOne. They viewed a victory for AT&T as a potential chance to renegotiate 100 percent ownership of Warner Bros. and HBO. Under the terms of the contract, MediaOne's management rights in the cable systems expire if another cable company, such as AT&T, were to buy it.

But if the purchaser were, say, Microsoft, the minority partner would retain its management rights over the cable systems. That is one reason Microsoft and AOL officials are hungrily poring over terms of the complex Time Warner Entertainment partnership agreement. They view RoadRunner, the high-speed Internet access provider, and even the entertainment properties as embedded jewels that might make a leap into the MediaOne fight worthwhile.

People involved in the deal say Time Warner isn't trying to affect the outcome. Time Warner says it isn't taking sides. "We are just not going to get into the fray," says a Time Warner spokesman.

But clearly Time Warner doesn't relish the idea of Microsoft or AOL getting a piece of its pie. "They are nervous," says one big Time Warner shareholder of the company's top brass. "They hope AT&T wins. They will be crossing their fingers for the next three days."

The role of AT&T
The bidding war for MediaOne began when AT&T unleashed an unsolicited $54 billion offer for the cable company on April 22.

Coming on the heels of AT&T's $56 billion purchase of cable giant Tele-Communications Inc., MediaOne would transform AT&T into the nation's largest phone and cable company. Five years from now, AT&T would like to be selling consumers in-home movies, cable television, wireless phone calls and Internet service, in addition to local and long-distance telephone services. Adding such services, it says, will more than compensate for rivals' steady erosion of AT&T's core long-distance franchise.

AT&T needs MediaOne because it would give it a critical mass of U.S. households. MediaOne's 5 million U.S. subscribers are in some of the most coveted markets in the United States, including Los Angeles and Chicago. Through its various affiliations, MediaOne would extend AT&T's reach into more than half of U.S. households. Indeed, MediaOne represents such a prize that AT&T has said that if it is successful, MediaOne will be its last major cable acquisition.

As for MediaOne, it will lose its management autonomy, which might not be such a bad thing. The former arm of regional Bell US West has been a mediocre performer, reflecting management's relative inexperience in the cable business. The company's assets consist primarily of the old Continental Cablevision systems, which MediaOne bought in early 1996.

No matter who prevails, shareholders in the Denver cable company stand to come out winners. When MediaOne bought Continental in 1996, its shares were trading at around $17. They closed Monday at almost $80 apiece in composite trading on the New York Stock Exchange.