Broadband On Trial

By Chris Taylor

You must forgive Bill Gates if he's feeling a bit paranoid this week. By a brutal coincidence, his firm faces the unenviable task of defending itself in four different courtrooms simultaneously. Tiny software companies in Utah and Connecticut are taking Microsoft to task for its strong-arm operating-system tactics. Over in California, larger rival Sun Microsystems wants to save its Java programming language from Microsoft "pollution." And oh, yeah, there's the small matter of the antitrust trial, resuming Tuesday in Washington, where Justice Department lawyers are set to wheel out their biggest gun yet, an executive from IBM, the first computer manufacturer to testify against the software titan.

Despite all this jockeying for position on Gates' enemies list, however, there's no company that Microsoft claims to fear more than America Online. At this point, Microsoft's legal strategy in the antitrust case seems to consist largely of proving AOL's worth as a once and future competitor in just about every digital arena. At a deposition two weeks ago, Microsoft put AOL's Steve Case on the rack over his business plans. Now AOL exec David Colburn will be called as a hostile witness. "They've put most of their chips on the AOL marker," says George Washington law professor Bill Kovacic. "They're stretching," laughs chief prosecutor David Boies.

At first glance, it may look like a risky bet. Microsoft controls more than 90% of the world's desktops, and its leverage of that alleged monopoly is what's on trial here. AOL is the world's largest Internet service provider (ISP), controlling nearly 50% of the eyeballs on the Net. AOL's contention--and the government's--is that Microsoft is comparing apples and oranges. True, AOL's 18 million online customers easily outnumber Microsoft's 2 million. On the other hand, Microsoft's Web browser now commands a 60% share of the U.S. office market against 40% and falling for AOL's, according to the latest figures from Zona Research (the release of which could not have come at a worse time for Gates).

The ISP wars are over; the browser battle is winding down. For all Microsoft's muttering about how its rival wants to create a direct competitor to Windows--the so-called AOL PC--Case would admit to no area in which the two firms are in danger of butting heads on equal terms.

But that's not entirely true. That sound you hear in the distance is two gigantic war machines rumbling into position for a battle over the future of the Internet, a turf war that's going to make the browser rivalry look like a schoolyard spat. The name of the game is broadband, the technical term for high-speed Internet access. It's complex stuff, so much so that even the big players sometimes get confused. (When asked a convoluted broadband question at his deposition, Case did a double take. "Am I in the wrong room?" he asked, to peals of laughter from Microsoft lawyers.)

What it boils down to is this. Netizens are sick of the World Wide Wait. We know the Internet isn't living up to its potential. Most of us would junk our 56K modems in a Palo Alto minute for a viable, affordable high-speed link to our home. But which pipe will we choose? Cable? Telephone? Wireless? Satellite? No one knows for sure, and Microsoft and AOL--both of whose businesses depend on the answer--are at pains to appear neutral in the coming shakeout. "We're pipe agnostic," says Microsoft vice president Brad Chase. Which actually means they have to be ready to pray at all the altars. That's why Microsoft and AOL were vying to be best man at the wedding of AT&T and cable giant MediaOne; they both wanted a piece of the cable-modem action.

Microsoft won that bid with its much publicized $5 billion purchase of AT&T stock. Now it's set to provide Ma Bell with up to 10 million set-top boxes preloaded with a stripped-down version of Windows. AOL missed out, and its stock went into a brief tailspin. But broadband is not a zero-sum game--at least, not yet. Case quickly countered with his own new deal, to have Hughes Electronics' DirecTV offer AOL via satellite to its 7 million customers. The resulting product will be called AOL TV. Microsoft, of course, is still pushing its own interactive television service, Web TV. And here too the battle lines are drawn.

AOL TV is just one-half of a digital double whammy. This summer AOL will start rolling out high-speed digital subscriber line (DSL) access to more than 16 million Bell Atlantic customers. Expect a ton of those annoying pop-up ads trumpeting the fact, and a slew of stories on Case's ominous-sounding broadband strategy, known in the trade as "AOL Everywhere."

Everywhere, of course, must include cable. Why? Because cable modems are so fast--almost twice as speedy as DSL and a full eight times as fast as satellite, at least in theory. "AOL still needs to deal with the cable guys," says Tom Wolzein, Internet analyst at Sanford Bernstein. "It has to be worried about getting locked out entirely, especially when Microsoft wants to be in everyone's online space."

But Case has that covered too. In the same week as his Microsoft deposition, the AOL boss took time out to appear on Capitol Hill to make an impassioned argument for government regulation in the cable-Internet industry. His pitch: the FCC needs to make sure that the little guys--which in his book include AOL--don't suffer if proprietorial cable services like AT&T's At Home or Time Warner's RoadRunner end up owning the online gateway. "It's a battle," Case said, "between good and evil." The FCC isn't entirely convinced, but it has agreed to look into the matter.

Microsoft execs will no doubt see a darker purpose in such a probe, just as they cried conspiracy when AOL bought Netscape while both were witnesses for the prosecution. Microsoft is convinced that AOL is hiding under the government's antitrust skirts, and there's little Case can do that won't be viewed in Redmond through that prism. When AOL bought Netscape, why didn't it change its default browser from Microsoft's to Netscape's? So as not to weaken the antitrust case, says Microsoft. "When the trial is over," predicts an exec, "they're going to switch."

That may be a little too paranoid even for Gates. But when it comes to the broadband Internet, the world's richest man has reason to worry. After all, high-speed Web access and the proliferation of Web-based applications could one day make his operating system obsolete. That's why when the trial resumes, the threat of AOL Everywhere may be Microsoft's best defense.

--With reporting by Sally B. Donnelly/Washington

With reporting by Sally B. Donnelly/Washington