NEW YORK -- For AOL Time Warner, losing the bidding war for AT&T's cable systems means a lot more than not reaching another 13.8 million TV subscribers.
AOL Time Warner (AOL), which already owns the No. 2 cable company, wanted to build a massive base of speedy information "pipes" to deliver packages of communications and entertainment services, a battle in which AOL is pitched against Microsoft.
Many of those services remain in their infancy, such as using cable lines for Internet access, phone service, interactive television and video on demand. But the importance to AOL and Microsoft (MSFT) of controlling how consumers use those services cannot be underestimated.
That's why AOL made such a strong push to acquire AT&T Broadband, the nation's largest cable company, despite the regulatory headaches such a deal would have faced. AOL declined to comment Thursday on AT&T's decision to accept a rival offer from Comcast (CCZ), the No. 3 cable company.
AOL's heartbreak doesn't end there. In addition to getting a huge cable systems company, winning AT&T Broadband also would have given AOL Time Warner a bigger base for its cable networks such as HBO, CNN, TBS and TNT.
Now, its largest customer is also a major rival. The newly created AT&T Comcast Corp. will have a base of 22.3 million subscribers, about a third of all U.S. cable homes, putting it in a better position to negotiate with AOL Time Warner for terms in carrying AOL's programming.
Even more importantly, AOL Time Warner may have to offer sweeter deals to get AT&T Comcast and other cable providers to offer AOL as an online access provider to customers who upgrade to high-speed Internet service using cable modems. But AT&T Comcast already has a $5 billion investment from Miscrosoft and may be more inclined to use their Internet service provider, MSN.
"AOL is in a tougher position to negotiate to gain access to the system," says Rob Martin, a digital media analyst at Friedman, Billings, Ramsey, a brokerage based in Arlington, Va. "Now you've got a scenario where AT&T Comcast has access to 22 million homes, and unless AOL gains access to that base their growth will be stifled."
AOL has been asking for favorable terms from cable TV providers in offering its Internet access service, arguing that the popularity of the AOL brand would encourage cable TV subscribers to sign up for the more expensive high-speed subscriptions.
But cable providers have seen their customers sign up for those services even without AOL, Martin said. That means AOL may have to drop its insistence on controlling the user interface and the billing relationship with the customer.
Internet access providers are only the beginning of the competition between AOL and Microsoft. The two companies also produce competing Internet browsing software, Internet Explorer and Netscape, as well as rival messaging systems, online music services and personal identification software.
Microsoft declined to comment on the AT&T-Comcast deal, but Martin said it clearly worked out in the company's favor. As more advanced services begin to roll out over cable TV lines, Microsoft will have an ally in AT&T Comcast.
Building up the number of high-speed customers has been a priority for AOL, but so far only 10 percent of its 32 million subscribers use high-speed connections. The company doesn't provide figures for how many of those users are using cable modems, computers at work or other types of connections.
Media executives have been hoping that cable TV lines, with their ability to carry huge amounts of data, will provide the crucial gateway into U.S. homes for the next generation of media services since they can operate at speeds more than 50 times faster than telephone lines.
Cable modem use has grown quickly over the past three years, but it remains a relatively small business. Figures from the National Cable & Telecommunications Association show that 5.5 million homes used cable modems to access the Internet, about 8 percent of all U.S. cable subscribers.
