As The Web Spins

It's enough to make investment bankers lose track of who's selling what to whom. First, AT&T edged out Comcast to buy MediaOne and then landed a $5 billion investment from Microsoft. General Electric's NBC has thrown in with upstart Xoom to boost its Web presence, while USA Networks' Barry Diller is backing away from a bid for the portal Lycos. Also on May 10, Microsoft said it's buying a chunk of Nextel to get into wireless communications. AOL forged a deal with Hughes to get into satellite TV--then Microsoft was back, rumored to be talking with Britain's Cable & Wireless. Phew! What's it all about? With the Internet revolution gathering strength, companies in communications, media, and software realize they need to get into position for the convergence of computers, mass media, and telecom. Here and in the following stories, BUSINESS WEEK details how the process is playing out.

What do communications companies want?

In a word: pipes. They want big, fat digital pipes through which to sell all sorts of services--from conventional phone calls to digitized television to Web surfing to online shopping. These forms of digital communications are expected to converge on the Web, changing the whole Internet experience from cruising static pages and waiting for sluggish downloads to a new form of interactive media, including streaming video and rich audio off the Web to your PC or TV. AT&T is buying cable companies because it believes cable's pipes will convey this digital deluge sooner.

What are media companies looking for?

They see their audiences drifting to the Net, and they want to follow. On the Web, audiences gravitate to so-called portal sites, like Yahoo! Inc. or Excite Inc., which combine search services, content, and handy links to other sites in a single place. That's why Disney has launched Go! and NBC, a unit of General Electric, acquired the Snap! portal site last year and on May 11 forged a deal with startup Xoom to bring more E-commerce traffic to the site.

Microsoft seems to be all over the place--what's it up to?

Microsoft Corp.'s recent deals are aimed at the future beyond the PC. Since early May, the company has invested nearly $6 billion in AT&T and Nextel Communications and is negotiating with Britain's Cable & Wireless. The goal: to kick-start use of the Windows CE operating system in TV set-top boxes and wireless phones. But Microsoft is also a media company, and it wants to make sure its MSN portal attracts traffic. Part of the Nextel deal, for instance, will include special links to MSN for wireless phone users.

What is America Online up to?

The nation's No. 1 online service wants to maintain its leadership on the Internet as it becomes more of a video and entertainment medium--accessible over TVs and other devices as well as PCs. That requires faster speed than conventional phone lines offer, which is why America Online considered helping Comcast up its bid for MediaOne. On May 11, AOL Inc. took another tack: a deal with Hughes. Initially, the arrangement involves putting AOL programming onto TVs, but it could evolve into a broadband service. Meanwhile, America Online's Chief Executive, Stephen M. Case, has been cutting deals with the Baby Bells for fast Web links.

What is "broadband"?

The term refers to any high-speed system for transmitting data. Phone companies, cable operators, and satellite services are all racing to provide broadband connections for Internet access and other digital services. Eventually, broadband pipes will carry live video, telephone calls, music, interactive games, or just about any form of communication or entertainment that can be digitized. So far, the cable industry has been deploying broadband technology the most aggressively, but the Baby Bells are beginning to push hard.

What advantages do cable systems have in delivering broadband?

Some two-thirds of U.S. homes are now served by cable. The fat coaxial cables that carry TV signals permit data rates--over so-called cable modems--up to 500 times faster than the 56k modems that are used on most new PCs. What's more, the Web connection is always active--like a TV channel--so users don't have to dial into the Net to start surfing.

How does cable phone service work?

For now, companies such as Cox Cable are using their cable as a conventional phone wire. In the future, however, voice calls will be digitized, chopped into data packets, and mixed in with other data like E-mail and Web pages. That will lower costs and increase capacity. Companies like Cisco Systems Inc. and Lucent Technologies Inc. are racing to provide the gear to make voice-over-Internet calls possible, but there are still lots of kinks. Analysts don't expect such systems to roll out before the end of 2000.

Where does that leave the phone companies?

Local phone companies have a way to wring broadband speed out of their copper wire. It's called digital subscriber line, or DSL, and typically moves data at speeds between 128k and 1.5 megabits per second, although it can get up to 7 megabits per second. DSL service, which costs about the same as cable modem service--$30 to $60 a month--has not spread as fast as cable modem service (chart), due partly to a lack of aggressive marketing to date. But prices are dropping: On May 11, U S West Inc. slashed prices for its entry-level DSL service by 25%.

What about satellites?

Satellites can relay data at superfast speeds. That makes satellite a great way to distribute data at broadband speeds. But consumers can't beam up at the same speed--they have to communicate requests for Web pages through a conventional telephone modem operating at 56k. That's why Hughes Electronics Corp.'s DirecPC, an Internet offshoot of its DirecTV service, has not attracted many subscribers. But two-way systems are coming, using hundreds of low-flying satellites. One of the most promising: the Teledesic "Internet-in-the-sky" project backed by Microsoft Corp.'s William H. Gates III and cell-phone pioneer Craig McCaw. It's expected in 2003.

Which technology is better?

Each has an edge. Cable is theoretically the fastest, with download speeds up to 30 megabits per second, enough for five simultaneous digital movies. But in practice, it's slower, since scores of customers share each connection. DSL tops out today at 7 Mb, and each user has a dedicated connection, but depending on price and quality of service, the bandwidth may not be guaranteed. DSL is fast enough for videoconferencing, but the cheapest services are too slow for TV-quality movies. Worse yet, DSLs won't work beyond three miles from a phone-switching office. Satellite is still nascent.