America Online purchase of Netscape creates a formidable foe to Microsoft

The $4.21 billion merger could fundamentally alter the balance of power on the Internet.

While AOL is already the world's largest Internet access and online service provider, the deal gives the company important advantages in its battle with Microsoft Corp. to dominate the main Internet sites where people get information and buy goods and services.

Together, Netscape's and AOL's sites reach a staggering 70 percent of all people who access the Internet, according to NetRatings, a research firm.

The deal also underscores the popularity of Netscape's Navigator software for browsing the Internet, despite the meteoric rise of Microsoft's rival Internet Explorer - a crucial concern in the U.S. government's antitrust lawsuit against Microsoft and its chair, Bill Gates.

Microsoft lawyers argued yesterday that the AOL-Netscape deal backed up their claim that Microsoft is simply a player in an extremely competitive software market and not, as the government claims, a monopolist trying to crush its rivals.

The merger also is a vindication for Steve Case, the boyish-looking chair of AOL.

Just a few years ago, AOL was ridiculed for supplying its own proprietary online entertainment and information to subscribers at a time when people could get a far wider choice on the Internet. Last year, a surge in usage across AOL's network triggered massive bottlenecks.

Despite the problems, Case stuck to AOL's strategy of mass-mailing start-up diskettes and luring tens of millions of Americans to ''channels'' of neatly organized subject categories. AOL also provided online users access to the Internet and set up its own free Web site, encouraging users to buy products and services from advertisers.

But Case, realizing AOL's limitations, wants to dramatically step up his Web presence by using Netscape's Websites and software.

Case said there won't be a big change for consumers right away.

But he said eventually he plans to give AOL's 14 million subscribers easy links to Netscape's popular NetCenter Website, a portal to services and information geared toward businesses.

AOL is expected to offer advertisers a single rate to reach users of its proprietary online service and visitors to the NetCenter site as well as to its existing AOL.com Internet site.

A second plan is to use Netscape's software to eventually create a new AOL browser that makes it easier for people to view and retrieve Web information.

For now, however, AOL will continue to use Microsoft's browser.

''We do recognize Microsoft is a major competitor in a lot of different areas, but we've always said we'd like to work with them wherever it makes sense,'' Case said in an interview.

AOL also hopes to use Netscape's software to help advertisers set up and manage their own Web sites.

AOL's stepped-up efforts could pose a big new challenge to Microsoft's ambitious plans to expand its Web sites, currently ranked No. 4 in number of visitors.

Also vulnerable is Microsoft's MSN online service, which has yet to earn a profit.

''MSN now faces a much more daunting task if it wants to overtake AOL at any point in the future,'' said Jim Balderston, an industry analyst with Zona Research Inc., based in Redwood City, Calif.

AOL's expansion also could help it compete with other portal companies such as Yahoo! Inc., and new rivals such as cable-TV and phone companies, which hope to soon provide much higher speed service to the Internet than AOL.

Netscape's purchase, in turn, is sure to speed consolidation among smaller Web companies competing in a two-tier Web world ruled by either AOL or Microsoft.

11-25-98