January 13, 2000 Web posted at: 8:57 a.m. EST (1357 GMT) by Bob Trott

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(IDG) -- As far as Microsoft is concerned, the proposed purchase of Time Warner by America Online confirms what officials at the Redmond, Wash. company have been saying for some time: Microsoft is a software company, not a content company.

"This deal demonstrates how differently people can view the market, and how divergent the paths of AOL and Microsoft have become," said Microsoft spokesman Tom Pilla.

Microsoft has had a spotty history in the content market. While it has had commercial successes, such as CarPoint and Expedia, it has also had failures, such as the formerly proprietary Microsoft Network (MSN). And the AOL-Time Warner marriage could be the knockout punch for Microsoft's content efforts, according to analysts.

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"The trend of the past six months has been for Microsoft/MSN to shy away from developing its own content and emphasize partnerships more," said Dwight Davis, a Summit Strategies analyst who tracks Microsoft. "Given the AOL-[Time Warner] merger, a lot of content providers out there are going to be looking at that competitive behemoth and be a lot more willing to partner with Microsoft as a counterbalance."

"If maybe I was a little leery of getting into bed with Microsoft prior to this point, what other alternatives do I have [now] to find a good infrastructure partner with a strong presence and a strong brand name to make an Internet play?" said Davis, who is based in Kirkland, Wash. "Microsoft now is in the running for [partnerships with] a lot of content providers who are going to be aggressively and nervously looking for partners now."

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In late 1999 Microsoft revamped MSN in hopes of boosting its presence as an Internet portal, offering a new array of services as well as content. Because the focus is on "software as a service," MSN should thrive regardless of the AOL buy, the company insisted.

"AOL seems to be further cementing its strategy of promoting its own proprietary content," Pilla said. "In contrast, Microsoft and MSN believe the future of the Internet is all about building better software and services to help people get things done on the Web with a variety of content providers and partners."

While it clearly is a bigger deal, the AOL-Time Warner merger can be seen as a response to Microsoft's $5 billion investment in AT&T -- which owns TCI and MediaOne -- in May 1999. That deal, coupled with a previous $1 billion investment in Comcast, positioned Microsoft, at least temporarily, at the forefront of the Internet-via-cable picture.

"We've done lot of deals in the last couple of years," Pilla said, pointing to Microsoft's recent work on TV set-top boxes. "We've been one of the early supporters and investors, putting our money where our mouths are, and working on broadband deployment."

Nevertheless, AOL and Microsoft will continue to butt heads in the future. Last year, the two warred over instant messaging, a conflict that was spurred by AOL's purchase of Netscape Communications, which had been one of Microsoft's fiercest rivals in the Internet software arena.

The AOL-Time Warner merger also could give Microsoft some ammunition against the antitrust lawsuit filed by the U.S. Department of Justice, particularly as U.S. District Judge Thomas Penfield Jackson - who declared Microsoft a monopoly last November - weighs possible actions against the company.

When AOL bought Netscape and struck an alliance with Sun Microsystems, Microsoft's legal team said it proved that the high-tech industry was highly fluid, and no one company could enjoy a monopoly position because new, unexpected competitors spring up all the time.

Summit's Davis said that argument will gain credence through the merger of AOL and Time Warner.

"It's another argument in the negotiations," Davis said. "Microsoft can say it really is just a little player in the world of online commerce. It doesn't excuse many of [Microsoft's] past actions, but it should have some bearing on the remedies."