AOL and Microsoft face off over net deals

Microsoft and AOL Time Warner may be heading for new bust-ups on two fronts - broadband cable and the desktop screens of new PCs with Windows XP installed.

AOL has agreed a deal with Compaq to have its online services as the exclusive online service desktop icon when the vendor begins to sell computers with Windows XP installed this winter.

Microsoft is also reportedly worried that AOL may be lining up a $50bn-plus bid that would give it 40 per cent of the US cable market.

The desktop is the Mayfair of computer addresses for installed applications, and software or services resident there can reap rich rewards for their makers.

The agreement relegates Microsoft's MSN service to the startup menu, where users will have to click through two layers to find it.

Compaq's deal with AOL is doubly galling for Microsoft, as it takes advantage of a US court ruling preventing Microsoft from using its dominant position to dictate to computer makers the composition of their desktop.

Despite losing an appeal, Microsoft has asked for another ruling on the matter.

A Compaq spokesman said: "We are looking at alternatives that were not available to us three, four weeks ago. The change of XP kind of opened the door."

Analysts predicted back in June that the pair could end up at war over new internet markets, following the collapse of talks to renew the highly successful co-bundling agreement for the launch of Windows XP.

Microsoft is reportedly even more concerned that AOL may buy US telco giant AT&T's broadband cable business, after a $52bn bid by US firm Comcast was rejected.

Were AOL to bid successfully and gain regulatory approval for AT&T's division, it would give AOL Time Warner around 40 per cent of the US cable market.

Such a position would strengthen AOL's hand in the consumer internet market and potentially throw up barricades in the path of Microsoft expansion into ecommerce, information and entertainment services.