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AOL-Gateway deal paves way for Linux Web appliance

AOL Anywhere gets hardware arm, Philips gets it in the last reel?

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The appliance strategy AOL announced earlier this year when it bought Netscape has started to take on clearer form, with the announcement of an $800 million alliance between AOL and Gateway. This ties Gateway PC hardware and AOL online services closer together, but is also intended to take the pair way beyond the PC. You don't really need anybody to draw a picture for you, but in a note in its Q3 report yesterday Gateway does anyway: "Gateway and America Online today unveiled a strategic alliance to accelerate distribution of each company's products and services, create a host of new personalised Internet services and ramp up the 'AOL Anywhere' vision of Internet access across multiple devices for consumers in the home and on the go." Of Gateway's old buddies, Intel will be pleased with the deal, but it's ominous for Microsoft. Intel is the likely winner as far as much of the basic hardware for the proposed appliances the pair will develop, but independently (?) both AOL and Gateway have been turning to Linux as the base OS for their post-PC efforts. Gateway has been beavering away at the cheap/subsidised Web PC area already, and is also getting into the appliance market via Cobalt, so the AOL alliance is clearly designed to take it further in and - as we noted would be necessary when AOL first started talking about Internet appliances - provide AOL with a hardware arm that can build the devices its corporate visions require. There are Gateway connections worth noting - the long-standing one with Intel and the more recent one with Cobalt. As a long-standing Intel loyalist Gateway can be expected to support Chipzilla's efforts in the appliance market, and by a massive coincidence you'll recall that Intel managed to muscle in on AOL's "AOL TV" efforts earlier this year. With this AOL envisaged set-top box type devices that would facilitate a merger between Web-type services, TV and satellite. Intel of course envisaged millions of chip sales, and it's safe to presume that Gateway must now be in on that deal. And Philips out? It's like those old Westerns - Philips always gets it. Cobalt's switch from MIPS to Intel as a platform meanwhile seems massively convenient to Gateway. When we reported the Gateway-Cobalt server appliance deal we did wonder how long Gateway would be able to sustain selling devices with non-Intel chips, but the speed with which Cobalt decided Intel-Linux was a more viable combination than MIPS-Linux surprised even us. And of course it's a happy coincidence from Gateway's point of view. The Cobalt deal gave Gateway an entrée to the market for cheap, simple email, Web access and low-rent Web server boxes for small business, and the Cobalt switch of platforms will allow Gateway to use more of its own and Intel's technology. The AOL relationship will give Gateway easier channels to sell these through, and plenty of scope to produce other classes of box in furtherance of AOL Anywhere. The mechanics of the deal are that AOL will invest $800 million in Gateway over two years (worth about a 5 per cent stake), $150 million of that being in AOL stock. AOL will take over the admin of Gateway's online service, Gateway.net, and Gateway will spend $85 million in marketing via AOL. AOL gets prominent placing on Gateway desktops, and AOL will promote Gateway PCs. The two will jointly develop hardware and software products. Separately, both companies reported record quarterly earnings yesterday. Gateway's Q3s showed a 39 per cent increase in unit shipments, revenues up 20 per cent to $2.18 billion and net income up 40 per cent to $113.2 million (nice, but we're talking narrow margins here). AOL's Q1 income was up 47 per cent to $1.5 billion, and net tripled to $184 million. But you can never be sure about AOL results until you've consulted flotillas of tax accountants. ®

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