Now It's a War Between Microsoft and AOL Time Warner

Microsoft and AOL Time Warner have emerged as the two 800-pound gorillas in the battle for the future of the Internet - and now they've squared off in a fight to the death. 

The face that launched a thousand ships in this war is that of C. Michael Armstrong, the head of AT&T who is now looking to sell his extremely valuable cable systems. 

Comcast, a Microsoft partner, has offered to buy AT&T cable for some $52 billion, and AOL has moved in and is preparing an offer of its own. 

As The Post reported exclusively yesterday, AOL boss Gerald Levin held a secret powwow with Armstrong on Thursday to hammer out details of a possible deal. 

But Microsoft needs a merged AOL-AT&T like a hole in the head. An AOL-AT&T cable company would reach 28 million U.S. homes - some 40 percent of the market - making it much harder for Microsoft to funnel its own Internet offerings to Americans at high speeds. 

If AOL and AT&T announce a deal, Microsoft's Bill Gates might throw some of the $50 billion in spare cash he has lying around behind Comcast's bid. And if Comcast doesn't need the money, he might join forces with another partner - possibly Disney or Yahoo! - and make a run of its own. 

Now the two giants have begun a war of words. 

Last week Microsoft CEO Steve Ballmer told analysts, "It's unbelievably egregious, the stuff AOL is doing now is just limiting market choice." 

Ballmer was fuming at AOL's plan to pay computer makers to place AOL icons on the Windows desktop, a practice which Microsoft itself recently allowed to relieve pressure from the Feds. 

Chairman Bill Gates chimed in, whining that AOL was "trying to get OEMs to delete the features of Windows." 

Yesterday Microsoft hit back by saying the Windows XP desktop must either be shipped "clean" - totally bare - or, if it does carry a link to another company's software, it must also carry one to MSN, Microsoft'sstruggling Internet service. 

AOL Time Warner VP John Buckley scoffed, "It appears that Microsoft is backing off their much ballyhooed itty-bitty teeny-weeny sliver of flexibility and heading back to the rigid stance that has been slapped down by the second-highest court in the land." 

Of Microsoft's cable strategy, Jupiter Media Metrix analyst Joe Laszlo said, "It looks like a strategic move to slow AOL." 

AOL and Microsoft compete on the desktop, in ISP subscriptions, instant messaging and in wireless and TV. "Broadband is the next obvious battlefield," said Laszlo. 

With $50 billion in cash, Microsoft could buy AT&T Broadband outright, but has no stomach for running an infrastructure company. 

When Microsoft invested $1 billion in Comcast in 1997, then-CEO Bill Gates said, "It's important to have one company that we have a very close relationship with that we can go out and do the pilot studies and really demonstrate what's possible." 

Spokesmen for Microsoft and AOL refused to comment. A spokesman for Comcast did not return calls.