The entry of Bill Gates's company into the UK telecoms sector would make Orange a much heavier hitter among companies jockeying for position in the converging computer, telecoms, and broadcast industries. It would also strengthen Microsoft's grip on another platform of the converging technologies.
Microsoft entered the UK cable TV sector on 25 January when it invested pounds 300m in NTL, Britain's third-largest cable TV company, and a tie-up with Orange would be seen as another step down the same road.
"It may or may not come off, but the Orange thing is part of a larger picture," said a City banker. "The idea is Orange and NTL will link up, with Microsoft as the big brother."
Paul Mountford, UK head of the American internet giant, Cisco, added: "A new generation of products linking computers, television sets, and mobile phones is approaching. It makes sense for Microsoft to invest in distribution systems for its products."
Orange denies it is in talks with Microsoft. A spokeswoman declared on Friday: "There is absolutely no truth in this rumour."
Industry sources insist, nevertheless, that the prospect of an alliance, including an infusion of Microsoft cash into Orange, is the subject of discussion between Microsoft and Orange shareholders.
Hong Kong based Hutchison Whampoa owns 49.2 per cent of the mobile phone company. British Aerospace owns 5 per cent. Since BAe acquired Marconi, GEC's defence business, last month, there has been speculation BAe might unload its Orange holding.
In an interview with The Independent on Sunday on Friday, Microsoft UK managing director Neil Holloway declined to discuss the possibility of an Orange tie-up, but he did confirm the company's interest in telecommunications.
Explaining the company's strategy, he said: "We want to focus on what's slowing down growth. [That means] the deployment of high-speed networks, whether cable, satellite, or wireless ... We need to give the communications infrastructure a push."
A senior industry executive characterised Microsoft's interest in Orange in more aggressive terms: "Microsoft almost missed out on the internet revolution," he said. "They want to make damn sure not to miss out on the development of other distribution systems for their software."
The executive pointed out that, in light of allegations by the US Justice Department that Microsoft violated anti-trust law, the software giant is unlikely to do high-profile deals in the US, but would experiment and build a network in the cable TV and telecoms businesses internationally. Last month Microsoft also invested $300m (pounds 183m) in UPC, a Dutch cable TV company.
One industry observer suggested that Orange would resist a tie-up with Microsoft on the grounds that its future would be better served in an alliance with other European mobile phone companies. Washington and Brussels are currently stymied in talks to establish a single global standard for "smart" mobiles. The outcome will influence whether Microsoft or the UK's Psion will gain the inside track in linking "smart" mobile phones to computers and TV sets.
"Orange would also be attractive to Microsoft because it has always sold direct to customers rather than via intermediaries," an industry exec- utive said. "Orange would have a lot of data on high-earning clients who would be interested in new Microsoft products."