Microsoft's push to link cable TV up with the Net

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The Independent Online
Microsoft, Bill Gates' software giant, is hoping to take centre- stage as the Internet and television converge by linking up with leading US cable companies. Cathy Newman asks what Microsoft stands to gain, and what cable companies have to lose.

In recent weeks, Microsoft has reportedly been talking with all the big US cable companies - US West, Tele-Communications (TCI), Cox Communications, and Time Warner.

Microsoft's interest in television took off earlier this year when it invested $1bn (pounds 600m) in an 11.5 per cent stake in Comcast, the fourth- largest cable television operator in the US, and bought Web TV Networks, a digital television set-top box maker, for $425m.

Recent reports suggest Microsoft wants to make substantial investments in both US West and TCI. In addition, the company is believed to have held discussions with Cox and Time Warner about developing software for digital television.

Microsoft is intent on making itself indispensable when, next year, a new-generation set-top box - the device which unscrambles digital television signals - will give US customers simultaneous access to television and the Internet.

In return for sharing the financial burden of setting up new interactive services, Microsoft is hoping to gain control over the software used to enable viewers to access the Internet on TV screens. The move would enable Microsoft to dominate in the home entertainment market, just as it presently enjoys a virtual monopoly in the personal computer market.

Microsoft would be able to get its products into tens of millions of US homes subscribing to cable television, as potential profits from mainly office-based computer software tail off. Whereas, in the UK, cable penetration is struggling to take off, in the US, roughly 60 per cent of households with access to cable subscribe.

Mark Lambert, telecoms analyst at Merrill Lynch, says: "Over the last 12 months, Microsoft has recognised the growing potential of the value of delivery into the home."

He adds that cable has become attractive to Microsoft as many of the new interactive services being developed use a lot of capacity. Cable has the right infrastructure for interactivity as it provides a far wider band-width than most ordinary telecoms networks.

Microsoft is obviously keen to identify an opportunity before someone else does. "Someone else might be able to control the conduit as well as the content if Microsoft doesn't," says Mr Lambert.

Fred Moran, managing director of Furman Selz, a subsidiary of ING Barings, says: "We believe there will be further activity between Microsoft and the cable companies. Microsoft wants to expedite the development of the cable set-top box and ensure their software gets utilised in the process."

But Microsoft is not necessarily the only beneficiary of the alliances. Far from seeing Microsoft as a threatening mono-polist, Mr Moran reckons the software company provides "one of the cable industry's biggest opportunities".

Talks of Microsoft's overtures to the likes of TCI and US West have done wonders for shares in cable companies. Mr Moran estimates that since Microsoft invested in Comcast, cable stock prices have appreciated by more than 50 per cent.TCI has almost doubled its value.

Cable operators have had to foot a vast bill in order to build networks, and Microsoft's $9.63bn cash-pile could come in useful. "They could use Microsoft's help in cleaning up their balance sheet," Mr Moran says.

There are signs, though, that the cable industry may hesitate before getting into bed with Microsoft. In August, John Malone, TCI's chairman, was quoted as saying: "Bill [Gates] has to accept the fact that he cannot have quite the dominance in supplying our industry as he has developed in supplying the PC industry." And Brian Roberts, president of Comcast, has made it clear Microsoft will not necessarily be the sole provider of software for the new set-top boxes just because it has a stake in the cable company.

US cable sources say Microsoft is beginning to compromise over the terms on which it invests in the new digital products. They argue that Microsoft cannot afford to use heavy-handed negotiating tactics, especially as it faces the US Justice Department next month over allegations that the conditions attached to the installation of its Internet browser are anti- competitive.

Four years ago, Microsoft talked to TCI and Time Warner about forming a group to make software for the interactive cable systems developed before the Internet took off. Those talks collapsed when the cable operators became concerned at the software company's dominance. That may yet prove the stumbling block once again.