The world is not enough for Murdoch and Gates

Bill and Rupert's extraordinary adventure into interactive TV

It would be impossible to dream up a more potent business pairing. Rupert Murdoch, the media tycoon whose News Corporation reaches all four corners of the world, and Bill Gates, the Microsoft founder whose software is found in almost every personal computer, are fast becoming business pals.

Their blossoming relationship centres on DirecTV, a US satellite broadcaster owned by General Motors. Mr Murdoch has been trying, so far unsuccessfully, to get his hands on DirecTV and so net around 10 million subscribers and complete a missing link in his global satellite business, which already has strong footholds in the UK, Europe and Asia. Meanwhile, Mr Gates can see the potential for a huge Microsoft software deal.

Both Microsoft and News Corp are keeping tight-lipped about such plans. But here's how the pair are understood to be working together:

Microsoft is handing News Corp $3bn (about £2bn) to help the broadcasting and publishing empire acquire DirecTV. In a complex transaction, News Corp would purchase 30 per cent of DirecTV for about $50bn. It is understood that General Motors wants at least $7.5bn in cash.

While the combination of Microsoft and News Corp might strike some as a sensible business partnership, to others it could raise the spectre of "monopoly squared".

Microsoft's own run-ins with antitrust regulators are well known, and the company is currently appealing against the US Department of Justice's break-up order. For its part, News Corp has been known to test the limits around the world of national laws restricting the reach of any one media firm. In fact, Mr Murdoch's attempt to acquire DirecTV has raised the regulatory concern of the popular US senator John McCain, who has wondered whether a Murdoch acquisition "could result in a consolidation of power the like of which this country has not seen since William Randolph Hearst".

Mr Murdoch's vast US holdings already include the Fox TV network, 20th Century Fox movie studios and The New York Post. He covets DirecTV because it would complete a valuable link in News Corp's global chain of satellite companies, which includes the UK's BSkyB, Asia's StarTV, and Japan's PerfectTV.

What's in it for Microsoft is nothing less than control of what could become "Internet 2" ­ digital television and the interactive services that digital TV supports. Many industry pundits predict that the TV rather than the PC will eventually reign as consumers' favourite online buying device because people trust the good old set more.

The promise seems real, with 1.5 billion TV sets installed worldwide. Research firm Ovum estimates that the number of sets with digital connections will surge to 350 million by 2006, up from around 60 million worldwide today. Of those, 226 million will tap interactive services, compared with 13 million today.

Early signs of TV's preferred status are emerging in the UK, where a handful of retailers such as Domino's Pizza and Carphone Warehouse sell more goods through inter-active TV than they do through web-attached PCs. The digital pioneer whose wagon they are riding for most of these sales is BSkyB.

And interactive TV is more than e-commerce. It augurs the "personal TV" nirvana of televisions intelligently delivering programmes and advertisements, for viewing and recording, in a way that is tailored to each individual.

None of this will happen without the underlying software, and that's where Microsoft steps in. It sells several software products that reside both on the television set-top box and on the computer servers which help run broadcasting networks. If Microsoft aims to dominate interactive TV, it could have no more kindred broadcasting partner than News Corp. Counting the various satellite and cable companies that it owns entirely, or parts of, around the world, plus the broadcasters which resell Sky content, it has a hand in some 80 million set-top boxes.

Its potential for growth is enormous, with Mr Murdoch expanding globally and bowing to the Chinese government to loosen restrictions and give him greater access to a potentially huge market.

Could Mr Gates' $3bn buy him a place on every News Corp TV top? "We are asking the same question ­ what strings are attached to the $3bn?" says Andrew Wallace, marketing director for Pace Micro Technology, which supplies set-top boxes.

Make no mistake that interactive TV is vital to Microsoft's future. At a cable and telecommunications conference last week in Chicago, the company issued a flurry of press releases about various interactive TV partnerships in Europe, Latin America and the Middle East. It also dispatched the chief executive, Steve Ballmer, to Lisbon earlier this month for the launch of a Microsoft-based interactive service by Portuguese cable operator TV Cabo.

But the TV Cabo announcement represented an anti-climactic breakthrough after a frustrating run of defeats for Microsoft. For several years it has been buying into European cable companies, including Telewest, NTL and Dutch firm UPC. Until Cabo's decision, Microsoft had been unable to convince its partners to use its products.

A strong News Corp partnership could help to reverse its fortunes. Microsoft supplies software to just a handful of the 10 million boxes in use by DirecTV, so an alliance with Mr Murdoch could help secure that future should he succeed in his takeover attempt. In the UK, some are wondering if Mr Murdoch will migrate his BSkyB boxes to Microsoft software. At present, Sky uses software from OpenTV but, perhaps tellingly, BSkyB is dropping its own "Sky Open" brand, folding that interactive shopping mall into the Sky Interactive division.

Sky is reticent on the subject of Microsoft. Its boss, Tony Ball, and the company's interactive chief, Jon Florsheim, both decline interviews. A spokesman insists Sky has no plans to migrate to Microsoft software, and notes that a new whiz-bang set-top box that Sky has delayed until later this year is based on OpenTV software. Sky already has an installed base of more than five million boxes using the OpenTV software. It has invested considerably in those. Sky will not give away the new set-top boxes but it is not yet saying how much it will charge.

A switch to Microsoft in the short term may be unlikely. But, notes Mr Wallace at Pace, which is building the Microsoft-based boxes for TV Cabo, "never say never ­ Sky is always looking at alternatives, and it would never let the grass grow under its feet in how the technology is evolving".