November 5, 1997

Microsoft Ready to Invest $1 Billion in US West Cable Business

By JOHN MARKOFF

AN FRANCISCO -- Microsoft Corp. is close to an agreement to invest up to $1 billion in the cable television operations of US West, according to several people involved in the negotiations.

Illustration: Christine M. Thompson / CyberTimes

The investment would buy Microsoft as much as 6.3 percent of US West's cable business at the current stock price. More important, it would further the software giant's strategy of turning the nation's cable systems into the primary providers of high-speed access to the Internet -- with Microsoft hoping to control the television set-top box software people would use to get online.

In June, in a similar deal, Microsoft agreed to pay $1 billion for an 11.5 percent stake in another big cable company, Comcast Corp.

Word of the US West negotiations, which the two sides hope to conclude by early next month, comes just weeks after Microsoft was reported to be close to such a deal with cable company Tele-Communications Inc. But those talks have apparently been tabled, executives close to the situation said.

Microsoft was said to be concerned about TCI's 39.5 percent stake in a potential Internet access competitor, (at)Home Networks. (at)Home, moreover, employs the World Wide Web-browser software of Microsoft's Internet software rival, Netscape Communications.

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Executives at Microsoft, US West and TCI all refused to comment. But Microsoft's chairman, Bill Gates, is known to have been pressing the cable industry to make the large investments in the digital technology and set-top boxes necessary for updating their high-capacity networks for widespread Internet use.

Direct investments in cable companies by Microsoft are meant not only to provide some of the financing for such work but also to give the cable industry confidence that money spent on Internet technology will pay off in the future. Already, Microsoft's investment in Comcast has improved the cable industry's status with Wall Street, helping drive up the stock prices of many cable companies.

For its own part, Microsoft sees cable access to the Internet as a way for the company to potentially gain the same software dominance over millions of settop boxes as it currently wields over millions of personal computers. The company also sees high-speed cable networks as a way to build upon Microsoft's current Internet businesses, which include providing information, entertainment and commercial transactions via its MSN on-line network.

Microsoft has already developed Windows CE, a consumer-electronics version of its Windows 95 software operating system for PCs, which the company is expected to promote as a standard for a new generation of cable set-top boxes. As part of its move into TV-based Internet access, Microsoft spent $425 million earlier this year to acquire WebTV Networks Inc., an Internet service provider, and Microsoft is said to be working on ways to blend WebTV's set-top technology with the Windows CE operating system.

The people involved in the Microsoft-US West talks said the negotiations were moving quickly and Microsoft hoped to announce a deal before the Western Cable Convention, a major industry trade show scheduled for early December.

Teaming with Microsoft would be the sort of new opportunity that US West, a regional Bell telephone company, was thought to be seeking when it announced late last month that it would split off its cable business into a new corporation, the Media One Group. Media One, with 5.1 million households, would be the nation's third-largest cable system operator.

The bulk of US West's cable subscribers were acquired last year when the company bought Continental Cablevision, a Boston-based cable operator that had been actively developing Internet services for its customers around the country.

US West is also a major shareholder in Time Warner Inc. and an active partner in management of its cable systems -- an arrangement that would give Microsoft a foothold in Time Warner's growing cable empire. After some pending acquisitions, Time Warner will surpass TCI to become the industry leader, serving 13 million households.

Microsoft's push into cable is causing alarm among its competitors, who fear that the software giant is intent on translating its dominance of the PC world into a similar position in digital television and the Internet. Such fears helped scuttle a previous campaign by Microsoft to make inroads into the cable industry.

Several years ago, before the ascent of the Internet, Microsoft, TCI and Time Warner came close to forming a corporation, Cablesoft, that was to have developed software for the interactive cable systems then considered the wave of the future. That alliance failed to materialize, however, because the cable companies worried that Microsoft would become too powerful a partner.

Microsoft subsequently turned its attention to the Internet, with an evolving strategy that has lately begun to place much less emphasis on providing information and entertainment "content" through news services and on-line magazines. Instead, Microsoft is now focusing on conducting commercial transactions over the Internet through efforts like its Expedia travel service, its Carpoint auto sales business and its Sidewalk city guide, which includes ticketing and reservation services.

Microsoft realizes that such ventures can become successful mass-market consumer businesses only if they are able to reach the tens of millions of households subscribing to cable television -- instead of the far fewer number now connected to the Internet through PC modems and conventional telephone lines.

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