Microsoft and TCI Team in Net Software, Cable TV Deal
Software billionaire Bill Gates and cable mogul John Malone are negotiating a wide-ranging deal that would bring about the broadest convergence yet of Silicon Valley and the television industry, potentially enabling consumers to surf the Internet and check their e-mail on a television set equipped with 200 or more digital cable channels.
Under the deal, Gates’ Microsoft Corp. would provide Malone’s Tele-Communications Inc. with the software for advanced television set-top boxes and make a substantial investment of between $500 million and $1 billion in the Englewood, Colo.-based cable operator, according to sources close to the negotiations.
The deal between the largest software company and the largest cable operator is part of an aggressive campaign by Microsoft to retain its dominance as the computer and the television converge in living rooms across America. Microsoft already controls the desktop, with 90% of today’s computers running on its software. In a bid to increase its influence in television, Microsoft earlier this year paid $450 million to buy WebTV Networks, a crude system for surfing the Internet over TV, and in June invested $1 billion in Comcast Corp., the fourth-largest cable company.
Neither TCI nor Microsoft would comment on the negotiations, and sources said both sides have signed a nondisclosure agreement. Those sources said the deal could be announced before the end of the month, though various points, including the amount to be invested in TCI by the Redmond, Wash.-based software giant, are still in flux.
Sources said Microsoft is also trying to convince Time Warner, the country’s second-largest cable operator, to endorse its software, but those talks are in preliminary stages.
Microsoft has been angling since early summer to strike a deal with the cable industry, but the overtures were initially rejected because the company wanted a big cut of the revenue generated by new digital services. Microsoft’s proposal was a hot topic at the Allen & Co. media conference in Sun Valley in July, where sources say Gates pushed Malone to negotiate a deal.
But the cable industry in general has been leery of allowing Microsoft, known for its cutthroat practices in the computer business, to set the standards for software in the digital cable business. Many in the cable industry fear that Gates will use Microsoft’s proprietary approach to become a gatekeeper into the living room, just as he has done in the computer market.
As recently as late August, at TCI’s annual meeting, Malone himself warned shareholders of the dangers of allowing Microsoft or any other single supplier to secure a lock on supplying digital boxes. “We would be very foolish to allow that to happen. That doesn’t mean it’s a go or a no-go with Microsoft. What it really means is that Bill 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.”
It is unclear what effect a Microsoft-TCI deal would have on a bidding process now underway by a consortium of cable companies trying to establish standards for digital boxes to make them compatible with any cable system in the country. TCI is a leader in that process, spearheaded by Cable Television Laboratories Inc., outside Denver, which set a deadline of last Friday for submissions. CableLabs says 23 bidders submitted proposals, including Microsoft and its archrivals, Sun Microsystems, Oracle Corp. and Netscape Communications Corp.
Some industry sources say a Microsoft pact with TCI--and its negotiations with other top cable operators, including Time Warner--is part of a preemptive strike by the software giant to establish its software as the de facto standard for a new box. They say Malone is now trying to get other large cable operators to back the Microsoft approach.
“Microsoft doesn’t want to take a chance that CableLabs will pick Oracle,” said one source. “The question is whether Malone is bolting from the pack or has extracted a good deal from Gates that will benefit the entire industry.”
Sources say the CableLabs process will continue, and that contracts could be awarded by year-end, with new boxes on the market in the first quarter of next year. But they say a deal between Malone and Microsoft could mean that there are two different boxes on the market, if CableLabs backs another operating system or the second-leading cabler Time Warner also breaks rank with the industry by backing another vendor, such as Oracle.
Sources say a deal between Microsoft and TCI could propel cable stocks more briskly than Microsoft’s investment in Comcast, which is less than a fourth the size of TCI. While Wall Street saw that transaction as endorsing cable as the preferred pipeline for entertainment and information into the home, cable sources say Gates’ deal with TCI could substantially reduce the industry’s costs of delivering those services, vastly strengthening cable’s franchise.
The cable industry has been slow to introduce digital boxes, now in fewer than a million of the 70 million cable homes, in part because of their high cost--more than $400 each. Sources say Microsoft has agreed to subsidize the advanced models, cutting TCI’s costs by more than half.
It currently costs TCI roughly $400 for digital boxes that double its channel lineup and improve picture and sound quality. The company, which reaches 14 million subscribers, spends an additional $400 for modems that its cable customers can use to hook their computers to the Internet at speeds 1,000 times faster than via telephone lines.
The new boxes under development would combine both functions. Microsoft’s box would accomplish that using WebTV and Windows CE software.
