Microsoft Wins TCI Deal on Cable Boxes

In a major victory for Microsoft Chairman Bill Gates’ quest to shape the future of television, the nation’s largest cable TV operator said Saturday that it would use software from the computing giant as the foundation for new set-top boxes that promise to revolutionize the way consumers use their TVs.

After marathon negotiations that ended early Saturday, Tele-Communications Inc. agreed to license Microsoft Corp.’s Windows CE operating system for at least 5 million of the advanced digital boxes. TCI plans to begin offering the boxes by late 1998 to its more than 10 million customers, allowing them to watch hundreds of channels, check their e-mail, do their banking, surf the Internet and shop by way of their television sets.

Although it is a major coup for Microsoft, the agreement is not as sweeping as Gates had hoped. Microsoft was eager to expand Windows’ monopoly over the computer industry into the living room. Desperate to establish his company as the exclusive operating system for the box, Gates was eager to invest $1 billion in TCI for additional leverage in blocking such rivals as Sun Microsystems Inc. from carving out a role, TCI sources said.

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But TCI was wary of Gates’ increasing demands for control and backed away from making Microsoft a shareholder of the company after Microsoft made a secret bid to buy a controlling stake in the cable operator, behind TCI Chairman John C. Malone’s back.

“There is no investment being made by Microsoft in TCI,” Malone said in a Saturday conference call to discuss the agreement with reporters. “It is a pure technology deal based on our perception of the time and quality advantages it will give us. We chose Microsoft because we felt they were the farthest along in terms of the convergence of the Internet and the TV set.”

As part of the deal, TCI will have access to a variety of Microsoft’s technologies, including the WebTV service that links television with the Internet.

But Microsoft, based in Redmond, Wash., will not have a cut of revenues generated by the new boxes, as company officials had hoped. What is more, TCI has not committed to using Microsoft’s Web browser as part of the box.

In an earlier blow to Microsoft, TCI agreed Friday to install Sun’s Java software as the language for the box. Malone said Java and Windows will run in tandem on TCI boxes, memory permitting.

While talks between Microsoft and TCI reached a standstill Friday, sources said Gates returned to the table with a compromise, eager to strike a deal before his presentation Saturday at the Consumer Electronics Show in Las Vegas.

In a jab to archrival Sun, he told industry executives during his presentation that Java will only be offered as a subset on some of TCI’s boxes with additional memory. “Windows CE will be in all of them and Java will be in some of them,” he said.

Analysts said pitting suppliers against each other in the negotiations helped drive down the cost of the boxes for the industry, improving the chances of a widespread roll-out of the new technology.

The announcements are the culmination of an industrywide initiative since last summer to develop standards with Silicon Valley firms for an advanced box that could be plugged into any cable system in the United States. Those standards were delineated last fall, with the cable industry, led by TCI, agreeing in December to order 15 million of the boxes based on the new standard from General Instrument. TCI must still decide what microprocessor to use in its boxes. Windows CE is designed to work with chips from Intel Corp., Hitachi and NEC Corp., among others.

Analysts say TCI’s selection of Microsoft should give Microsoft an advantage in negotiations with other cable operators, many of which share subscribers with the Englewood, Colo.-based company.

Although the cable industry has been promising a world of 500 digital channels for years, analysts believe these boxes could actually be in as many as 25 million of the nation’s 100 million households in the next five years. The boxes are expected to provide huge new revenue streams for the cable industry.

“There are still lots of things that are unresolved,” warned Richard Doherty, director of Envisioneering Group, a Seaford, N.Y.-based research firm. “It is unclear if [the boxes] will be cost-effective.”