Here's a very interesting read. I hope Wind fills it's Sails and gets going Quick. MSFT'S big push for WIN CE and the set top box
***RAGAS SPEAKS FOR THE WEEK*** From Raging Bull
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Enemies in the U.S., old chums abroad
The broadband revolution seems destined for a new plot twist, and Bill Gates
appears to be the ghost writer of this slowly unfolding cliffhanger. It's a
poorly kept secret to investors here in the U.S. that Microsoft is hell-bent on
achieving widespread adoption of its Windows CE software on set-top boxes and
with the cable companies. To help achieve this goal, Microsoft dropped $1
billion into Comcast (CMCSA) for a 10% stake back in 1997, and ponied up $212
million for a 10% stake in Time Warner's (TWX) high-speed RoadRunner cable
service last year. While the Comcast and RoadRunner deals were sizeable, it
turns out that Bill Gates was only beginning to get his engines revved up. In
May, Microsoft plunked down $5 billion in cash for a small stake in AT&T (T),
and announced the expansion of an agreement for Ma Bell to distribute more
Windows CE-powered set-top boxes in the future. The smaller, almost unnoticed
part of the deal was an additional announcement that Microsoft would purchase
MediaOne's (UMG) 30% stake in Telewest Communications (TWSTY), a large U.K.
cable operator, which would have eventually become an AT&T investment holding
under AT&T's planned acquisition of Media One.
Fast forward ahead to this week. On Tuesday, Dutch cable TV operator United Pan
Europe Communications (UPCOY) announced it was forming a joint venture with
Microsoft and Liberty Media Group (LMGa), the media and programming arm of AT&T
controlled by former TCI head honcho John Malone. Liberty Media will purchase
$493 million worth of existing UnitedGlobalCom (UCOMA) shares, the majority
owner of UPC, and then give Microsoft half of these shares. Earlier this year,
Microsoft had already purchased a 7.8% stake in UPC for over $300 million.
Microsoft and Liberty Media will together end up with a combined 50% stake in
the European joint venture. What's curious about this deal is not that
Microsoft is continuing to invest in cable companies, but that Liberty Media and
Microsoft, of all people, partnered in this deal. After all, it is Gates and
Malone who have long been rivals. Let's not forget that it was Malone who was
one of the founding forces behind AtHome, now ExciteAtHome (ATHM), the
high-speed cable service that Redmond views as largely "anti-Microsoft"
according to e-mails uncovered during the Microsoft anti-trust trial. But this
is the second time that these two colossal forces have come together on a cable
deal in less than four months. Liberty Media was already a 22% shareholder in
Telewest before Microsoft inherited Media One's minority stake.
Blending cable ownership
So here we have a case of Liberty Media and Microsoft both being shareholders in
the third-largest cable operator in the U.K., Telewest, and in UPC, the
second-largest cable company in Europe. Pretty interesting possibilities. In
addition, Microsoft purchased a 5% stake in February for $500 million in NTL
(NTLI), the largest cable operator in the U.K. NTL is poised to grow even
bigger once it completes the almost $10 billion acquisition of Cable & Wireless'
(CWP) residential cable business, which it announced in late July. First of
all, I don't believe for a moment that Gates and Malone are all of a sudden good
pals. Friendships matter not when there are bigger game to hunt together on the
horizon. In this case, this big game comes in the form of Deutsche Telekom's
extensive cable TV network. Last year, amidst pressure from European
regulators, Deutsche Telekom announced plans to sell its cable operations.
Interested bidders so far have included Rupert Murdoch's News Corp (NWS),
Microsoft, German media giant Bertelsmann, and a variety of European cable
operators, including UPC. In other words, this latest partnership between
Liberty Media, UPC, and Microsoft would appear to be signs that the three are
pulling together a consortium to make a collective bid for all nine of Deutsche
Telekom's regional cable systems. In addition, one can expect UPC to now embark
on an even faster buying spree of other European cable systems. It doesn't get
much better than having Gates and Malone as your backers.
I still don't think most Net investors realize the scope of cable-related
investments that Microsoft has recently made abroad. Microsoft's primary
business may still be in developing and hawking software, but they sure have
warmed up to cable. Besides these stakes in NTL, Telewest, and UPC, in July,
Microsoft paid $400 million for a 9% stake in Rogers Communications (RG), the
largest cable operator in Canada. Other recent Microsoft cable investments
include a 2.5% stake in TV Cabo, a cable TV operator in Portugal, and a $126
million minority investment in Globo Cabo (GLCBY), a large cable firm in Brazil.
In addition, Microsoft recently purchased a minority stake in a new interactive
TV venture from Thomson. Hmm, maybe it would be more fitting if investors
started referring to the software giant from Redmond as "Micro-cable." Whatever
the case, having a savvy cable veteran like Malone on board for Microsoft's
cable conquests in Europe shows the building momentum of Microsoft's investment
strategy to "force feed" adoption of Windows CE by these cable operators.
Foiled again, Java fans. The thought of Gates and Malone playing footsie under
the UPC boardroom table, even if they're both holding weapons behind their back,
should send chills down the spine of Sun, Oracle, and Liberty Technologies
executives. Mr. Softie is going to lock the European cable scene up entirely.
Just watch.
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