Thread
With due credit to the originating author at "The Raging Bull", a very interesting thesis on where Softy is headed.
Would welcome your comments.
mariner
A Desktop Dinosaur On The Web
After several months of frenetic deal making in Redmond, Wash., one thing
is abundantly clear to me. Microsoft (MSFT) is making the proper alliances
and cable/DSL investments to become the preeminent broadband gateway. If
all goes as planned, Microsoft will control not only the emerging set-top
box and Internet appliance operating system for consumers, but will also
provide the underlying server software for the majority of the world's
broadband networks.
Have I fallen off the deep end? Isn't Windows CE a clunky operating system
that pales in comparison to Sun Microsystems' (SUNW) Java and 3Com's (COMS)
Palm OS? Perhaps. Isn't Windows NT receiving competition from the upstart
Linux system? Definitely. And haven't Yahoo! (YHOO), Lycos (LCOS), Excite
(XCIT) and others so far kicked Microsoft's MSN portal around the block?
Agreed.
But none of that really matters. He who ultimately controls the dominant
operating system in the end wins. Once that is accomplished, all the other
chips fall neatly into place. Microsoft's Bill Gates and Steve Ballmer
understand this. They've been down this path before in their domination of
the desktop environment with Windows. That's why Oracle's (ORCL) Larry
Ellison and Sun Micro's Scott McNealy are terrified.
Sure, Ellison and McNealy are still talking a good game, but both realize
Microsoft's recent cable investments, telecom investments and broadband
alliances have put the promise of a Java-powered world largely in doubt.
Detractors love to paint Gates & Co. as a lumbering desktop software
behemoth which has found itself embarking on a jumbled Web and broadband
strategy. Few things could be farther from the truth. Gates "gets" the
Web.
Microsoft understands all too well that good software is nice, but great
marketing and distribution channels are even better. Think about it for a
second. Web consumers love their freedom and ability to choose what they
want online. However, if a consumer gets used to one operating system on a
handheld device or set-top box first, that consumer is more likely to
purchase other devices that use the same system.
Controlling The Set-Top Box
That's why Microsoft is hell-bent on controlling the operating system for
the next generation set-top box. Let's follow Gates' thinking. Wean
consumers on Windows CE in the set-top box and it will be that much easier
to gain consumer acceptance of Windows CE on related Internet appliances
like handheld computers, Web phones and personal digital assistants. The
real battle for domination of the broadband system of the future will be
won not in the consumer's living room, but in the corporate boardroom.
This takes us to Microsoft's recent $5 billion dollar investment and
alliance with telecom giant AT&T (T), which is every day looking more and
more like Ma Cable instead of Ma Bell. As part of the non-exclusive
agreement, AT&T will deploy a Windows CE based system on 7.5 million to 10
million set-top boxes. AT&T will also use Microsoft's client/server
software in two showcase cities by mid-2000. Although the deal is
non-exclusive, and it's Microsoft's largest single investment ever, I
believe it will prove to be the most lucrative investment Gates has ever
made.
All this goes back to the age-old adage, “keep your friends close, but your
enemies closer.” AT&T and Microsoft may not like each other, but they
realize that together they can dominate the future of e-commerce,
connectivity and content.
What a cheap lottery ticket for such a potentially enormous payoff. For
only $5 billion in cash, Microsoft will no longer be on the outside looking
in when dealing with the cable companies. The other cable cowboys on the
broadband playground may not like geeky Microsoft, but with Ma Cable taking
him under her wing, Sun Micro and Oracle aren't going to mess with Gates &
Co. any longer.
This deal also tells me that C. Michael Armstrong is calling the shots now
over at cable giant TCI, which AT&T acquired earlier this year. Cable
pioneer and former TCI chief John Malone had long been a supporter of the
Sun/Oracle camp and had instituted what he called an "arm's length
relationship" with Microsoft regarding Windows CE. But regardless of what
soothing "non-exclusive licensing" words Armstrong provides government
regulators and the press, TCI and Microsoft aren't playing ball at
arms-length any longer.
After all, it was TCI and venture firm Kleiner Perkins which initially
funded high-speed cable company At Home (ATHM). Sun Micro is a Kleiner
Perkins portfolio company and TCI is an investor in Kleiner's KPCB Java
fund. Obviously, Armstrong is more concerned about rolling out a
functional broadband system than appeasing past friends of the TCI family.
He is in a race against the clock to offer local phone services via cable
telephony to his cable customers, and he believes the bunch from Redmond
can deliver. It's likely the approval for Baby Bells like Bell Atlantic
(BEL) to offer local phone services is right around the corner.
Opening Doors
Through its partnership with AT&T, Microsoft has the opportunity to show
off its Windows CE and Windows NT server software to TCI's executives as
well as cable provider Cablevision (CVC), a firm in which AT&T acquired a
37% stake as part of the TCI acquisition. The cable connections don't end
there. Microsoft already has an "in" with Time Warner (TWX) and MediaOne
(UMG), because both are shareholders along with Microsoft in RoadRunner,
the largest competitor to at At Home's service. Microsoft also maintains a
10% stake in cable company Comcast (CMCSA) for which it paid $1 billion.
I assume Microsoft also has a good shot of eventually winning the
interactive television client/server business from Microsoft co-founder
Paul Allen's Charter Communications. After all, Allen still maintains
roughly a $21 billion stake in Microsoft. If you were Allen, and your
largest single holding was the creator of Windows CE and Windows NT, would
you bet on a competing set-top software in the long run? Not likely.
Finally, Microsoft gained a roundabout way into the camps of Cox
Communications (COX), Rogers Cablesystems and Shaw Communications (SJR)
camps, because AT&T now has majority voting control of At Home through its
acquisition of TCI. The aforementioned cable companies are all investors
in At Home. There are already signs that AT&T is exerting its influence
over the operations of At Home for the benefit of Microsoft. On Thursday,
At Home Solutions, a division of At Home devoted to providing broadband
services to small and medium-sized cable operators, announced a technology
partnership with Microsoft which will work to incorporate Microsoft's
Windows NT server software into At Home's network. The agreement gives
Microsoft access to a variety of mid-range U.S. cable players like Falcon
Communications.
Overseas
Microsoft has been particularly aggressive investing in United Kingdom and
European cable operators. Once again, Microsoft is after the same goal
overseas - to get Windows CE in every set top and Windows NT server
software powering every broadband network. The benefit of investing in
European cable systems is that many of the systems are newer and more
technologically advanced than U.S. cable systems.
Microsoft purchased a 5% stake in NTL Inc. (NTLI), Britain's third-largest
cable operator, at a cost of $500 million. It plunked down $300 million
for an 8% stake in United Pan-European Communications, Europe's largest
cable television provider. And as part of the recent AT&T/Windows CE
alliance, Microsoft also agreed to buy 29.9% percent of Britain's No. 2
cable operator, Telewest Communications (TWSTY). News reports earlier this
week suggested Microsoft may also have its eyes on a 30% stake in Britain's
Cable & Wireless Communications (CWZ) for roughly $4 billion.
If Microsoft does invest in C&W, it would give Gates ownership positions in
each of Britain's top three cable operators. Make no mistake, Windows CE
will be deployed widely in the British set-top box market, which is bad
news for Network Computer Inc., which currently provides most set-top
software in the market. Again, Microsoft's moves are all aimed at giving
Sun Micro and Oracle, a major Network Computer shareholder, a pair of nasty
black eyes.
Repeat with me Larry Ellison - distribution, distribution, distribution.
Gates' strategic worldwide cable investments are greasing the palms of a
distribution network that I doubt Sun Micro or Oracle can match. Sun Micro
and Network Computer have a deal with America Online's (AOL) AOL-TV set top
which will help, but it still doesn't build direct relationships with the
cable operators.
Hedging Their Bets
Gates has further strengthened his case for Windows CE and his MSN portal
by investing in various wireless and DSL providers. On Monday, Microsoft
announced plans to invest $600 million in wireless provider Nextel
Communications (NXTL). The two companies plan to develop a co-branded
wireless MSN portal site. This partnership will eventually enable Nextel
customers to access e-mail, calendar and address book functions.
Now you can see why Microsoft has sunk millions into developing their own
content and acquiring "sticky app" Web companies, such as free e-mail
provider Hotmail and online calendar company Jump Networks. Hotmail and
Jump are ideal applications for use on Internet appliances. It goes back
to the primary Microsoft mantra – “control the operating system”, be it
Windows98 or Windows CE. Gates & Co. then has the ability to pre-package
and push its optimized MSN content to the variety of Internet appliances
that utilize his system.
Microsoft has made similar moves by investing $200 million in broadband
Internet company Qwest Communications (QWST) to help with developing a
variety of Web-enabled applications and broadband solutions for Qwest
business customers. You can rest assured that Microsoft will push the
business elements of their MSN portal, such as LinkExchange, to Qwest's
customers. Microsoft also made $30 million investments each in Northpoint
Communications (NPNT) and Rhythms NetConnections (RTHM), two high-speed DSL
Internet providers. Both companies will promote a co-branded version of
the MSN portal to the companies' small business customers.
Betting On Microsoft
The next year may prove quite challenging for Microsoft. The official
rollout of the Windows 2000 (NT 5.0) and Office 2000 systems continue to be
pushed back. I don't see the incentive for huge numbers of corporations to
rush out and snatch up Windows 2000 licenses or gravitate over to Office
2000. Some early adopters will ante up, but I think most computer users
will sit on the sideline and make do with what they have. That's bad news
for Microsoft, because the majority of its revenue and profits come from
Office and Windows sales.
But looking long term, I'm more convinced then ever that Windows CE (as
clunky and bloated as it may now be) will eventually grab the lion's share
of the set-top box and Internet appliance market. The reward for
Microsoft's control of the interactive television, broadband and Internet
appliance market is mind boggling. Owning a disconnected Windows desktop
is one thing, but owning cherished set-top box screen real estate with
two-way interaction between advertiser, e-tailer, programmer and consumer
is on an entirely different level. Can we say mind-boggling revenue
potential?
Windows CE will evolve into more than just an operating system for set-top
boxes and related broadband. We are witnessing AT&T and Microsoft make a
play at becoming the pre-eminent "digital tollbooth" of the next century.
I can envision a picture of Gates and Armstrong gleefully skimming a small
percentage of the billions in e-commerce, online banking, interactive
advertising and programming revenues generated by a Windows CE powered
set-top box in the coming years.
Makes the few billion dollars Microsoft has tossed around in the past two
seem downright cheap, doesn't it?
Microsoft is the "desktop dinosaur" on which I'd lay all my chips in this
broadband poker match. It's Microsoft's competition which may soon be
extinct. |
