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August 4, 1997updated 03 Sep 2016 12:52pm


By CBR Staff Writer

As the software behemoth Microsoft revealed details of its $1 billion stake in the cable TV company Comcast last month, the company immediately found itself on the defensive. Some pundits likened Microsoft’s Bill Gates to the magnate Rupert Murdoch, suggesting that he wants to control the highways of the future to make more and more money. Others see in Gates something more sinister, a desire to control not just the sources of revenues, but the information that citizens receive about the world. At the Federal Communications Commission in Washington, however, and at the offices of ‘superhighway supremo’ Al Gore, an entirely different view is being taken. They are simply glad that there are still some major businesses prepared to overlook the short term troubles of the cable industry and make a strategic investment in cable-based broadband interactive networks.

Controlling Access

Indeed, this was the way that Microsoft executive vice president Steve Ballmer presented the deal. He played down the influence Microsoft could get through controlling access to 4.3 million cable subscribers in the north-east of the US. Nor did he make much of the fact that Microsoft could clearly make use of Comcast’s shopping channel – QVC – the largest electronic retail outlet in the US. Instead, he says the company invested $1 billion in cable outfit Comcast, the fourth largest cable company in the US, in the hope that it will re- energize the cable industry as a whole. He noted that Microsoft’s (highly profitable) $16 million investment in UUNet, the internet service provider in 1995, helped to bootstrap the internet services provider industry at a time when many companies were struggling. UUNet later floated, and went on to form a key part of MFS, now a leading global services provider. With that investment, too, Microsoft was criticized, prompting the comment from Bill Gates that We’re just plumbers here. However Microsoft’s investment is viewed, it is hard to see the company as merely doing some plumbing. Microsoft, for example, has its $220 million investment in its MSNBC joint venture with NBC; it has the Microsoft Network, which might be compared to a nascent internet TV channel; Gates even has interests in building a global, satellite-based data and voice communications service through Teledesic Corp. Even so, there is no escaping the fact that the US, like almost every country in the world, badly needs some plumbing work to be done before it can claim to have the semblance of an information highway. With the exception of those organizations that have high-speed direct line access to the internet, virtually no-one accesses the internet today at a rate faster than 56 kilobits. Most of the telecommunications companies hope to upgrade their networks to solve part of the problem, but this will take money, time and will power. Microsoft doesn’t want to wait that long; it believes that, with the funding, mass market, high speed internet access can come more quickly from two rival sources: interactive cable services; and digital TV, which may of course use cable as a transport mechanism. Only when these are in place, can Microsoft really set about selling the software and packaging the content for the hundreds of millions of devices that will be hooked up. In April, Microsoft spent $425 million on the acquisition of WebTV Networks. This gives Microsoft a foothold in the set-top box market, enabling consumers to tap into the web via a TV using only a remote control and a telephone line. Later, when digital television is launched, the set-top boxes will deliver more channels and more interactivity. When combined with cable, the promise is even greater.

Somewhat clumsy

Over time, the combination of telephones, TV sets and set- top boxes, based on broadcast TV, may appear somewhat clumsy, especially as the broadcast could be analog for up to nine years. By pumping cash into Comcast, says John Moroney, principal consultant for new media at research company Ovum, Microsoft is hedging its bets. For the cable industry, the involvement of Microsoft is viewed with trepidation, but positively. Shares in other cable companies surged on the news, and with good reason. Some 93% of homes in the US have coax cable running past their door, capable of delivering 10 megabits per second, making it the natural conduit to deliver internet services. But most cable companies have struggled to turn their one-way broadcast networks into reliable, interactive networks. As the examples of TCI and Time Warner show, the process of upgrading the networks is very expensive. One of the effects of Microsoft buying a stake in Comcast is that it gives a vote of confidence to the ailing cable industry, which was the worst performer last year in the Standard & Poor’s 500. The cable industry’s battered profile largely results from its failure to deliver on promises that it was ready to offer interactive TV and digital transmissions. Certainly, Comcast was trying to develop interactive services. In 1995 it became part of a cable company consortium that has just recently launched an internet service via cable. The venture – Comcast@Home – supplies internet access and cable modems – devices which have only just become available and which still cost hundreds of dollars. This outlay, along with the $40 a month service charge, is why cable internet penetration still remains negligible. Last year Comcast began a $600m upgrade of its network, which is one reason why Microsoft’s investment was required. But even this outlay may prove insufficient. Cable networks resemble ethernet networks – they slow down when there is too much traffic. If Microsoft’s involvement has the effect of boosting use, the networks will need to be redesigned with more bandwidth and intelligent switching. According to John Davison, a consultant with Ovum: Comcast is the furthest along in using cable data. Microsoft is attempting to understand what products are needed to develop services and develop software. It needs experience of the appropriate software tools and end user software. It is radically different from PC software. After all, you can’t load up Word onto a TV operating system, says Davison. So far, the concept of widespread interactive devices has not really got beyond the planning stage, points out Davison, with many organizations interested but unable to scale up this interest. It’s difficult. The one thing that is missing is user demand and you can’t roll out the network until you get the demand. In this context, Microsoft’s investment is not so much a bid for world domination, but an attempt to research and develop a software market which, in some years time, might be essential for its continued health.

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