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Will cable spending spree turn MS into Ma Bill?

Or is the company just blowing the cash before Justice brings down the shutters?

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Microsoft's $5 billion investment in AT&T, plus further major infrastructure investments that Microsoft CFO Greg Maffei has said the company will make, appear to be a response to the growing sentiment that Microsoft may be prevented from making acquisitions as one of the penalties form the antitrust case. Microsoft already has a $1 billion investment of 11.5 per cent in fourth-place US cable provider Comcast, as well as some smaller European cable investments. Microsoft's AT&T/MediaOne deals were masterminded by Greg Maffei, who recently tried to quit Microsoft to go to RoadRunner, a cable modem Internet service owned by Time Warner and MediaOne. The deal just done makes Maffei's departure rather unlikely now. Paul Allen, Microsoft co-founder and director, has not done very well out of his $10 billion cable investments, but he may continue acquisitions and move some way towards his dream of setting up an alternative Internet access network based on cable. Cable operators are as aware as the banks about the challenges of having a business relationship with Microsoft, and are not inclined to allow Microsoft to have any exclusivity. The attempt by Microsoft to link with Comcast to bid for MediaOne failed because Microsoft wanted technology exclusivity. Financial muscle With Microsoft not making any progress in its quest for market share with hand-held devices running Windows CE, it seems it has turned elsewhere and is using financial muscle to establish the OS. The threat of the Symbian Epoc operating system in the telephony market has made Microsoft's progress there near-impossible, for technological reasons: CE needs too much power to run it, and in any event, it is too big and slow. Gates does not like losing, so he gave Greg Maffei the go ahead to do something with AT&T and MediaOne, in the hope of buying some CE market share. Watch out for set-top boxes with CTRL, ALT and DEL buttons to allow rebooting from the couch. The $5 billion that Microsoft is putting into AT&T for a 3 per cent stake contains a CE provision, in addition to the existing agreement for AT&T to increase CE set-top box deployment from a 5 million commitment by a further 2.5 to 5 million. However, this would still be a small fraction of the 62 million households that AT&T cable will eventually reach (according to Dow Jones, although Microsoft is saying that the AT&T's owned and operated systems will pass only approximately 25 million homes, and Reuters chips in with just 14 million set-top boxes in the next few years). Microsoft has also obtained a commitment from A&T that it will license Microsoft's client/server TV software, and will showcase two cities by June next year. Microsoft has some $22 billion in cash at the moment, so a $5 billion investment is significant. It cannot count it as a short-term investment, because of the way it is structured. It will take three years before the warrants that Microsoft receives for its cash will become convertible into AT&T shares. Government review? Microsoft will also receive newly issued preferred securities with a 30-year maturity but a conversion aspect that can be terminated after three years. Assuming regulators do not object - it is a possibility because Senator Orrin Hatch, chairman of the Senate Judiciary Committee, said the Microsoft/AT&T deal would receive "a generous amount of government review" - AT&T will be the biggest cable company in the US, pushing Time Warner into second place. AT&T had to give Comcast 2 million subscribers as a consolation prize for not doing a deal, albeit for $9 billion, but will probably get the pole position for offering telephony to Comcast subscribers. Comcast is also to receive $1.5 billion from MediaOne as a termination fee for their proposed merger. The guns to ploughs aspect of the deal for AT&T will be the possibility of replacing cable by telephone lines, and gaining back a stake in the Baby Bells' hold over residential phone service. If that happens, than the Baby Bells would probably be allowed to compete in the long-distance business, since there would be effective competition at the local level. AOL will be boxed in by these moves, because AT&T will push RoadRunner, in which it is acquiring a stake from MediaOne, as well as @Home, where it has a significant stake. AOL has not yet effectively leveraged its 17 million subscriber base, but when it does so it may try to come to a deal with the Baby Bells and alternative technology such as DSL. This diversification by Microsoft suggests that Fort Redmond sees limited profits from the desktop market, and is seeking to monopolise growing consumer markets. It is significant that Microsoft's investment focus is not towards the enterprise market at all. For users, the ganging up of the major monopolist of the 1980s with the major monopolist of the 1990s cannot be good news. Will Ma Bill really be our friend? Will a Win T&T brand replace Wintel? ® See also: Microsoft buys Telewest stake from AT&T lS spends $5 billion to boost CE cable presence MS taking more slices of UK cable business MS to take $5bn stake in AT&T Comcast yields to AT&T over MediaOne Stakes raised in MediaOne bidding war Microsoft, AOL enter MediaOne bidding war

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