The software giant's latest move, a $200 million investment in Qwest Communications, expands Microsoft's market for selling its Windows NT operating system to corporations. Qwest is in the midst of building a mammoth international fiber optic network--a project that seems ripe for a software deal.
In return for its 1.3 percent ownership stake in Qwest, the company will utilize Microsoft's Windows NT Server operating system--to be called Windows 2000 in a forthcoming 5.0 version--as part of a customizable data services offering for businesses.
Microsoft, anxious to find new markets for its operating system and business software, has been busy investing in telcos and cable companies, creating ventures to tackle new markets, and striking partnerships to expand deployment of digital subscriber line (DSL) technology.
Part of Microsoft's investment rationale with companies specializing in bandwidth is simple: Telecommunications is a Unix-dominated market that remains wary of a software provider best known for success on the desktop.
"Telecommunications is, in some ways, the toughest market for Microsoft to crack," said Dwight Davis, software analyst with market researcher Summit Strategies. "Some players in the telco space want nothing to do with Microsoft."
However, Joseph Nacchio, chief executive of Qwest, noted that the telco so far has been interested only in Microsoft.
"We have been very conservative with our equity. We have generally not put equity on the market other than our IPO," Nacchio said. "Our equity is very valuable. This is the first company we are opening up our treasury for. It was the right amount needed to get the job done. Apart from the Comcast investment [last year], I think this is Microsoft's biggest investment in another company."
But yesterday's investment in Qwest is hardly the first foray into the telecommunications industry for Microsoft.
Last year, Microsoft joined forces with local telephone giant Ameritech to offer DSL service, a technology that many telecommunications companies are using to provide high-speed data transmission over standard copper phone lines. And in January, the company teamed with other PC industry heavyweights to get DSL off the ground.
Still, many industry experts speculate cable operators, not telecommunications companies, are better positioned to capitalize on the new wave of digital data services for consumers and businesses. As a result, the software giant--known to frequently invest in competing technologies in order to hedge its bets--also has forged alliances in the cable industry.
Along with Microsoft's $1 billion investment in Comcast, it also owns WebTV Networks, and has invested in Road Runner, a high-speed Net-over-cable service operated jointly by Time Warner and MediaOne.
The software giant already has a deal with cable giant Tele-Communications Incorporated to provide its Windows CE operating system for TCI's digital set-top boxes.
Earlier this month, Microsoft announced a plan to offer a Windows NT-based software package for cable operators. The company also recently dipped into the wireless communications niche, striking a deal with Qualcomm to start a joint venture focused on wireless data services.
The company is looking for new ways to get its NT software into networks and organizations as a means to show that it is ready to handle high-end tasks. While most entrenched carriers are large Unix-based shops, Microsoft may see an opportunity to spread the Windows religion with a relative new entrant such as Qwest, according to some.
"While most ISP shops still lean toward various flavors of Unix, Microsoft decided this deal was important enough to sweeten the pot with an investment," noted a report from Zona Research, a high-tech industry watcher. "Obviously, Qwest made it clear that simply the offer of NT products was not enough to close this deal. If and when this new business gets up and running, Microsoft may actually get itself a credible reference account for ISP deployments."
The two companies said they expect the new services to roll out in the second quarter of next year.
In addition to opening additional markets for its Windows NT products, some analysts said Microsoft wants faster data transmission speeds.
"There's an explosive growth in the Internet and bandwidth is one of the constraints," said Dimitri Triantafyllides, a telecommunications analyst at First Union Capital Markets. "[Microsoft seems] to have an interest, as they did in the '80s with processors, in making sure bandwidth is not a constraint."