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Microsoft's cable gambit

Having a cool $10 billion on hand, as the software giant does, makes it a lot easier to decide "where you want to go today."

Having a cool $10 billion on hand, as Microsoft does, makes it a lot easier to decide "where you want to go today."

So the software giant today made another $212.5 million bet on the cable television industry--this time for a 10 percent stake in Time Warner's and Media One's Road Runner, which provides high-speed Net access via cable systems. Compaq Computer also joined in, matching Microsoft's $212.5 million investment.

The deal marks Microsoft's second major investment in cable. One year ago this month, the company said it would invest $1 billion in Comcast, the nation's fourth-largest cable operator. Both deals come on top of Microsoft's buyout of WebTV for $425 million.

Despite its ample cash reserves, Microsoft isn't being philanthropic. The company wants to help speed along the rollout of data and multimedia services over cable so it ultimately can sell more software. Another goal: making sure it is a dominant player for the ballyhooed PC-TV convergence.

To maintain its lofty earnings momentum and keep investors happy, Microsoft needs to tap new markets.

"Clearly, both Microsoft and Compaq believe that high-speed, last-mile connectivity is critical to the continued growth of the core consumer PC market," said Michael Harris, who follows the industry for Kinetic Strategies, a consulting firm.

Harris added: "Both companies also have a chance for product wins, because the Road Runner camp clearly sees both as strategic technology partners."

For Microsoft, opportunity exists both on the client and server software side. Microsoft's Internet Explorer browser already is being used for the Road Runner network. In addition, the software giant also helps Road Runner provide Net access in Hawaii using Windows NT. Digital, which Compaq is buying, is the integrator of the NT-based server deployment in Hawaii.

As a result, the potential exists for a "fully integrated, end-to-end network" with Microsoft and Compaq as partners, Harris said. Oracle also had bid for a stake in Road Runner, but that deal hasn't materialized.

Microsoft's investment may help grow the cable modem market, but challenges remain, analysts agree. Despite its fast growth, only about 250,000 people now get Net access via cable systems.

Cable television operators face enormous costs in installing a two-way system, as well as in persuading consumers to sign up.

In addition, most analysts say they have yet to see anything concrete resulting from Microsoft's investment in Comcast.

Microsoft and Compaq, for that matter, are hedging their bets, too.

As reported, both companies are part of an effort to promote high-speed Net access over copper wires, dubbed DSL. The so-called Universal ADSL Working Group also includes leading telecommunications carriers, representing a "copper renaissance" for the Bells, at least in their minds.

With both DSL and cable modems, the PC makers and software companies want to offer bundling deals that make the technologies transparent to consumers and easy to use.

Microsoft chief executive Bill Gates also has said that WebTV will get DSL hookups.

The other leading cable Net access provider, @Home, also has a partnership with Microsoft, but no investment is involved. @Home and Road Runner do not compete in most markets, but they will be competing for independent cable affiliates, as well as for content and commerce partners.

The newly beefed-up Road Runner will provide stiff competition for @Home in these areas, analysts said.