Microsoft charts a new DSL course

Microsoft made a $30 million investment yesterday in Rhythms NetConnections--a significant departure from the company's previous trend of cable investments.

Rhythms is a new competing telephone company that offers digital subscriber lines (DSL) to corporate customers, and for resale through Internet service providers (ISPs).

The move marks the first DSL investment for the Redmond, Washington-based giant, which has poured $1 billion into cable TV company Comcast, partnered with cable modem venture Road Runner, and invested millions in European cable operators.

DSL allows high-speed Internet access and other data transfers over standard copper telephone wires, and is viewed as a competing technology to cable networks.

The cable industry has gained attention in the past year for its ability to deliver digital video, high-speed Net access, and telephony, as well as video-conferencing and other advanced services over the same network. These possibilities have not been overlooked by the software giant.

But analysts said Microsoft has a history of hedging its bets.

"I think they've been agnostic when it comes to technology", said Thomas Hensel, a financial analyst who follows Microsoft at Everen Securities. "They're finding that more and faster bandwidth is good, and they're not hung up on how it gets there."

Microsoft sees high-speed broadband connections as a way to drive demand for its software products.

"We just want to help get [broadband connections] into place so our software can bring [the Internet] to life as this amazing tool," said Microsoft chief Bill Gates at an event to roll out the latest version of the company's Internet Explorer browser.

Laurie Falconer, a DSL analyst with TeleChoice, said Microsoft will do whatever it can to push its products. "They're going to work with any type of broadband access service because they want to be everything to everyone," she said. "They don't want to miss out on any opportunities by not developing a particular technology."

Rhythms, a competitive local exchange carrier (CLEC) slated to go public in late March or early April, leases phone lines from the regional phone companies to deliver DSL to business customers.

The data-focused CLECs, such as Rhythms and competitors Covad Communications and NorthPoint Communications, are aggressively targeting the Baby Bells' most profitable business customers.

"With cable modems, they [Microsoft] already have a pipeline into homes, but few cable modem service providers have a pipeline into businesses," Falconer said. "I think they're saying 'We're going to make inroads with DSL into businesses.'"

Analysts also said the broadband alliance will boost Microsoft's MSN portal, an Internet property that some observers have criticized as underutilized given Microsoft's weighty influence in the PC industry.

Microsoft yesterday said it will offer a co-branded version of its MSN site with specific tools and applications aimed at businesses. The deal also is the first broadband move for MSN; some other portals already have announced plans to deliver their services to consumers via high-speed connections.

"Their business prospers when you open up the pipe," Hensel said. "Their online business is being hampered by the fact that they just can't get the bandwidth."

America Online has already struck DSL deals with Bell Atlantic and SBC Communications, giving the online giant a seemingly early advantage over Microsoft and its MSN service.

But the Baby Bells, for the most part, are focusing their DSL efforts on the mass-market consumer. MSN, through its new deal with Rhythms, will attempt to target corporate customers--also an audience to whom Microsoft can sell its Office products and Windows NT-based services.

Although Microsoft had not previously invested in DSL, the company is no stranger to the high-speed data-over-copper technology.

Microsoft joined forces with Ameritech to deliver DSL in 1997 and later teamed with Compaq Computer and Intel in a DSL alliance in January 1998.

The company also was part of a large DSL trial with GTE last year for its remote employees.

Analysts said they expect Microsoft to continue pushing broadband connections, both via cable and DSL, by partnering with and investing in many companies.

Everen's Hensel said: "They're going to place their bets like you would on a Roulette wheel. If you can cover all the numbers you win."

News.com's Ben Heskett contributed to this report.