Microsoft stakes a claim on many shores

Side-stepping domestic regulatory heat, the software giant is rapidly building a worldwide portfolio of communications investments. Ultimately, Microsoft hopes its investments will reap rewards by increasing the transfer of data over networks, thereby cultivating new markets for its core desktop and software products and expanding the reach of its Internet business.

"When people get high-bandwidth connections they use the computer more often," said Charles Rutstein, an analyst with industry consultants Forrester Research. "When they use the computer more often, they're probably using more Microsoft products."

Microsoft made two new forays into the global telecommunications market this week. It formed an Asian joint venture with Global Crossing and Softbank, and partnered with Dutch cable company UPC and Liberty Media in Europe.

"Telecommunications generally has probably been the toughest market for Microsoft to crack because it's been a stronghold of Unix," said Dwight Davis, a Microsoft analyst at Summit Strategies. "If they can get NT into some of the business and billing operations [in the communications industry], then that's all for the well and good as far as Microsoft is concerned."

Unix-based operating system software has dominated the industrial-strength computing market for some time, but Microsoft--noting the profits associated with Unix-based systems--has targeted the market with its Windows NT corporate desktop and server software (now re-named Windows 2000).

Today, Microsoft announced that Qwest Communications International will be the first participant in its new pilot program for application service providers--companies that host and serve software for business customers. Microsoft took a $200 million stake in Qwest in December.

Overseas benefits
Although the software firm has made significant telecommunications investments in the United States--including a $5 billion stake in AT&T and a $1 billion investment in Comcast--foreign markets offer several advantages, according to company executives.

"These markets have far more fragmentation so there's an opportunity for more consolidation," said Greg Maffei, Microsoft's chief financial officer. "There's also far less penetration so there's more opportunity to help grow the services immediately."

In light of the software giant's ongoing antitrust legal battles at home, the relative lack of regulatory constraints on international communications companies is another advantage.

"Deregulation is part of what makes those markets attractive," Maffei said.

As the U.S. communications market continues to deregulate, many companies have jumped in and made investments in the growing market. Many overseas firms, however, are still under government control or have vastly different regulations than those found in the United States.

"Clearly they're under a great deal of scrutiny here, but the regulatory environment overseas is still murky," Rutstein said. "The U.S. market is a small piece of Microsoft's overall market, so if they can go plant their flag on the moon and get out there early, they will."

Money to spend
With a war chest of cash totaling $17.2 billion as of the end of its last fiscal quarter, Microsoft has ample means to spread its influence.

"China, for example, is a big market for us in terms of computer software, but it's relatively weak in terms of telecommunications infrastructure compared to the U.S., so that's a real opportunity," said Maffei, referring to the company's most recent Asian communications venture.

Overall, the company would like to position itself at the confluence of personal computers and communications networks--a growing marketplace, as witnessed by the flood of so-called application service providers that provide software applications over networks that can handle increased data communications.

"We think there's an increasing merger of software and communications in terms of bundled services," Maffei said.

In addition to its latest ventures with Global Crossing and Liberty Media, Microsoft has previously taken stakes in UPC, British cable operators NTL and Telewest, and invested in a Brazilian cable company. The company also has investments in Canadian cable operator Rogers Communications and Portugal Telecom, and was reportedly interested in Deutsche Telekom's cable TV unit.

"Their international investments are not fundamentally different from their investments here, and the one thing that will create primary demand for Microsoft software will be unlimited connectivity," said Forrester's Rutstein. "They've simply recognized that the world is behind on telecommunications infrastructure [compared with the United States], so why not help bring them up to speed."

Maffei declined to comment on which region of the globe Microsoft might invest in next, but said, "I think it's quite likely that we'll do more deals and investments."

Microsoft's financial chief also insisted the company doesn't have a master plan in terms of global telecom investments, as it has invested in cable but also in fiber-optic carriers and digital subscriber line companies. Rather, the company looks at the globe on a market-by-market basis.

"We look at markets that look interesting," Maffei said.

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