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Microsoft-TCI set-top deal getting cold?

Nearly two months after the duo agree to use Microsoft technology in next-generation digital TV set-top boxes, analysts are saying negotiations have slowed.

Nearly two months after Tele-Communications Incorporated (TCOMA) and Microsoft (MSFT) reached an agreement to use Microsoft technology in next-generation digital TV set-top boxes, analysts are saying that a chill has set in on negotiations, highlighting the wariness which TCI harbors for the software giant's clout.

In January, the companies announced that TCI will use Windows CE

General Instrument's DCT5000
General Instrument's DCT5000
in 5 million interactive TV set-top boxes, at the time seen as a surprise victory for the software giant. But in the aftermath, the deal seems to have been founded on Microsoft's visceral need to counter a deal struck with arch-rival Sun Microsystems (SUNW), which stipulated that some TCI set-top boxes would be able to run Java-based programs.

Now, TCI and Microsoft appear to be at a loggerheads over how to structure a deal to finance deployment of Windows CE-based set-top boxes.

"Negotiations have clearly fizzled," says Cynthia Brumfield, an analyst with Paul Kagan Associates. Other industry analysts agree with her characterization.

Previous reports have stated that TCI was not enthusiastic about the negotiations since Microsoft tried to strong-arm its way into the deal.

A TCI spokesperson denied that talks have "fizzled" but offered no further comment. A spokesperson for Microsoft would not comment on "rumors."

Analysts see a strained relationship, which tracks with the tenor of TCI chief executive officer John Malone's original description of the relationship as "arm's length" when the deal was signed on January 10.

The two companies are "distant" in their negotiations, says Richard Doherty, director of The Envisioneering Group, though he adds that "nobody at Microsoft is paranoid yet" about having its operating system excluded from TCI's set-top boxes.

Ultimately at issue is TCI's dilemma: TCI wants Microsoft to finance a new array of interactive services while maintaining control over its own destiny. The cable giant fears giving Microsoft a chance to exert the kind of dominance that it now enjoys over the PC industry, yet it also needs its help in paying for the deployment of the set-top boxes.

High-tech heavyweights such as Microsoft are interested in getting their products into the set-top boxes which sit on top of tens of millions of TVs. While the devices now do little more than change TV channels, in the future these set-tops will be able to offer services such as video on demand, email service, Internet browsing, telephony, and more.

"It's very possible that TCI never wanted Windows CE but wanted the prestige of [working with] Bill Gates," said one analyst, who wished to remain anonymous. Perhaps Wall Street agrees, as TCI's stock price has climbed almost five dollars since early January to over $29 a share.

"As far as that [January] deal, Microsoft says it's a binding agreement. Will TCI ultimately deploy CE? I don't know," Brumfield says.

Sources close to Microsoft confirm that talks aren't moving as quickly as expected.

Another possible reason: Doherty says the cable industry is in the habit of announcing big deals during two big trade shows each year, the next one being in May. He says a deal could be finished by then.

Analysts also point to the nature of cable industry negotiations, which are inherently slow compared to PC industry, where deals as well as innovation proceed at a relatively fast pace.

Meanwhile, the companies that would supply technology for digital set-top boxes as well as those that are making the boxes, including General Instrument, are waiting for the blueprints to the next generation of interactive television.