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MS eyeing TCI investment

Microsoft may invest $600 million to $1 billion in giant cable operator Tele-Communications Inc., according to reports.

    Microsoft (MSFT) may invest up to $1 billion in Tele-Communications, Inc. (TCI) (TCOMA), one of the nation's largest cable operators, the Wall Street Journal reported today.

    The deal has not been finalized yet, people familiar with the negotiations told the paper, and may still fall through. But as TCI prepares to make a large investment in the next generation of digital cable boxes, which would provide high-speed Internet access as well as digital TV channels, a deal with Microsoft would provide the company with much-needed financing.

    Microsoft, when contacted, would not comment on the impending deal. "At this point this is strictly a rumor," said Mike Murray, Microsoft's corporate public relations manager.

    Amid mounting speculation that the company was preparing some kind of deal, TCI stock climbed 20 percent since last month, the paper said. At a Goldman, Sachs conference last week, TCI president Leo J. Hindery Jr. said the company would announce a strategic venture that would lift the value of all cable stocks "by the first snowfall."

    "We have had indications of some kind of deal since last June and more specifically since August," said Rick Doherty, director of Envisioneering Group, a research firm in Seaford, New York. "Microsoft tried to get TCI's attention last August when it invested in Comcast, and this new offering is an even bigger attention-getter."

    Microsoft made a $1 billion investment in Comcast, the country's fourth largest cable operator, this summer for an 11.5 percent stake in the company.

    In an attempt to establish itself in the field of emerging digital TV technology, Microsoft has been trying to convince cable operators to adopt a platform compatible with Windows 98 and Internet Explorer 4.0 software. Windows 98 is expected to include TV tuner and channel-guide technology, and IE 4.0 includes push features that easily could be adapted to work with cable broadcast systems.

    The new digital TV technology is expected to deliver the Internet to a broader base of consumers. The new boxes are expected to provide many services, including Web access, email, home shopping, movies on demand, and interactive games.

    "Microsoft has been in discussion with cable operators and set-top box makers to adopt a Microsoft platform for the new boxes and content," Doherty said. "But during a meeting last August, TCI refused to give an open endorsement to the Microsoft plan. It was unclear to cable operators where Microsoft would begin or end, and that is part of what scared them away."

    Following those discussions, TCI chairman John Malone used the company's annual meeting to take a shot at Microsoft chairman Bill Gates. Malone chided Gates for attempting to be the only supplier of the new digital-cable package. "Bill has to accept the fact that he can't have total dominance here as he does in computers," said Malone.

    While Microsoft was pushing for its software and technology, cable operators, through the Colorado-based non-profit research group, CableLabs, were discussing the new standards. As of last week, when the call for proposals ended, Microsoft's plans were not among those on the table.

    "Microsoft hopes that, through an investment in Comcast and TCI, the company can influence the outcome of the emerging technology," Doherty added. "Its interest in TCI, as the largest cable company in the U.S. and one of the most digitally ready, is understandable. But where will it end? Will they have to earmark $6 billion to buy influence with the remaining cable operators?"

    Doherty believes that if TCI doesn't go for the bait, Microsoft will be ready to offer it to Time Warner, Cablevision, or another cable company in the future.