MS invests $1 billion in Comcast

Apparently, things aren't moving fast enough for Microsoft (MSFT).

The company said today it will invest $1 billion in Comcast (CMCSA) to help roll out data and delivery services faster over cable.

Analysts say the deal is Microsoft's boldest move yet to make Redmond, Washington, the capital of PC-TV convergence. Microsoft's investment in Comcast, which could amount to as much as 11.5 percent of the company, comes two months after Microsoft agreed to buy WebTV for $425 million, a deal that currently is being scrutinized by the Justice Department.

Comcast is the nation's fourth-largest cable TV operator. It also is an investor in @Home, which is rolling out high-speed Net access over cable systems throughout the country. Three weeks ago, @Home announced that it would offer its subscribers Microsoft Network for $6.95 per month as part of a bid to boost its content offerings.

"helvetica"="" color="#cc0000"> Bill Gates, CEO of Microsoft

"Microsoft is very enthused to be working with Comcast in taking their high-speed connections out into millions of homes and seeing how we can combine that with our software technology," Microsoft chief executive Bill Gates said at a press briefing. "We think the cable modem [rollout] is going very well. Through this investment, we can accelerate this activity."

But in a previous interview with CNET's NEWS.COM at last year's Comdex in Las Vegas, Nevada, Gates declared that Microsoft was not interested in getting involved in cable or other infrastructure industry: "We do not provide the pipe. We are not in the communications business in any way. We work with cable and phone companies. We promote ISDN, ADSL, PC cable modems, you name it, and [those aren't] businesses that we understand or that you'll see us be part of."

Microsoft's other investments may be inspiring the change of tune. As it has backed its content efforts such as MSNBC with millions and millions of dollars, the company needs to build momentum for accessing this content on devices other than PCs, including WebTVs. At the same time, PC users, particularly in the corporate sector, will rely more and more on faster connections to the Net and local networks.

Moreover, Microsoft was sitting on $9 billion as of January, cash generated from its core operations that can be used for both sides of the street: "substantial investments in Internet technology and interactive media," as previously reported.

One Microsoft executive suggested that the synthesis of cable modems and interactive content could lead to, say, a viewer watching a baseball game while pulling down sports-related Web pages in another part of the screen.

"helvetica"="" color="#cc0000"> Brian Roberts, president of Comcast

While the Comcast investment is Microsoft's largest in any outside company, the Microsoft chairman noted the company has no intention of running the cable provider, adding "we have no voting position."

Gates will work closely with Comcast's president, Brian Roberts, on the project's strategic and technological direction. In addition, Greg Maffei, Microsoft's vice president of corporate development, will act as an observer on Comcast's board.

Gates also said the software giant does not plan to make any such investment in a telephone carrier but will continue to work with companies such as GTE to ensure the rollout of high-speed Net access such as ISDN and xDSL. "I think it's less likely that a phone company would turn to Microsoft. They have a much different financial position."

The minority stake in Comcast could accelerate the use of slimmed-down Windows CE operating system in TVs, strengthen its relationship with the cable industry, and provide a "good" return, according to Gates. He added it will complement the company's recently announced WebTV buyout.

Microsoft and Comcast will work together in trials that will include high-speed Net access, as well as interactive gaming, Internet telephony, and online shopping, among other features. Comcast also controls the QVC shopping channel. They could also could work together on standardizing the video format for broadcasting digital content on TV and PCs.

For its part, Comcast needs the Microsoft money to roll out the complex, costly two-way broadband networks. The market also responded positively to the news: Comcast stock rose as much as 20 percent in trading today.

Practically speaking, he said the money could be used to buy back some stock and pay off debt, as well as expanding the two-way broadband network.

In addition, Gates said the deal clears the way for Microsoft to work with @Home, which is partly owned by Comcast. "It is imperative that we work together so Microsoft software fits in with their systems." @Home previously has touted Netscape Communications as a technology partner; Netscape CEO Jim Barksdale sits on the board. "We hope to convince [@Home] of the merits of our software," Microsoft's Maffei said.

The investment is expected to close this month. It calls for Microsoft to buy 26.6 million shares of class A special common stock for $500 million at $20.29 per share and $500 million of a new issue of Comcast series B convertible preferred stock at an initial conversion price of $23.54 per share. The issue will have a final maturity of 20 years, but may be redeemed at Microsoft's option or called by Comcast after seven years.

694K "helvetica"="" size="-1" color="#666666">Bill Gates on "the pipe" "helvetica"="" size="-1" color="#666666">(November 1996)

One source told CNET that discussions regarding a Microsoft investment in cable have been under way for more than a month ever since executives from Cable Labs, an industry research arm, visited Silicon Valley and Seattle right around the time that Microsoft announced plans to buy WebTV.

"Brian and I talked for a long time about combining the cable capability with rich software and intelligent devices," Gates said. About a month ago, the two began talking seriously about the investment. Gates confirmed that it was Roberts's idea.

Some cable insiders said they were not surprised by the move. In the past, Roberts has made remarks to Gates suggesting that if he wanted to have some influence over the cable TV industry he should invest in it, a source said. Tele-Communications Incorporated chief executive John Malone once made a similar crack, the source added.