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Microsoft sees cable in its software future

Redmond reportedly may make a large investment in AT&T in a move to ensure its software and operating systems will be a critical component of cable set-top boxes.

Microsoft is reportedly making moves to ensure its software won't be left out of the broadband revolution.

Media reports indicate the software giant may be close to expanding its investments in the cable world. Following its $1 billion investment in cable operator Comcast, Microsoft may be considering taking a $5 billion stake in telecommunications giant AT&T.

The move would be intended to keep Microsoft in the middle of the broadband boom, since AT&T, following its proposed acquisition of MediaOne, will become the largest cable company in the nation. Comcast, the No. 4 cable operator, late yesterday opted not to counter AT&T's $54 billion cash-and-stock bid for the cable operator.

A Microsoft spokeswoman refused to comment on possible negotiations between the software giant and AT&T.

AT&T's chief executive C. Michael Armstrong also had nothing to say on the reported deal. "I really can't comment on any negotiations with any other third parties, including Microsoft," Armstrong told CNBC in an interview.

Microsoft's interest in cable is rooted in expanding the market for its Windows operating system software. It hopes to make its Windows CE a key component in current and future cable set-top box technology. Many industry observers believe the set-top box will be at the center of an emerging opportunity for interactive TV services, like Web surfing and video-on-demand, for example.

"Microsoft's motivations are quite simple," said Thomas Hensel, an analyst at Everen Securities. "Microsoft wants to be the provider of the infrastructure from the software point of view [for set-top boxes] as well as providing the content and information flowing through the pipes."

Redmond has made no secret of its aim to make various forms of its Windows operating systems a component in the telecommunications market.

Hensel noted that the software giant does not really want to be in the business of providing cable, telephony, or wireless services, but is more interested in pushing its CE agenda and delivering software and services through these mechanisms.

Microsoft chief Bill Gates has long-professed an interest in the cable industry as a means to deliver a wide array of interactive services. He has backed up his words with investments in Comcast as well as in RoadRunner, a high-speed cable-based Net access service owned by a consortium of cable firms, including Time Warner.

"Microsoft works with these partners because it wants them to provide the delivery mechanism for [services] while using CE as the operating system," said Hensel. "Microsoft would like to be the sole provider of all that infrastructure for the set-top boxes, but will have to settle to just be a major player along with other competitors."

Hensel noted, however, that even with an investment from Microsoft, AT&T will want to work with a number of different vendors for its set-top boxes.

"[AT&T] is savvy enough to not want to create a situation where they are dependent upon a sole supplier for a critical component," said Hensel. "This is true of any business. No one wants to be at the mercy of one vendor in case they go bankrupt, or raise prices."

As a measure of Microsoft's interest, the company negotiated a last-minute deal in January of last year with the former TCI, now a part of AT&T, to keep pace with rival Sun Microsystems. Sun had announced a deal with TCI based on its Java programming language, but Microsoft added its own software after eleventh-hour negotiations.

The cable industry has been wary of Microsoft in the past. TCI's support of both Windows and Java is indicative of the industry's agnostic approach to the software wars between the two computing firms.

AT&T said it plans to continue to adhere to that goal.

"Anything we do will be non-exclusive," Armstrong told CNBC in response to a question regarding a possible Microsoft investment. "It will be an open environment."