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Microsoft's deal with Qwest paying off

The Redmond giant's investments in the communications industry have met with plunging stock valuations, but at least one partnership is delivering as promised.

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MSN, Qwest team on Net access pact
Bob Visse, product manager, MSN
April 26, 2001
Microsoft's multibillion-dollar investment forays into the communications industry have met with plunging stock valuations and bankruptcies, but at least one partnership is delivering as promised.

The software giant's $200 million stake in Qwest Communications International in 1998 is paying dividends--in experience and exposure, if not financially.

By contrast, the giant's highly touted $5 billion alliance with AT&T has delayed joint initiatives and been clouded by uncertainty as Ma Bell has moved toward a four-way breakup. Other Microsoft investments, such as Winstar Communications and NorthPoint Communications, have failed miserably by ending in bankruptcy.

"It's easier to spot the disastrous investments, notably Winstar, rather than the ones that have paid off," said Dwight Davis, vice president at Summit Strategies, a market research firm. "Qwest would be one. It's a nice coup for Microsoft to have struck that strategic alliance."

Microsoft began taking stakes in communications companies, including Comcast and AT&T, in the mid- and late-1990s. The company initially intended the stakes as a way to infiltrate the communications market with its software. But, interestingly, its efforts to spur broadband use may be having at least as much success.

Picking a winner
The strategic alliance between Microsoft and Qwest, one of the nation's larger long-distance phone and data carriers, is multipronged. It includes efforts in e-commerce, high-speed Internet access, Web hosting and software services based on Microsoft's Windows 2000 operating system.

Specifically, the Qwest partnership has generated tangible benefits for Microsoft in terms of software sales and new MSN Internet subscribers, based on the latest deal struck between the two companies.

The companies agreed to deliver MSN Internet Access via Qwest's high-speed DSL (digital subscriber lines) last week. Qwest already uses Windows 2000 in its Web hosting data centers and, most recently, was certified in March as a Microsoft Gold Partner among hosting companies and ASPs (application service providers).

"Qwest has built a whole infrastructure for Web services around Microsoft products. Qwest has been as successful as anyone in the area of application hosting," Davis said. "I think it's been a very positive relationship with Microsoft."

Analysts also point to Microsoft's $50 million stake in Digex, a major Web hosting firm, as another on a short list of positive investments for the software giant. In fact, sources say Digex expects to operate 20,000 Microsoft-based servers by 2002, up from just 600 currently.

The bigger picture
The overall plan called for Microsoft to infiltrate the communications sector, which for years has preferred Unix-based operating system software, with its heavy-duty Windows 2000 software, formerly known as NT. In addition, the Redmond, Wash.-based company also hoped to spur broadband Internet access, which would in turn facilitate the use of Microsoft services and software.

"Microsoft is trying to seed markets--they call it driving demand--for broadband Internet applications that would require, obviously, Microsoft applications," said Bill Whyman, president of the Precursor Group, an independent research firm. "So they are trying to drive broadband and are using their capital and credibility."

Counse Broders, a senior Internet services analyst at market research company Current Analysis, put it this way: "They put money into these companies, but then it's a way to get these companies to standardize around Microsoft products. Microsoft says, 'Yeah, we'll invest in you, but we want you to use NT.' For these companies, it gives them access to the research and development of Microsoft."

Indeed, Microsoft has been successful in penetrating the communications market with its high-end software. But analysts say few communications companies use it to manage their critical networks, rather Windows 2000 is used for Web hosting, other data applications or billing functions.

"Certainly (Microsoft's investments have) increased NT sales. When I talk to (smaller local phone competitors), many of them are using NT for back-end applications," said Lisa Pierce, director of telecommunications research for Giga Information Group, a market watcher. "But I don't know any carrier that is using anything but tried-and-true Unix for real-time heavy-duty communications services. Yes, NT has come a long way, but it has a ways to go."

Microsoft and telecommunications
Microsoft's stake in AT&T, which is now splitting apart into four separate companies, is one instance where it may not be getting the return on investment it expected. Ma Bell's stock price has since plummeted, and the two companies have yet to offer interactive TV as broadly as promised.

"I think that (AT&T) is one investment that clearly has far under performed from Microsoft's perspective," Davis said.

Meanwhile, the future of Road Runner remains uncertain as AOL Time Warner develops its broadband strategy. And the tribulations, and stock-price plunges, of DSL wholesalers NorthPoint and Rhythms have been well documented.

However, as the rest of the telecommunications sector tanks, Qwest stock has remained relatively stable, losing little of its value.

Microsoft bought into Qwest at $45 per share. Qwest shares were valued at about $40 each earlier this week.

The same cannot be said for stock in AT&T, in which Microsoft took a stake in 1999. Ma Bell's stock, trading in the mid-$50s at the time, now is valued in the low-$20s. Despite the intangible successes of its partnership with Digex, stock in that Web hosting company also has declined steeply.

Microsoft declined to comment on the financial aspects of its communications investments, but said there are many ways to consider the success of its partnerships.

"Microsoft makes each investment with a specific business strategy in mind, and if an investment can benefit customers and business partners as well as help drive Microsoft's business, we consider it successful," a Microsoft representative said.

Analysts say that considering the sector's steep decline in the past year, Microsoft may have spent too much money on its telecommunications stakes, but the company is selling more software than ever in the communications industry and is learning valuable lessons for the future, they say.

"In Microsoft's case it's been mixed," Pierce said. "They certainly have learned a lot more than they knew several years ago. They're getting experience with different technologies."

Summit Strategies' Davis agrees: "Even if it doesn't immediately pay off...Microsoft really stresses how important it is to get access to the customer base of these service providers," he said. "Microsoft gets really good information that it can feed back into its product-development teams for the next generation of its products."

So, despite the depressed stock prices of many of Microsoft's network service provider investments, analysts agree the software giant is learning valuable lessons.

"They may have spent more than they would have liked, but it doesn't mean it still won't be a wise investment," Pierce said.