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MS could boost cable sector

Talk of another investment in the cable industry by Microsoft powers the sector's stocks and may continue to fuel them forward.

Talk of another investment in the cable industry by Microsoft (MSFT) has powered the sector's stocks and may continue fueling them forward.

Since Microsoft's investment in Comcast (CMCSA) in June, the cable sector has been on a run, leading some analysts to believe that the industry could be poised for change.

"Clearly all the stocks had a nice bump and have continued to advance since the June announcement," said Douglas Shapiro, an analyst with Deutsche Morgan Grenfell. "A lot of people got excited that Microsoft was endorsing the industry, but what is really significant is that this relationship could lead to a fundamental change in the economics of the cable business."

MS investment boosts stocks
18-1/2 30
Cox Communications
33-1/8 46
Time Warner
59-9/16 29
13-3/8 118
72-13/16 122
Century Communications
8 45

Since June, Tele-Communications Incorporated (TCOMA) has gained about 30 percent, to today's close of 18-1/2; Cox Communications (COX) gained about 46 percent to close at 33-1/8; Time Warner (TWX) has gained 29 percent, to close at 59-9/16; Adelphia (ADLAC) has gained 118 percent, to close at 13-3/8; Cablevision (CVC) has gained about 122 percent, to close at 72-13/16; and Century Communications (CTYA) has gained about 45 percent, to close at 8.

Microsoft reportedly is poised to make a $1 billion investment in US West (USW), giving the company as much as 6.3 percent of US West's cable business at the current stock price, the New York Times reported today in its electronic edition.

This prospective investment would be the third cable company Microsoft has eyed during the past six months. The software giant said in June it would invest $1 billion in Comcast to help speed up the roll out of data and delivery services via cable. Then in October, there was speculation that Microsoft would make a $1 billion investment in TCI.

Although speculation has centered on Microsoft's interest in pushing its technology as the industry standard, Shapiro said Microsoft's stake could in fact speed up the development of a standard, which in turn could ease the cable companies' expenses and push their stocks up even higher.

Shapiro explained that each cable company independently had been swallowing expenses for research and development aimed at developing interactive television, full-service networks with video-on-demand, and home shopping.

Meanwhile, the PC industry and the Internet have grown geometrically because of open systems, interoperability, and open hardware systems, which then spurred software development.

Cable Television Laboratories, a research and development consortium of cable television system operators, recently put out a request for information in its attempt to establish OpenCable, a project aimed at obtaining a new generation of set-top boxes that are interoperable. Shapiro said the consortium got just over 20 proposals to create a standardized box.

"This initiative could get a lot of expenses off cable companies' balance sheets, and prices would be cheaper and more applications would be created," Shapiro said. "Digital TV would take off much, much faster with Silicon Valley behind the development."

As there is more incremental news over the next several weeks, with CableLabs trying to release a standard as big names build products, the standard likely will be encouraged, followed by a push to move the products to retail. Those factors, Shapiro said, are fundamental changes that merit more upward movement in the stock.