London -- Microsoft Corp. stormed onto the European cable
scene last week, saying that it will invest $800 million in two of the region's
leading MSOs to advance the rollout of interactive-broadband services.
The Redmond, Wash.-based giant will invest $500 million in
NTL Inc., Britain's third-biggest operator, and $300 million in United Pan-Europe
Communications N.V. (UPC), Continental Europe's leading MSO and a unit of
Denver-based United International Holdings Inc.
The selection of NTL and UPC was no accident: Both are
considered key regional players with considerable scope in their markets.
"We talk with a lot of network operators, and it was
apparent to us that these two companies were very closely aligned in terms of their
aspirations for upgrading their networks and rolling out new digital services over their
networks," said Alan Yates, director of platform marketing for Microsoft's WebTV
Networks unit. "They see the same sort of opportunities as we do."
While Microsoft could develop similar products with NTL and
UPC, the investments will remain "separate deals," he added.
NTL is much more than a cable MSO. Its U.K. franchises
include 5.5 million homes, with 2.6 million homes passed and 1.1. million cable and
telephony customers. Its franchise-penetration rate of 40 percent is twice the U.K.
national average, while its churn rates have stood at one-half the local industry's
norm.
The company has stakes in, and provides transmission
services for, some of the U.K.'s leading Internet-service providers, and it recently
announced plans to roll out a nationwide Internet-over-TV service similar to WebTV.
Microsoft has agreed to buy $500 million of NTL's 5.25
percent convertible preferred stock, which is convertible into NTL common stock at a price
of $100 per share.
Microsoft chief operating officer Bob Herbold said the
investments in NTL and UPC are aimed at "increasing the use of information technology
in general."
UPC is a giant MSO operating in 20 European markets,
providing cable-TV service to about 3.4 million homes. It's also moving aggressively
into telephony through its Priority Telecom unit, and into interactive-broadband services
through its wholly owned Chello unit, which is similar to U.S. services such as @Home
Network and Road Runner.
The company also doubled the size of its initial public
offering last week, to up to $1.25 billion from a previously announced $650 million. UPC
will reserve $300 million worth of shares for Microsoft, which it can buy during the IPO.
UPC CEO Mark Schneider said Microsoft will be his
company's preferred supplier. And the Microsoft cash will come in handy, with UPC
eager to expand both in operations and programming.
Currently, UPC's telephony connections stand at just
19,000 lines. By the end of this year, Schneider said, UPC will have "substantially
completed upgrading its cable infrastructure to two-way [hybrid fiber-coaxial]."
UPC sees itself as what Schneider called "a
triple-play company," with increased revenues from video services and significant
growth potential out of telephony and the Internet.
Yates said Microsoft hasn't yet discussed specific
projects that it will develop with NTL and UPC, but specific Microsoft platform brands,
such as Windows and WebTV, could be delivered over the MSOs' networks. "It is
quite feasible that there will be significant services delivered in 2000," he added.
The $800 million investment in NTL and UPC is "small
change," for Microsoft, as one analyst put it. And "Microsoft has no intention
of becoming a big player in the cable-television business," Herbold said, adding,
however, that it could make further acquisitions.
Microsoft's move in the U.K. could spur others eyeing
the market to move quickly as values of the country's MSOs surge.
"I think that you'll see other international
content and communications providers come in and try to get a piece of the market, as
well. It highlights the value of the assets that they've built," said Aryeh
Bourkoff, who follows European cable for CIBC Oppenheimer Corp. in New York. "It puts
pressure on other multichannel providers to come in before the price gets too high."
Shares of NTL -- which surged 18 percent on news of the
Microsoft deal -- were trading at $79.875 early last Thursday, up 42 percent since Jan. 1.
Shares of UIH, meanwhile, were trading at $49.125, up 155 percent year-to-date.
Mike Galetto contributed to this report.
