Microsoft Corp.'s agreement to buy MediaOne Group
Inc.'s share of Britain's No. 1 MSO -- its biggest international cable
investment yet -- gives it a major presence there as digital takes hold in the market.
The Redmond, Wash.-based software giant said last week that
it would buy MediaOne Group Inc.'s 29.9 percent stake in Telewest Communications plc
through a share swap. The agreement is contingent on AT&T Corp. -- which already owns
21.7 percent of Telewest through Liberty Media International -- completing its deal to buy
MediaOne.
Microsoft didn't provide further details on the deal,
but MediaOne's stake in Telewest has been valued at as much as $3 billion.
In January, Microsoft agreed to invest $500 million for 5
percent of NTL Inc., Britain's third-largest MSO.
Telewest plans to introduce digital cable in the fourth
quarter, behind NTL's June rollout and No. 2 MSO Cable & Wireless Communications
plc's rollout, which is set to begin in July.
None of those three MSOs has committed to use Microsoft
software in their end-user set tops.
"Clearly, one of the reasons why Microsoft wants to be
exposed [to U.K. cable] is because of the other applications," Lehman Bros. Inc.
analyst Carlo Campomagnani said.
NTL does have a software agreement with Microsoft covering
back-office operations. NTL spokesman Will Robson said the MSO has "no stated
commitment" to expand Microsoft's role in its user applications, but it is in
discussions with Microsoft.
Microsoft didn't return calls seeking comment.
Campomagnani added that Microsoft's marketing muscle
could be particularly valuable for cable's digital rollouts.
"Microsoft can bring what has been completely lacking
in the United Kingdom," he said, noting that cable has a "pretty miserable track
record" marketing its services there.
This will be important as direct-to-home platform British
Sky Broadcasting Group plc, which launched digital services in October, pushes further
onto cable's turf.
Last week, BSkyB announced plans to provide free Internet
access and cut-rate phone service to its "SkyDigital" subscribers. The platform
-- which is 40 percent-owned by News Corp. -- also said it would supply free digital
set-top boxes.
Cable also faces competition from
digital-terrestrial-television platform ONdigital. And the MSOs' exclusive franchise
rights are expected to end over the next two years, Robson said.
But franchises could become a nonissue amid continuing
mergers and acquisitions in the British market.
"More consolidation is going to take place in U.K.
cable," SG Cowen Securities Corp. head of European telecommunications research James
McCafferty said.
He speculated that a first round could involve Telewest and
CWC -- which said last month that they were in talks that could include "the transfer
of various businesses." Spokesmen from the companies said the talks are continuing,
but they declined to provide further comment.
NTL -- which agreed to buy Irish pay TV operator Cablelink
Ltd. for $730 million last week, as well as reaching a deal to buy Comcast U.K. Partners
Ltd. in February -- could join in at a later stage, McCafferty said, echoing some
sentiment that the U.K. could end up with just one big MSO.
Microsoft could also expand its presence in Continental
Europe, where it already owns 7.85 percent of United Pan Europe Communications N.V. (UPC),
the region's largest operator, and 2.5 percent of TV Cabo Portugal S.A., the pay TV
unit of Portugal Telecom S.A.
MediaOne owns stakes in cable operators in the Netherlands,
Belgium and the Czech Republic.
"There's a very high degree of
fragmentation" in European cable, Campomagnani said. "I wouldn't rule
anything out."
