May 12, 1999 1:15 PM PDT

Microsoft seeks European broadband stake

Following its recent investments in the U.S. high-speed Internet market, Microsoft is now looking to drive its financial stakes deep into Europe's developing broadband business.

The software giant already has secured a share in two of Britain's biggest cable companies, and is now in talks to acquire a stake in Cable & Wireless' cable TV division, according to reports in the Wall Street Journal.

But Microsoft is looking See related story: The new world order beyond the British Isles for additional expansionary moves. The firm is reportedly interested in taking a $1 billion stake in German giant Deutsche Telekom, or possibly investing in that company's cable division. Additionally, Sweden's Sendit, which provides Net access through mobile phones, said today that Microsoft is bidding for a controlling stake.

The various European moves are aimed at ensuring Microsoft's operating system software becomes the standard for the next generation of high-speed Internet and interactive television devices on the continent, analysts said. The company's recent $5 billion investment in AT&T was spurred by a similar goal for the nascent market in the United States.

"Computing will go beyond the desktops that we know today," David Svendsen, chairman of Microsoft's U.K. division, told Bloomberg. "It will be in mobile phones and televisions. That's where we want to be."

The European cable market is particularly attractive for companies with their eyes on Internet revenue, noted Michael Harris, president of Kinetic Strategies, a cable broadband consulting firm.

Many European telephone companies charge their users by the minute even for local telephone calls, which means dial-up Internet users usually have to pay a per-minute fee for Net access.

Because of these per-minute charges for telephone Net service, European cable companies' broadband pricing could be more immediately competitive with dial-up service than their U.S. counterparts.

"That's one of the large selling points for cable there," Harris said. "They can create a slightly different business model."

The U.K. market in particular is attractive because networks were originally built with large fiber-optic components, making the upgrade path to interactive services relatively smooth, analysts say. The cable companies also have heavily marketed telephony services over the last few years, preparing consumers for nontraditional cable offerings.

Also driving Microsoft's investments is an advantage few other companies have: a nearly inexhaustible supply of cash on hand. At its last reporting date, the company had more than $20 billion in cash reserves. Even with its recent spending spree, the firm still has ample funds to continue making deals.

In addition, Microsoft's traditional operating systems have done particularly well in English-speaking and other European countries, Harris said. "They're going to want to leverage that in the broadband markets," he added.

Microsoft has paid the most attention to the British market, beginning with a 5 percent stake in operator NTL last January. Last week, it agreed to take MediaOne's 29.9 percent stake in Telewest, another large operator, as part of its $5 billion investment in AT&T.

The moves are in a large part designed to minimize inroads that Network Computer Incorporated, Microsoft's most aggressive set-top box competitor, has made in the British market. NCI has already signed deals with the top three cable companies, but Microsoft's quick investments have placed its own set-top box software head-to-head with NCI's offerings.

The company is pursuing a similar strategy in the wireless Internet access market. A $600 million investment in U.S. wireless firm Nextel earlier this week included an agreement to create an Internet portal for wireless customers through Microsoft's MSN, pushing aside a similar Nextel agreement with Netscape's Netcenter struck earlier in the year.

Bloomberg contributed to this report.

 

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