As the ink dried on AT&T's $47 billion sale of its cable unit to Comcast (CMCSK ), some analysts heralded the deal as a victory -- for Microsoft (MSFT ). By converting the $5 billion that AT&T (T ) owed it to equity in Comcast, Microsoft at the very least has put its money in the hands of a more capable cable manager and should see a far better return on its investment. And at best, Microsoft could have a new pipe to 22 million U.S. households through which to push its new ensemble of consumer services, not to mention a second chance for its troubled TV set-top-box software.
Even more important, the debt-to-equity exchange could allow Microsoft to forge closer financial ties with one of the few companies that may have the horsepower to challenge AOL Time Warner (AOL ). Both AOL and Microsoft are convinced that cable's fat pipe into the home is the key to the digital kingdom. "There are invisible strings attached [to this deal]," says Lydia Loizides, a Jupiter Media Metrix analyst. "This is meant to build Microsoft's relationship with the largest cable operator in the U.S."
None of the parties admits to any formal arrangement. Comcast CEO Brian Roberts says the Microsoft stake comes with "no strings attached." And Redmond remains coy, offering nothing more than a spokesperson comment that "Microsoft hopes to have the opportunity to bring high-quality software services to consumers" by working with AT&T Comcast.
That could be an enormous understatement. Bill Gates & Co. hopes that its stake in Comcast will buy it broad distribution of its MSN Internet service via cable, which would be a great coup for the No. 2 online service. It would be especially beneficial for rolling out MSN's new consumer offerings, which include such popular applications as e-mail, personal calendars, and online shopping.
Just keeping AT&T's cable assets out of AOL's control is itself a small victory. While it's not completely fair to say that Microsoft played the spoiler because the AT&T board knew an AT&T-AOL combo would've faced huge regulatory hurdles, by swapping its debt stake in AT&T for equity, Microsoft made the deal financially more palatable for Comcast. And it's obvious that Microsoft's best interests lay in ensuring that anyone but AOL CEO Richard Parsons won the AT&T auction. "This is a race to make convergence a reality for mainstream America. And in that race, Microsoft took a few steps ahead," says John Corcoran, a new media analyst at CIBC in Boston.
Still, AOL isn't completely out of the picture. As part of the AT&T deal, Comcast got stuck with a 25.5% stake in Time Warner Entertainment, a programming conglomerate that includes popular cable channels such as HBO. Armstrong sought for years to sell it back to Time Warner (before it merged with AOL), but the two feuded over a fair price. Comcast management has made clear that it wants to sell the stake to reduce the new company's $23 billion in debt, but AOL Time Warner is the only logical buyer. And while AT&T's stake in Time Warner Entertainment is valuable, AOL nevertheless has the high cards. "AOL could have Comcast over a barrel with this," says CIBC cable analyst Jeffrey Wlodarczak.
The only tangible gain for Microsoft in the deal is a substantive stake in Comcast, which is no small thing. In 1997, the software giant invested $1 billion in Comcast. CEO Roberts say Microsoft has quadrupled its money on that stake due to Comcast's strong growth. Roberts points out that the AT&T-Comcast deal allows Microsoft to convert a 1999 investment in AT&T that had a paltry 5% return thus far into one that could earn much more.
While Microsoft hardly needs the cash, it wouldn't mind if its investments make big bucks. And Microsoft's 115 million new shares could give it as much as a 5% stake in the new Comcast, according to sources close to the deal. The Roberts family still holds 33% of the voting stock, enough to control the company, but big initiatives might go more smoothly with Microsoft's stamp of approval.
To date, though, Microsoft's cable investments haven't always panned out. Shortly after after it made its $5 billion stake in AT&T's cable unit in 1999, AT&T announced it would use Redmond's software for interactive TV. But AT&T CEO Michael Armstrong ultimately jilted Microsoft, agreeing to test lower-end but less-complicated software from Microsoft rival and Oracle protégé Liberate Technologies. And in July, 2000, heat from the European Commission forced Microsoft to scale back its investment in British cable company Telewest (TWSTY ), thwarting Microsoft's efforts to gain a controlling stake and use it a springboard for broadband efforts in Britain.
Even given its less-than-successful cable history, Microsoft can hardly lose with this deal. At worst, it gets an upgraded investment in AT&T. At best, Gates gets a new opportunity to take on AOL. Not bad for a deal that cost him nothing.
By Jane Black in New York
Edited by Alex Salkever