Who Do You Want To Buy Today?

Microsoft's flood of new deals aims to position it in everything from cable TV to cell phones

Buying a bit of the future isn't cheap. That's one reason why Internet stocks are so pricey--even after their recent setback. It also explains why Microsoft Corp. has shelled out more than $7 billion in the past six months to buy stakes in everything from tiny Web startups to mighty AT&T. William H. Gates' acquirer-in-chief, Chief Financial Officer Gregory B. Maffei, has been on a nonstop shopping binge that's aimed at two goals: expanding the markets for Microsoft software beyond the company's current personal computer stronghold and beefing up its Web business, principally the Microsoft Network (MSN).

The pace is stunning. May began with a surprise $5 billion investment in AT&T to help get Windows CE launched in cable TV. Before the month ends, it could include a deal with German media giant Bertelsmann to make a $1 billion bid for Deutsche Telekom's cable-TV business. In between, there were four other investments, including the deal on May 20 to inject $250 million into the newly merged Healtheon/WebMD Web site in return for the right to use the health care content as an MSN channel.

And the software giant isn't through yet. Maffei--who was in Europe on May 24 and 25, but declines to comment on the progress of the Deutsche Telekom negotiations--says he sees many more possibilities for Microsoft partnerships.

It all represents a new tack for Microsoft, which has generally moved into new markets by leveraging its position in PC software. But in the emerging market for new Internet-cruising devices, such as smart phones and digital set-top boxes, Microsoft is finding that the power of Windows doesn't speak as loudly as the $20 billion it has in the bank. Also, with a federal antitrust trial focusing on allegations that Microsoft has illegally used the Windows monopoly to force Microsoft products on computer makers, it's cleaner to use cash.

So, whether it's to get into cell phones or set-top boxes, Microsoft is dealing. "We are buying ourselves a seat at the table," says Brad Chase, a vice-president at Microsoft and manager of the company's online efforts.

Still, the company has restricted its buying to acquisitions of small players or minority stakes in larger ones. "There is no way that Microsoft can do a megadeal like other players, because they will never get it past the feds," explains Hambrecht & Quist analyst Christopher J. Galvin. "So they are going with a portfolio approach to create a new platform."

CONTENT-HUNGRY. To do this, Microsoft has been swarming all over Silicon Valley. Jeffrey D. Brody, a partner at Brentwood Venture Capital, says Microsoft has had discussions with about a third of the startups that his firm backs. "Microsoft seems to be covering the waterfront," he says. "They are talking to two or three of our portfolio companies at any given time." Mitchell E. Kertzman, CEO of software rival Liberate Technology, says that Microsoft has bought into so many companies where Liberate already has marketing partnerships that "we've been joking about creating an ad campaign telling people to buy our software and get a rebate from Microsoft."

At the top of Microsoft's list are companies that can help it offer customers access to such services as E-mail, stock quotes, video, and interactive television--whether they're near a PC or not. For instance, Microsoft's $600 million investment in Nextel Communications Inc. on May 10 was driven by a desire to extend MSN to wireless customers--via a new portal to be built by Nextel and Microsoft.

Each piece may be small, but the new structure could be vital for Microsoft. "If Microsoft doesn't execute on this effort, they will not be relevant 20 years from now," said Giga Information Group analyst Rob Enderle. Competitors such as America Online, Yahoo!, Sun Microsystems, Liberate, and others have a headstart in the world beyond the PC.

To catch up, Microsoft has been particularly aggressive in buying relationships with companies that can help establish its software and content on high-speed broadband networks. That's what drove the deals with AT&T, Qwest Communications, and Britain's NTL. In addition to helping get CE into set-top boxes, for example, the AT&T investment may help Microsoft sell AT&T on using its technology and services on the cable network itself. "There is a shift taking place where communications and software are coming together," says Maffei. "We are investing in these companies to understand the issues. Then we can take what we learn and transfer it into software."

Microsoft has also formed a partnership with Qualcomm Inc. to create WirelessKnowledge LLC, which will enable Microsoft's Windows CE operating system to be included in chips that power cell phones.

At the same time, Microsoft continues to shop for content deals that will help make MSN a more popular portal. Originally, Microsoft only featured homegrown content on MSN. But to compete with the likes of Yahoo! Inc. and America Online Inc., it has had to buy up content to match theirs. Jump Inc., which Microsoft bought Apr. 26, provides an online address book and calendar service for MSN customers. On May 24, for example, Microsoft spent $17.8 million for a piece of CareerBuilder Inc., which will give MSN an online job placement and recruiting service. That deal came just four days after the Healtheon-WebMD deal added an online healthcare service.

The content deals, analysts say, may be as important to Microsoft as getting its operating systems in place in the post-PC world. For example, when users have access to the traditional Internet fare over broadband cable systems, they will also be offered vast amounts of preprogrammed interactive content and services akin to online services such as AOL, says Michael W. Harris, president of Kinetic Strategies Inc., a broadband consulting firm. To get this, the cable systems will have to go to content providers.

Microsoft cannot afford to move slowly to get into that content game. In fact some--like Javier Rojas, a managing director at investment bank Broadview International--believes that it needs to speed up. "There is plenty of room for Microsoft to do more, and they should if they want to solidify market position as well as their expansion into new markets," says Rojas. With an ever-expanding cash pile, that shouldn't be a problem.

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