01 Jun 1999

How long have we been talking about the convergence of everyday gadgets: the telephone, the television and the computer? Well, it's finally coming and guess who is acting as marriage broker? Microsoft.

The US headlines announced that Microsoft is buying into AT&T at the same time that the telco is adding cable TV and wireless phone operator MediaOne to its stable. The deal also follows AT&T's purchase of America's number two cable operator Tele-Communications Inc (TCI).

Microsoft has also recently bought a stake in alternative US telephone operator Nextel; and, has penned a deal with Sony Music. Sony will use its Windows compression-format technology to download the Sony Music catalogue comprising of about 500,000 musical recordings onto the Web.

In Europe, Bill Gates is snapping up stakes in cable TV systems and has bid to own 100 per cent of Swedish company Sendit, which makes applications software that gives mobile-phone opera tors access to e-mail and the Internet via their handsets.

At stake is the future of Microsoft's operating system software, be it Windows CE for portable devices, like telephones or digital TV set-top boxes (STBs), or its NT server software, which helps transform telephone exchanges into Internet-friendly transmitters and receivers. By buying into distribution systems, Microsoft is seeding the market. The goal is to accelerate the development of broadband and give Microsoft influence over the technologies these systems use to deliver services to end users.

Microsoft is at the centre of the on-going paring down of UK cable. TeleWest, NTL and Cable and Wireless Communications (CWC) are the three players left. A change in strategic direction at CWC parent company Cable & Wireless is giving Microsoft an opportunity there. Rival TeleWest is negotiating with CWC to buy part or all of its business, but Microsoft has a strong hand to play.

The software giant already has a deal with another C & W unit: HongKong Telecom (HKT). It is helping HKT develop interactive TV for Hong Kong's 6 million population. And, don't forget, earlier this year Microsoft paid $600 million (E363 million) for a stake in NTL.

C&W's new CEO Graham Wallace's strategy for the group doesn't include consumer businesses, such as its majority-owned CWC cable TV unit. C & W will focus on providing data and telecoms services to global businesses. "At the core of this is what best adds shareholder value," says Wallace about the likely sale of CWC's consumer TV and telecoms business. "Who will own what and when it will happen are the variables."

So why Microsoft, rather than another? Simple. Microsoft has so much cash that brokers looking for buyers in the converging industries put the company at the top of their 'potential buyers' lists.

Microsoft, for example is to pay $130 million for Sendit, 18 times Sendit's 1998 revenues. The five-year-old company posted losses of SKr43.3 million (E3.1 million) last year, on sales of SKrS9.8 million. But, Sendit has cutting-edge technology used by several big mobile players, such as Sweden's Ericsson, France Telecom's Itineris and Singapore's Singlel. Broker Broadview International, which represented Sendit, says the price-tag shows the premiums that can be demanded by companies working in Scandinavia's 'Telecoms Valley'.

The frenzy around delivering Internet content and e-mail by cable, telephony or satellite is growing at a clip that is out-stripping analyst's expectations. Many Internet-related IPOs double, triple or quadruple in their first day of trading. We've seen traditional media companies like USA Networks and NBC pair up with Net companies to catch the Web wave. But it's not always easy. USA Network's deal with search engine and Web-portal service Lycos fell apart over valuation issues, among other things. NBC may have hit on a bet ter strategy: putting many of its Web assets, including stakes in CNET, Snap.com and Xoom into a new company, NBCi.

Unlike NBC's stock, NBCi will be treated like a .com company. So, it doesn't matter if it looses money, it only matters that it's in Web space. The stock should perform well and give NBC and its partners 'Web currency'. This will allow them to buy other assets in cyber-space, without bankrupting the traditional company. The advantage of Web money is clear: it gets a higher valuation than a company like NBC, which is valued in the conventional way - on its balance sheet. The ability to access Web currency is important for anyone wanting to be a Web player.

But deals, such as America Online's (AOL) recently announced partnership with Hughes Electronics, Philips Electronics and Network Computer Inc. (NCI) to develop an interactive ser vice called AOL TV, up the ante for traditional media and software companies. AOL TV will be delivered using the DirecTV satellite system and telephone lines. Users will be able to send e-mail, chat on-line, etc., while watching television.

In April, Luxembourg-based Europe on Line announced its version of AOL TV. It will use the Astra satellite system to send signals to digital TV STBs or PC cards to deliver a broadband Internet service 'Internet in the Sky'. And, guess what Europe on Line plans to do this Autumn? Float its shares, of course.

I wonder when Microsoft will hive off its Internet assets into a separate listed company?