01 Mar 1999

Even as Mr. Gates is being beaten up at the US justice department for his alleged (and increasingly documented) efforts to beat up his competition, the Microsoft touch remains golden. Well, that is certainly what the executives of United Pan-European Communications (UPC) think.

In Janurary, when the Dutch-based UPC announced details of plans to sell a third of itself on the stock market, the expected proceeds doubled, up from the original estimate of $650 million (£393.9 million) floated in November last year, to $1.2 billion. It exceeded that estimate, having sold its stock - 40 million shares raised $1.3 billion.

What happened in the interim? Answer: Microsoft made its move. A day after the Seattle-based software giant promised to invest $500 million in UK cable company NTL, Microsoft announced it would also invest in UPC. Gates promised to buy $300 million worth of UPC's initial stock offer and provide operating software for the roll-out of UPC's interactive services, which could include offering to subscribers Microsoft's interactive TV and Internet device Web TV.

Just as it added lustre to US cable stocks several years ago with a $1 billion investment in US cable company Comcast, Microsoft has upped the fortunes of the European cable sector. Of course, there are other forces at work as well: The Internet frenzy is having a knock-on effect. Increasingly, cable is being seen as the best pipe into the home. And that doesn't just mean more TV channels. It's all about surfing and buying.

At stake is a burgeoning e-commerce market that is set to mushroom. In the US alone, on-line retailing revenues could triple between 1998 and 2000 to reach an estimated $30 billion.

The players are rushing to position themselves, not only with the right Internet companies, but also with the local pipes that can deliver the services. Late last year, AT&T agreed to buy the world's biggest cable company Tele-Communications Inc. (TCI); and, more recently, the long-distance phone giant inked a deal to use Time Warner's extensive cable networks to deliver its services directly into homes. And you can bet that AT&T has more in mind than plain old voice services.

AT&T's moves added fuel to a fight between cable and Internet companies over using the cable pipes. TCI wants to charge AOL for access to its cable customers, who through cable modems, can surf the Web at super speeds.

But the Open Net Coalition, which includes AOL, MCI WorldCom and local telco US West, plans to lobby the US Congress to bar cable television companies from monopolising Internet access through cable modems. They claim that TCI is protecting @Home, a high-speed Internet service it controls, from competition. The same is said about Time Warner, which owns Road Runner, a cable-delivered high-speed service.

What's driving all of this activity is the galloping growth of the Internet and its potential as a global shop window for all kinds of products and services, not to mention the accompanying advertising. The bottleneck for the Internet is the phone line. Cable lines with their bigger capacity can deliver Internet content hundreds of times faster.

So, it will come as no surprise that UPC is pitching itself not as a cable TV company, but as a "video, voice and data communications" company.

It counts 3.4 million "basic video services" (read: television) subscribers across systems in ten European countries and Israel, and plans to roll out cable telephony and its own version of @Home, called Chello, across all its systems this year.

Interestingly, @ Home is readying its first European roll-out set for the second quarter of this year in the Netherlands, where it will offer its dial-up service to 1.5 million cable homes. UPC's Chello will be up against a fierce competitior in @Home, which already counts 330,000 US subscribers, the backing of TCI's new parent AT&T, and through its recent purchase of Excite Inc., the number two portal site behind Yahoo!.

So, with the battle for the access road to the Internet hotting up in Europe, where do the traditional phone companies stand? Ironically, the ones with big cable assets, like Deutsche Telekom and Holland's KPN, have been "urged" by EU competition authorities to sell them off. Deutsche Telekom (DT) already has the biggest on-line service in Germany - T-Online - but the bidders for DT's cable net plan will clearly be offering Internet access through cable modems as fast as they can upgrade the cable systems.

To fight back, the European telcos (like their local phone cousins in the US), are testing digital susbcriber line (DSL) technology, which basically ramps up the speeds of regular phone lines. DSL is still in it infancy, however. In the US, at the end of last year, cable modems numbered about 700,000, by comparison, only about 50,000 high-speed DSL modem telephone lines had been installed, according to Broadcom, a supplier of chips that power cable and DSL modems.

The new values on European cable networks, inspired by Mr. Gates and the Internet frenzy, will certainly push up the prices paid for cable nets. But a cautionary note: cable networks in the US and in the UK, in particular, have traditionally promised more than their customer service and technical departments have delivered. So, while it's true that the Internet holds out a potentially huge new revenue stream for cable nets, Europe's traditional phone companies are not blind. And as Europe's liberalised telecommunications market forces them to be more competitive, they are getting smarter and fast.