Microsoft Yields to EC on Telewest Deal

SAN FRANCISCO (07/10/2000) - Under pressure from the European Commission in Brussels, Microsoft Corp. has agreed to limit itself to a minority interest in British broadband cable company Telewest PLC.

Earlier last week, reports had suggested that the EC would probably block Microsoft's investment in a decision expected by August. With this retreat and a commitment by Microsoft to forgo further attempts to control Telewest, the EC has agreed to let the deal go ahead without further action.

The commission had the power to review Microsoft's investment deal because the original proposal would have given the U.S. software giant effective control of Telewest. The commission's antitrust chief, Mario Monti, opened an in-depth probe into the deal in March, citing "fears that it would reduce competition in the digital-cable industry, in particular regarding the supply of software for digital television set-top boxes in the United Kingdom."

The proposed investment arose out of a larger deal in June 1999 that had Microsoft investing US$5 billion in AT&T Corp. and acquiring a 30 percent stake in Telewest from MediaOne, which was later acquired by AT&T. The AT&T deal brought Microsoft into close partnership with another Telewest stakeholder, Liberty Media, an AT&T subsidiary run by former TCI cable chief John Malone.

Together with Dutch cable company United Pan-European Communications (in which Microsoft has a 7 percent stake), Liberty formed a joint venture with Microsoft.

Microsoft has now agreed to limit its stake in Telewest to 24 percent, to "break all structural links with Liberty Media" and to relinquish "any rights which would have given it decisive influence over decisions at Telewest," according to an EC press release.

During the past year, Microsoft has used its gigantic cash reserves to accrue substantial holdings in cable companies across the globe. In North America, in addition to Microsoft's massive $5 billion stake in AT&T and $1 billion stake in Comcast, it invested $400 million in Canada's Rogers Communications.

In Europe, in addition to an investment in UPC, Microsoft invested almost $40 million in Portuguese cable operator TV Cabo. In Britain, it put $500 million into Telewest's British rival, NTL, which later bought the cable division of Cable & Wireless PLC to become the U.K.'s largest cable operation.

The complex ties between AT&T, Liberty and Microsoft are also evident in developments in the Japanese cable market. Recently, the two largest cable companies in Japan, Jupiter and Titus, agreed to a merger, which is expected to be completed on Sept. 1. AT&T's Liberty subsidiary owns half of Jupiter; Microsoft owns 60 percent of Titus.

It's unclear if Microsoft's new commitment to "break all structural links" with Liberty in Europe will have any impact on the fact that these two soon will share ownership of Japan's largest cable company.

Clearly, even with this hasty retreat before the Brussels antitrust regulators, Microsoft retains enormous equity influence in cable operations worldwide.

Those cable industry ties and the board seats that go with its equity will boost the Redmond, Washington, company's TV platform server technology and give it a chance for decisive control over the software that runs in many of the world's set-top boxes.

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