Patick Bartlett: "Cable might be dark horse in race for teleconvergence"

Never happy to be number two in any industry, Microsoft is moving hard and fast.

Adding to a string of previous acquisitions in the industry, Microsoft last week tied up with US phone and cable giant AT&T, and bought a large stake in a UK cable company.

This is more than parking money. The software company is trying to secure its commercial future.

Microsoft's main aim - not surprisingly - is to clinch a market for its software.

Teleconvergence

And there is a market out there: new technologies that allow the merger of communication, entertainment and information delivery.

Bill Gates promises the world to make the "Web lifestyle a reality"

The buzzwords are video-on-demand, high-speed Internet surfing, the integration of Web and television, and the control of all household applications through home intranets.

Some call it 'teleconvergence'. Microsoft boss Bill Gates calls it "the Web lifestyle".

This new 'lifestyle' has the potential to reach every consumer in the industrialised world.

But in order to work, the new high-tech television sets, mobile phones and set-top boxes need two things - highspeed, broadband, two-way data delivery systems, and good software to run on.

Digital cable networks are the obvious medium to deliver the new interactive services. They will revolutionise not only the Internet and television industry, but create a completely new market of interactive services.

However, the cable industry has so far struggled to make the medium work.

This is where Microsoft comes in. The company is pushing its Windows CE software, a slimmed down version of its omnipresent operating system for personal computers, to do the trick.

The next Microsoft monopoly?

Microsoft hopes that Windows CE will give it access to a new market of consumers

Cable companies, however, have been slow to adopt Windows CE as software standard.

There are two reasons. First there are doubts over the software's reliability and user-friendliness. Too many executives in the cable industry have seen their Windows-operated PCs freeze as to believe that Windows CE could run for days on end without crashing.

It is not only cable operators who have their doubts. Microsoft has patently failed to make Windows CE the standard for hand-held PCs, palmtops and mobile phones. Psion, 3Com, Geoworks and other companies are dominating that market.

Second, and possibly of much greater concern, is the reluctance to submit to yet another Microsoft monopoly.

Cable companies fear that Microsoft would rule supreme should they accept Windows CE as industry standard for set-top boxes that link the homes of consumers to their cable networks.

Buying the way in

Microsoft has found a way to eliminate these worries. The cash-rich company is buying strategic stakes in cable companies around the world. Once on board it tries to persuade them to use Windows CE instead of other software solutions.

In the United States, Microsoft already owns 11.5% of Comcast, one of the country's largest cable operators. It is now a partner of AT&T, which recently acquired cable giant TCI and now has added cable operator MediaOne to its portfolio.

In the UK, Microsoft now holds a 29.9% stake in cable operator Telewest Communications, and a 5% stake in rival NTL.

The third big player in the UK market, Cable & Wireless Communications, is reportedly in merger talks with Telewest, giving Microsoft potential access to cable homes across the UK.

AT&T takes a stand

AT&T boss Michael Armstrong tries to move his telephone business on to cable networks

AT&T chairman and chief executive Michael Armstrong has already begun to sing from the Microsoft hymn sheet: "We're gratified that Microsoft shares our strategy of using broadband cable to bring a new generation of digital communications, information and entertainment services to millions of American families."

It's down to this: Microsoft gives AT&T $5bn to help the company pay for its extensive cable buying spree. In return, AT&T will allow Microsoft to add "its creativity and technical know-how to our own". The technical know-how is called Windows CE.

AT&T will install Windows CE in up to five million set top boxes across the United States, on top of five million appliances that are already running the Microsoft software.

There must be more to cable television than this

Furthermore, the companies will combine their efforts to showcase new cable services in two US cities.

With deals like this Microsoft manages to transcend the limitations of the computer industry. The Seattle-based software giant has suddenly become the maker of mass-market consumer products.

However, AT&T is not a push-over. The official announcement of the Microsoft deal stressed that this was a "non-exclusive" arrangement, and that the company would continue to use "set-top software from multiple suppliers".

Broadband - for television and the Net

True 'teleconvergence' is still many years off. Neither the technology, nor the content are ready to go on the market.

In spite of this, the battle over broadband delivery systems is already intense.

It is being fought on two fronts: Television and Internet access.

Modem mania

For the Internet, it is simply an issue of competing technologies. Should the data arrive in your computer through the phone line or cable?

Running cable networks is a high-investment business

Companies like TCI, Comcast and Telewest try to push cable modems connecting to their networks as the best solution to take the word 'slow' out of the Internet experience.

So far, the take-up has been slow. One US cable modem provider, @home, has just about 330,000 subscribers. Rival Roadrunner boasts 160,000.

However, together they add about 2,000 new subscribers every day.

Analysts at Pioneer Consulting predict that by 2007 there will be more than 10 million residential cable modem users in North America alone, with another 14 million across Europe and some 12 million in Asia.

AT&T appears to have come down in favour of cable. One obvious reason for that is the fact that the company, a long-distance phone carrier, had no direct access to residential phone customers - until it entered the cable market.

Regional phone companies meanwhile, who control the 'final loop' to the consumer, try to upgrade their existing phone networks.

They are betting on technologies like 'Asynchronous digital subscriber lines', which promise Internet access 50 times faster than traditional dial-up modems by squeezing as much as 99% more capacity out of standard phone lines.

Regardless which technology carries the day, Microsoft wants to make sure that its software is dominant on either side.

The Murdoch factor

Cable television is an expensive and inconvenient technology. Roads have to be dug up and only densely populated areas are easy to supply.

Satellite television, on the other hand, is simple and easy to install.

As a result, cable companies in many countries have been lagging behind satellite television providers like Rupert Murdoch's BSkyB.

But satellite dishes are dumb, and they work only one-way.

If the Internet and television merge - and some experts say it is a big IF - satellite television will be an outdated technology, falling by the wayside like Telex and morse code.

Only broadband cable would be able to deliver the colourful new world of interactive media.

There is just one hitch. Many old cable networks are simply not up to the task of carrying broadband two-way services. Huge investments are necessary before it makes sense to install set-top boxes running on Windows CE.