Microsoft Plans $1-Billion Comcast Investment Deal

Dramatically raising its bet on the convergence of computers and television, Microsoft Corp. on Monday agreed to invest $1 billion in Comcast Corp., one of the nation’s largest cable television companies.

The deal is the latest in a series of moves by Redmond, Wash.-based Microsoft to position itself for what many expect to be the next wave of the digital age: a time when PCs and televisions merge and become consumers’ primary gateways for entertainment, information and even commerce.

Comcast represents several of those elements because the Philadelphia-based company is at the forefront of the cable television industry’s foray into Internet service, and has a controlling interest in QVC, the cable shopping channel.

For its investment--the largest in its history--Microsoft will receive newly issued Comcast stock and will have an 11.5% stake in the company.

Comcast class K shares jumped $2.94 to $21.375 on Nasdaq; Microsoft gained $1.06 to $125.125 on Nasdaq.

Comcast officials said the company will use the cash to accelerate work on an extensive upgrade project. The company is projected to spend about $1.5 billion over the next two years to install fiber-optic cable throughout much of its network, which reaches 4.3 million subscribers in 21 states.

Microsoft Chairman Bill Gates made it clear Monday that he believes the telecommunications industry has been too slow to build high-performance networks and has underestimated consumers’ appetite for the services such networks will carry.

“Demand for broad-band infrastructure is greater than most people expect,” Gates said in a conference call with analysts and reporters.

Proponents say a merger of PCs and television will produce a new breed of interactive services, such as news and weather tailored to specific viewers, the ability to shop and place orders with a remote control, or to select and view movies any hour of the day.

Skeptics caution that it will take years for truly compelling content to evolve, and point to the failure of recent tests of interactive television, including one conducted in Cerritos by GTE Corp.

But analysts said the deal reflects Gates’ commitment to the notion of convergence and his impatience with other companies’ efforts to bring about this new age.

“You could wait a long time for the telecommunications companies or the cable companies to do it,” said Greg Vogel, an analyst at Montgomery Securities in San Francisco. “Microsoft is trying to move this thing along.”

In fact, many of Microsoft’s most significant moves in recent years have been in anticipation of the arrival of high-capacity networks.

The company has spent millions of dollars developing online entertainment guides and Internet content covering topics ranging from travel to personal finance.

Microsoft also joined forces with television network NBC to create MSNBC, which delivers news and information over a cable television channel as well as the MSNBC Web site.

In April, Microsoft spent $425 million to acquire WebTV Networks, a Palo Alto-based company that makes software and electronics that enable consumers to access the Internet through their television sets.

But Gates stressed that Microsoft is not turning its back on software, in which the company is the unrivaled industry leader.

To the contrary, much of Microsoft’s strategy for the future now appears to hinge on its ability to duplicate in interactive television the stranglehold it has on the PC business.

Gates said that Microsoft’s Windows CE operating system, originally designed to run palmtop computers, will be installed on the next generation of set-top boxes from WebTV.

That means millions of consumers, many of whom don’t have PCs but do want Internet access, could end up with Microsoft software in their homes.

For their part, Comcast officials appeared elated by the $1-billion endorsement from Microsoft.

“In some ways, it is a defining moment for our company,” said Brian L. Roberts, president of Comcast. “This is an incredible endorsement of our cable strategy, and an affirmation of the possibility of bringing the PC and the TV together.”

Comcast has cellular telephone operations in the Northeast and also owns the Philadelphia Flyers professional hockey and the 76ers professional basketball teams. It is also one of a handful of cable companies that are beginning to offer Internet access over coaxial cable networks that were designed to deliver television programming.

Most people continue to get Internet access over telephone lines. But cable companies aim to capitalize on the fact that their networks can overcome one of the most common complaints among Internet users: painfully slow access times.

Coaxial cable networks can deliver Internet pictures and sound up to hundreds of times faster than ordinary phone lines. But cable access requires the use of a special modem, which typically costs much more to set up.

Telephone companies, including Pacific Bell in California, are also upgrading their networks and girding for a battle with cable companies to be the primary providers of Internet access, television programming and phone service.

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Biggest Broadbands

Comcast Corp., which received a $1 billion investment from Microsoft Corp. on Monday, is the nation’s fourth-largest cable company. Top five U.S. cable companies, by subscribers:

Company: Subscribers, in millions

Tele-Communications: 14.0

Time Warner Cable: 12.1

MediaOne*: 4.75

Comcast: 4.30

Cablevision Systems: 2.43

Note: Continental Cablevision, a division of U.S. West, has renamed itself MediaOne.

Sources: Broadcasting & Cable Magazine; National Cable Television Assn.

Researched by JENNIFER OLDHAM / Los Angeles Times