By Richard Morochove
First published July 15, 1999
Why would Microsoft Corp. invest $600 million in a Canadian communications company that loses money more often than not? Because it's an important step in making Microsoft's software ubiquitous in Canadian homes.
Rogers Cablesystems, Canada's largest cable company and a subsidiary of debt-laden Rogers Communications, must make a large investment in new technology to upgrade its cable system for new digital services, such as interactive TV. Microsoft's investment helps finance Rogers' upgrade and makes it happen quicker. It also ensures that MS TV software and other Microsoft services will be seen in one million Canadian homes.
Is Microsoft bribing Rogers with 600 bucks to get into each cable subscriber's home? Not according to Ted Rogers, president and CEO of Rogers Communications. In a conference call, Rogers said he would use Microsoft's TV technology even without the money from Redmond.
While Rogers has not agreed to use Microsoft's products exclusively, there's no question the investment cements the technology deal between the two companies. On a fully-diluted basis Microsoft could own 9.2% of Rogers Communications. That's not enough to control the Canadian company, but sufficient to influence it.
The new digital services won't be available until next year, so you won't notice any immediate difference even if you are a Rogers Cable subscriber. Over the next five years Rogers intends to replace existing cable converters with one million new set-top boxes that, in effect, are simplified computers.
The boxes will run a version of the Windows CE operating system known as Microsoft TV client software. These boxes will use the cable connection as a network to link up with powerful computers at Rogers using a version of MS Windows 2000 known as Microsoft TV Server software.
These little set-top boxes will open your TV to the world of the Internet. While watching a live sports broadcast you'll be able to check out a site with player statistics, for example. Many of these Internet-related services will be based on technology supplied by Microsoft.
You'll see a Rogers-branded web e-mail service, based upon Microsoft's Hotmail technology. With some 45 million mailboxes, Hotmail is the world's largest e-mail provider. The free web e-mail service was purchased by Microsoft about a year and a half ago.
Other Microsoft services that will be offered by Rogers include MSNBC, MSN Search and Passport, which keeps track of your name and credit card information. Passport makes it easier to shop from different sites on the Net since you don't need to provide the same information again and again on each commerce site.
In one sense, the new services Rogers Cablesystems will provide represent the next generation of Microsoft's Web TV, reviewed in this column last year. In fact, the Rogers service will use some Web TV technology. Web TV consists of a set-top box that connects to both cable TV and a telephone line. The Web TV box cleverly combines television programming from the cable company with Internet services from a dial-up Internet Service Provider (ISP).
The set-top boxes used by Rogers, made by Scientific Atlanta, combined with Microsoft's software, eliminate the need to hook up a telephone line and dial-up an ISP to provide the Internet component. Both television and Internet services come through a new two-way cable connection.
The result is a rather clever Trojan Horse that will bring Microsoft's Windows into many more Canadian living rooms. Most cable subscribers will think they're getting a new converter box, when they're really getting a specialized Windows computer. It will automatically deliver Microsoft's Windows to a whole new audience of television watchers who would never think of buying a home computer.
If this service is nicely integrated, I suspect it will slow the subscriber growth rate for conventional ISPs that don't offer a combined TV/Internet service.
I expect Microsoft will strike deals with other Canadian cable systems to offer digital TV services, although perhaps not with the generous investment component of the Rogers deal.
Why did Microsoft make Rogers its first Canadian cable deal? Microsoft has always been interested in market share, so the cable company's large size works in its favour.
There are other factors at play. Ted Rogers has long been one of the innovators in the Canadian cable industry. He believes both companies share a common vision. Executives at both organizations know each other. For example, Ken Nickerson, general manager of The Microsoft Network Canada, formerly worked at Rogers.
Finally, there's the Microsoft money. It will shore-up Rogers Communications balance sheet and improve the investment ratings of its securities. If a little of the Microsoft magic rubs off, Roger's shareholders will be toasting the deal with champagne. CW
Richard Morochove, FCA, is a Toronto-based computer consultant.
Copyright ©1999 by Morochove & Associates Inc. All rights reserved. This work may not be copied or distributed by any means without our prior written permission.
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