Analysis: Microsoft set to dominate broadband, squares up to BT

Microsoft sets its sights on the broadband Internet market in the UK. Analysis by Jane Wakefield

Microsoft has emerged from its DoJ mauling bruised but determined and now it wants a large piece of the broadband pie. Although the EC is watching its attempts to gain a foothold in the cable market like a hawk, some commentators think that Microsoft's plans for dominating the next generation of Internet services will make its titanic antitrust fight look like a walk in the park.

Microsoft has come out of its first round broadband battle with government with a smile on its face -- albeit something of a forced grin. As of Tuesday the software giant has a 22.98 percent stake in UK cable company Telewest, which, while not quite as much as it would have liked, is enough to set it off on its journey to dominate the broadband Internet market.

Telecoms analyst with research firm IDC, Nicky Walton, believes Microsoft's stake in Telewest will make the battle for broadband -- currently being fought in the UK between cable and DSL operators -- all the more interesting now the software giant is going head to head with BT.

"One way of looking at the deal is that it puts Microsoft in direct competition with BT," she says. What's more, she believes Microsoft can win. "The cable companies have the ideal infrastructure for broadband, far more so than BT."

Henning Dransfeld, an analyst with Ovum, is concerned that Microsoft is about to repeat its domination of the PC and Internet browser market in the broadband arena. "In the battle between cable modems versus ADSL, I am not sure how effective cable will be but if it is the winner, Microsoft will be very powerful in Europe," he says. "There will be fresh concerns about market domination. It is possible Microsoft will be the dominant player."

As analysts scratch their heads to work out whether ADSL, cable modem or satellite will win the race to bring broadband into our homes, Microsoft claims to be indifferent. "We are completely network agnostic," says group manager of network solutions at Microsoft Bruce Lynn. "We have invested in cable, DSL and satellite. In fact, we would invest in broadband carrier pigeons if someone could find a way for them to deliver two megabits into the home."

With Microsoft already owning a small stake in Telewest's main rival, ntl, most commentators maintain that the software firm is betting on cable modem technology.

Originally Microsoft had its eyes on an even bigger piece of Telewest and was set to gain joint control of the cable firm along with Liberty Media Group -- a subsiduary of AT&T. This forced an EC investigation which ruled it would have been detrimental to the emerging UK cable industry allowing Microsoft to "determine the technology decisions of the emerging digital cable industry in the United Kingdom leading to higher prices".

Microsoft backed down, agreeing to sever the link with Liberty and restrict its stake. In typical Microsoft fashion it claims those who said it wanted any more have got it wrong. "Twenty three percent is precisely what we wanted," claims Lynn. "There has been a lot of confusion. We never wanted to be a majority shareholder, we just wanted to make a strong investment in a strong European broadband player."

Dransfeld is not convinced the EC was tough enough on the software giant. "I am surprised they got off so lightly. They could have been prevented from taking any stake," he says. He is also worried that the EC took too short term a view of Microsoft's intentions. "The Commission looked at possible dominance of the digital TV access market but didn't look at the broadband market in general," he says.

Post-DoJ Microsoft is obviously slightly humbled and is prepared for further investigations but it remains defiant. "We will always be under scrutiny but we are not afraid of future scrutiny," says Lynn.

IDC's Walton is confident the EC will never let Microsoft run away with the lion's share of the broadband market. "The regulators wouldn't let Microsoft come in and hamper the competitive market it has striven to achieve," she says. "Microsoft weren't allowed to have joint share of Telewest for exactly that reason and its reduced share limits the chances of it becoming the dominant player."

Microsoft also dismisses the idea it will dominate broadband roll out. "It is impossible for any one company to dominate the broadband market. There are too many components and no one company can deliver it all," says Lynn.

Broadband is the next big thing, set to transform the Internet from a clunky and frustrating technology to a fast, video-rich wonderland of possibility. With more and more people keen to move away from PC-only Internet access it is predicted that interactive TV could become the unsung hero of the broadband revolution.

This is borne out in a recent Which? survey where one in three people claimed to want Net access through their TVs. Microsoft, late to both the Internet and mobile parties, is determined to become a key player in the emerging interactive TV market.

Lynn likens Microsoft's broadband plans to its fight for control of the personal PC market in the eighties and nineties. "The limits of the PC market were constrained by capacity which is why we worked with Intel to make sure the market expanded," he says. Now the restraint is bandwidth and cable companies are becoming Microsoft's new Intel. "Bandwidth is the bottleneck to our growth. The faster broadband rolls out the bigger the market which is good for us," says Lynn.

Dransfeld believes getting its Windows CE operating system -- which has not been the success Microsoft hoped it would be in the handheld market -- in set top boxes is the key reason the software firm is tying itself up with cable companies.

Microsoft agrees and has a typically understated goal for the future. "It would be our vision in five years time for everyone to have broadband access and we want to be the leading provider of technology for that broadband," says Lynn.

BT had better watch out.

Check out ZDNet's Interactive Broadband Guide

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