Monday, Jun. 23, 1997
BILL GATES' PIPE DREAM
By Stacy Perman
After wiring the country with coaxial cable and falling heavily in debt doing so, cable-television outfits have yet to realize a world in which television, telephones and computers meld into an "interactive TV" that lets viewers order movies or pizza, E-mail the kids' teachers, shop or browse the Internet. Cable still means endless reruns of The Odd Couple, wrestling and infomercials.
But the convergence of television and computers got a big push last week when a couple of digital-era bosses, Microsoft king Bill Gates and Brian Roberts, president of Comcast Corp., agreed on a deal in which Microsoft will invest $1 billion for an 11.5% stake in the Philadelphia company, the nation's fourth largest cable operator, with 4.3 million subscribers. Gates and Roberts intend to provide what the other cable guys promised years ago and so far have been unable to deliver: a new set of digital services and a bigger pipeline to pump it through. For viewers that means more channels, better picture and sound, onscreen interactive TV guides and high-speed cable modems that can process instant access to the Internet via cable wires.
The deal links two techno-forward cultures run by entrepreneurial boomers. Gates, 41, and Roberts, 37, were seated next to each other at a Seattle restaurant seven weeks ago at a dinner Gates was giving for visiting cable executives. Since it was his nickel, Gates complained about the slow pace at which cable-TV outfits were upgrading their systems to carry Internet traffic. Roberts retorted, "Why don't you invest in the cable industry? It would make a really strong statement."
Gates was surprised to learn that such a statement would be cheap: $1 billion could buy about 11% of Comcast. (A similar slice of his company would cost $18 billion.) Roberts soon returned to Seattle with his investment banker Steven Rattner, the newly elevated deputy CEO of Lazard Freres in New York City. Like Roberts and Gates, Rattner is a low-key baby boomer with an intense interest in media and technology. On a Tuesday morning, four weeks after the dinner, Gates and Greg Maffei, Microsoft vice president for corporate development, went to Rattner's suite at the Woodmark Hotel, where, over corn muffins, they discussed the deal with Roberts. They settled the details that evening in Gates' office, though not before Gates got a lesson in the preferred securities Microsoft was buying as part of the deal. Says Roberts: "We don't need six months of negotiations with teams of contentious people. This is [about] people who are accountable to senior management making up their minds to do something and not betting the ranch."
In reality, there's not much left of the Comcast ranch to bet. Roberts and his father Ralph, 77, who own 7% of Comcast stock, have spent billions building up a collection of programming and telecom services. The list includes 57% of QVC (home shopping); a 68.8% piece of E! Entertainment (programming); the N.B.A.'s Philadelphia 76ers and the N.H.L.'s Flyers (more programming); a 20% stake in Teleport Communications Group (business telephone service); and a 15% position in Sprint Spectrum (cellular telephones).
Comcast needs a bigger pipeline than conventional cable--called broadband in the industry--to handle that load, and Microsoft can help finance it. "By developing a broadband pipe, connecting it to a state-of-the-art chip and supplying the latest version of software, we will enhance both TV and the PC," says Roberts. To follow its own growth trajectory, Microsoft needs broadband to transmit its multimedia cornucopia of online news, entertainment and shopping. MS money now allows Comcast to accelerate construction of fiber-optic cable to expand high-speed Internet access, develop programs with Microsoft and reduce its debt.
The Comcast venture is Microsoft's attempt to push its content beyond the computer literate and into the mass market. Two months ago, Gates paid $425 million for WebTV Networks, which makes set-top boxes that allow Internet surfing through TV sets. "Gates is really confirming that the Internet is a medium, not a technology," says Christopher Dixon, a media analyst at Paine Webber. "They have content and need distribution. The key is that Microsoft has accelerated the development of opportunities in line with its prior investments."
Gates and Roberts arrived at this intersection from different directions. Gates dropped out of Harvard and built his mammoth software firm from his innate programming skills. Roberts, a Wharton graduate and the son of a Philadelphia belt manufacturer turned cable entrepreneur, learned his business at his father's side. Ralph Roberts left the belt business in 1962, fearing that beltless trousers would render his product useless. Brian stepped into the president's shoes in 1990.
Microsoft no doubt hopes to galvanize others into investing. FCC chairman Reed Hundt believes the deal will prompt the cable industry and then the phone companies to up their investment in interactivity. "For the past year and a half the cable industry has been trying to explain to everybody what they have and how valuable it is," says Hundt. "No one was listening until Gates gave his stamp of approval."
Roberts is positively gleeful that he didn't cave in earlier to shareholder pressure to ease some of Comcast's $7.3 billion debt in the face of what seemed to be declining returns and increasing competition. "People thought satellites would come and wipe out cable," says Roberts. "We thought that if we provided good service and lots of channels, and later offered digital service, we would have a whole new business." And it doesn't hurt one bit that Bill Gates has the very same vision.