Microsoft played an important behind-the-scenes role as the third-largest U.S. cable TV provider, Comcast, acquired nation-leading AT&T Broadband in a deal worth US$72 billion. Microsoft also invested US$500 million in a South Korean telephone company and announced a delay in the sale of travel site Expedia to content company USA Networks.

Microsoft in the Comcast-AT&T Deal

Microsoft, which already had a stake in both Comcast and AT&T, cleared the way for Comcast's purchase of AT&T Broadband by agreeing to lighten the debt load of the combined company. Specifically, Microsoft agreed to convert its AT&T preferred securities—which it purchased for US$5 billion in May 1999, and which required AT&T to pay Microsoft a yearly dividend—into regular shares of the new company. By converting the shares, Microsoft reduces the new company's dividend obligation (which can be viewed as debt) and leaves it more cash for building new business and acquiring new customers. The new company will have approximately 21 million cable TV subscribers in 41 states, 2.2 million cable Internet access subscribers and, according to AT&T Chief Financial Officer Chuck Noski, is expected to bring in US$18 billion in annual revenues.

In addition to its AT&T investment, Microsoft also invested US$1 billion in Comcast in 1997 for a 15% stake. Its participation in the merger between the two companies was primarily defensive, as archrival and number-two cable provider AOL Time Warner was also making offers for AT&T's cable business. If successful, AOL would have controlled one-third of the U.S. cable market, with 25 million subscribers, giving it tremendous leverage in the nascent markets for broadband Internet access over cable and for interactive TV. AOL, which has alliances with Microsoft rivals such as RealNetworks and Sun Microsystems, would probably not have used Microsoft technologies—such as Windows .NET Server or the Microsoft TV platform—to provide services to this enormous customer base. The new company is expected to sell AT&T's current 25% stake in Time Warner Entertainment, a division of AOL.

Microsoft will gain a voting share in the new company, but the exact proportion is difficult to determine because Comcast's founding Roberts family will retain a 33% voting interest in the new company while owning less than 2% of its common shares. For its part, Comcast will pay AT&T US$47 billion in stock and assume US$20 billion in debt.

Korea Telecom Investment

Microsoft has bought US$500 million worth of bonds in Korea Telecom (KT), the formerly state-run South Korean telephone company, with the option to convert the bonds into a small (probably less than 5%) equity stake. In turn, KT has agreed to use various Microsoft products, including Windows Messenger for voice-over-IP services, and will set up a cobranded Web portal with MSN. With 3.8 million broadband subscribers, KT could also give Microsoft a welcome test market for broadband-dependent initiatives, such as video-on-demand using Windows Media Technologies, or network-based productivity applications using .NET My Services. (See ".NET My Services Picture Getting Clearer" on page 26 of the Dec. 2001 Update.)

The KT investment echoes past investments in formerly state-run telephone companies. In May 2001, Microsoft put US$127 million into New Zealand's NZ Telecom (see "Investment Update" on page 22 of the July 2001 Update), and in Mar. 1999, it invested US$38.6 million in TV Cabo, the cable and satellite TV division of Portugal Telecom.

Expedia Sale Delayed

Microsoft's planned sale of travel site Expedia to USA Networks has been delayed pending the purchase of USA Networks by French media conglomerate Vivendi Universal. The sale, which was announced in July 2001, was expected to close in the quarter ending Dec. 31, 2001, giving Microsoft a pretax gain of US$650 million. It is now expected to close before the end of Microsoft's fiscal year on June 30, 2002.

For a complete list of Microsoft's investments and acquisitions, see www.microsoft.com/msft/invest.htm.