Microsoft Buys into Rogers

Microsoft Buys into Rogers

Call it convergence. Bill Gates, in Toronto last fall for the first time in a couple of years, runs into Ted Rogers in the middle of the lobby of the Royal York Hotel. Rogers, who would love to collaborate with Gates's gigantic Microsoft Corp., is on a long list of Canadian executives set to sit down with Gates while he's in town. Rogers is early and Gates is available. So they start "tossing out our hopes and dreams to each other," says Rogers, president and chief executive officer of Toronto-based Rogers Communications Inc.

Over the winter, Gates and Rogers kicked around the notion of working together to develop the computer software products needed to run interactive digital television. But Redmond, Wash.-based Microsoft and AT & T Corp. - which has a number of business alliances with Rogers Communications - "were not the closest of friends," Rogers says, making any such partnership awkward. Then, Gates bought three per cent of the U.S. phone and cable behemoth in May for $5 billion (U.S.). Suddenly, talks with Rogers intensified, culminating in last week's announcement that Microsoft is putting $890 million into the Canadian firm. In exchange, Microsoft gets 9.2 per cent of Rogers's equity and a promise that its operating system will be used in computers inside at least one million digital television set-top boxes leased to Canadian cable subscribers.

Investors were delighted, and Rogers's common shares jumped to $30.90 by the end of last week from $26.95 before rumours of the deal began trickling out on July 9. But what grabbed as much attention as a Canadian deal with the giant of software-making was the suggestion that, as soon as next year, millions of couch potatoes across the country could be sending e-mail and surfing the Net through their television sets.

A rudimentary form of digital cable is already on the market. Shaw Cablesystems Ltd. of Calgary has offered this service for almost two years. The boxes combine a converter and computer in a piece of equipment that looks like a VCR. Rogers unveiled its new digital service earlier this month. Montreal-based Cogeco Inc. and Le Groupe Vidéotron Ltée. are in the process of launching similar services.

At the moment, however, new digital services consist of a slightly better picture, a bunch more channels and, on Rogers cable, an interactive TV guide. Using a remote, a viewer can call up information about what is on the tube according to time, name or subject. The latest set-top boxes enable customers to do this while running a television program in one corner of the set. What's missing is the interactivity that is supposed to revolutionize communications and render PCs obsolete.

Just wait a few months, the cable companies say. The big barrier to interactive TV is the software system needed to connect the newest household computer to the plethora of goods and services available on the Internet. This is where Microsoft and other software designers come in. According to Rogers, his deal with Gates will not only speed up the Canadian cable transformation, it will pave the way to what he calls "other intimacies" between Microsoft and his subsidiary companies.

But do Canadians want the Internet on their televisions? So far, only 12 per cent of Shaw's subscribers have signed up for digital. Josh Bernoff of Forrester Research Inc. in Cambridge, Mass., says interactive TV will not take off unless people can do everything "holding the remote in one hand and a beer in the other." John Tory, president and chief executive of Rogers Cablesystems Ltd., agrees. "That will be the measurement," he says. Cable providers recognize that a lot of their customers like television because it requires marginal effort. "But we think," Tory says, "it will be extremely appealing as soon as people see that this will make your TV do more things for you."

Maclean's July 26, 1999