Microsoft Bites Peach for $75M, Adds to Interactive-TV Offerings

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New York -- Microsoft Corp. gained an inroad into digital
set-top boxes through its agreement to acquire control of Israeli interactive-television
company Peach Networks Ltd.

Two-year-old Peach, based in Tel Aviv, provides software
solutions that enable cable-television subscribers to access the Internet, interactive
gaming functions and PC functions through their TV sets. It has 46 employees.

Peach is 57 percent-owned by Elbit Ltd., based in Haifa,
Israel, which said it will get $43 million for its stake, valuing Peach at $75.4 million.
Microsoft did not disclose financial details of the deal.

Microsoft will fold Peach into its TV Platforms Group, and
it will offer the Peach technology in conjunction with its higher-end "Microsoft
TV" platform.

Peach is in beta-tests with three cable companies in
Europe, and it is in discussions with several MSOs in the United States.

With the Peach purchase, Microsoft gets access to
technology that helps it to expand into an almost-forgotten market for data-over-cable
service targeted to lower-end digital boxes.

Peach's software is deployed at the headend, and it can be
accessed by customers with basic boxes.

"It made sense to make an immediate entry into the
lower-end environment," Microsoft spokesman Ed Graczyk said.

Graczyk added that his company has been looking closely at
companies in the lower-end of the interactive space, and Peach had the best overall
technology. "Of the things Microsoft always looks for, first is technology and second
is talent," he said. "This is a great example of both."

Peach president Ofir Paz will continue to head the
operation in Israel, Graczyk added.

Although Peach has been in discussions with several MSOs,
the company admitted that convincing operators to participate in beta-tests has been a
challenge. The Microsoft acquisition gives the company and its technology a big
credibility boost that might make MSOs give Peach a second look.

"Most [U.S.] MSOs are aware of us," Peach general
manager of U.S. operations David Brown said. "With Microsoft, we have a broader
audience."

Brown said Peach first approached Microsoft last year about
forming a marketing partnership. Peach supports Microsoft's "Windows NT"
operating system.

"They took us very seriously, and [the acquisition]
was the result," he added.

Peach is not the only company offering a lower-end solution
to Internet access over the television set. One such company -- WorldGate Communications
Inc. -- also got a major lift from the news of the Microsoft investment.

WorldGate's stock, traded over the counter, rose 13 percent
to close at $34.50 Feb. 29, the day of the Microsoft announcement. However, the stock
retreated the following day, closing at $31.50.

Although Peach's service is basically an Internet-over-TV
service, the company is likely being thought of as an interim technology, or one to
attract a customer base before migrating them to a more feature-rich and expensive
service.

Microsoft has been addressing the lower end of the market
through its WebTV Networks offering. But so far, according to one analyst, that service
has not attracted the numbers the company may have initially hoped for.

"Clearly, this market is going to heat up," said
John Corcoran, broadband and new-media analyst at CIBC Oppenheimer Corp. "WebTV is
the market leader, but it has done a bit of a disservice to the segment -- it's
narrowband, and it's awkward to use."

WebTV, which has stalled at about 1 million subscribers,
has also appealed to a less-than-stellar demographic -- older retirees.

"Advertisers and communications partners want young,
technically savvy yuppies [as customers], and that's not what they're getting with
WebTV," Corcoran said.

Still, the acquisition of Peach could open up another
segment to Microsoft, and perhaps serve as a springboard to more advanced offerings down
the road.

Because the Peach system works with existing digital
set-tops already out in the field, Corcoran said, Microsoft could build its customer base
now and eventually migrate them to another higher-end service.

And because cable operators are going to be looking for
ways to extend the life of the basic digital set-top, he added, they, too, might be
attracted to the Peach service.

"The next-generation [digital set-top] goes for $450
to $500 a pop. That's a lot of money," Corcoran said. "If you are an operator,
you're asking yourself, 'What can I do today to extend the useful life of the equipment
I've already deployed?' This may look very attractive to cable operators."

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