Microsoft, Compaq Plunk $425M Into Road Runner


After six months of stutter-steps, Time Warner Cable's
Road Runner and MediaOne Express finally merged last week, accepting a $425 million
investment from Microsoft Corp. and Compaq Computer Corp. and defining everything about
the high-speed-data service except who will run it.

The merger also creates a definitive two-player
high-speed-data market for cable -- Road Runner and @Home Network -- which points to a
footrace for the 30 million subscribers served by smaller MSOs that haven't yet
affiliated with either party.

"This should come as good news for the independents,
[as they can now] angle in either direction to get a better deal," said Michael
Harris, an analyst with Phoenix-based Kinetic Strategies Inc., adding, "I don't
think it's coincidental that @Home spent the last few months locking down

Notably, a handful of smaller players -- ISP Channel,, HSANet Corp. and Internet Ventures Inc. -- are all squarely focused on
handling the high-speed-data needs of cable's smaller operators.

But in the end, it will likely come down to revenue splits.
Analysts said Road Runner is already offering a more palatable split to unaffiliated MSOs,
leaving them a 70 percent share, with Road Runner also ponying up cable-modem-headend
gear. @Home offers a 65-35 split, analysts said.

Analysts also said the $425 million investment from
Microsoft and Compaq gives Road Runner a higher market capitalization than what @Home
garnered by going public, and they doubted that Road Runner would take the
initial-public-offering route anytime soon.

"@Home only raised one-half of that amount,"
Harris said. "It shows that you can make a big IPO splash and watch a bunch of
executives get really rich, or you can get cash in other ways, which is what these guys
have done."

The nod to Microsoft and Compaq -- which will each sink
$212.5 million into Road Runner for 10 percent stakes in the venture -- also shuts out
several other Silicon Valley hopefuls that similarly rallied with inclusion cash.

Since Road Runner and MediaOne Express announced plans to
merge in December, a flurry of big names offered up bags of cash; Intel Corp. and Oracle
Corp. subsidiary Network Computer Inc. were two of the more notable checkbook-flashers.

NCI -- which went so far as to send a public-relations
executive to New York in May, in anticipation of signing and publicizing a deal -- may
still have a play.

Executives with Road Runner said that unlike @Home, which
is actively developing ways for its broadband content to work on TVs, Road Runner will
leave those decisions to the individual cable operators.

That means that NCI still has a shot at getting its
"DTV Navigator" products into Time Warner and MediaOne systems.

It also means that Microsoft was unable to win guaranteed
slots for its Windows CE operating system and WebTV Networks software in Road Runner
affiliates' digital set-top devices.

Doug Holmes, executive vice president for MediaOne, said
the Microsoft/Compaq funds are "clearly valued as more than just a financial
investment," but he noted that other than a technical-advisory panel, Microsoft and
Compaq received no governance rights.

"Where they will be active is in setting the
technological direction of the business," Holmes said, describing a technical
committee that's represented 50 percent by Microsoft and Compaq and 50 percent by the
cable partners.

Microsoft thus will have an insider's role in helping
to shape Road Runner's architecture, which could give it an inside track in supplying
software to fit those specifications.

"It feels terrific to finally get it done," said
Glenn Britt, president and CEO of Time Warner Cable Ventures.

Britt said that while there are no contractual agreements
that mandate the use of Microsoft's Internet Explorer software, "clearly, we
expect to use it, and Microsoft has made great progress on it."

Road Runner is also counting on Microsoft's expertise
in client, server and application software "as part of a major effort to accelerate
the delivery of broadband services over cable modems to consumers and small
businesses," Britt said.

Microsoft's intention is to speed the market for
high-speed services, said Steve Guggenheimer, group product manager for Microsoft's
Digital TV group.

"What we get is an opportunity to help determine what
the right technologies are to make this happen more quickly," Guggenheimer said.
"This isn't just a, 'Hey, here's the money' thing. It's a,
'Hey, here's the money -- and here's the expertise' thing."

Compaq said it intends to market "cable-ready PCs
[personal computers]," outfitted with Ethernet cards, high-speed-data software and --
when they're available, possibly by Christmas -- standards-based cable modems.

Ownership of the venture -- on a fully diluted basis, and
after the 20 percent sliced off for Microsoft and Compaq -- is: Time Warner
Entertainment-Advance/Newhouse (26 percent); MediaOne Group (25 percent); Time Warner
Entertainment, through Time Warner Cable (20 percent); and Time Warner Inc. (9 percent).