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Microsoft Sells Off Comcast

Software giant Microsoft has sold its 7.3% interest in Comcast, according to a Securities and Exchange Commission filing after market close on Jan. 16, selling more than 150 million shares of the cable operator's stock over the past 12 months.

In a 13G filing (made by holders of 5% or more of the outstanding stock of a company) late that day, Microsoft said that it owns no shares of Comcast. In contrast, in a 13G filing made on Jan. 15, 2008, the software giant said it owned 150.9 million shares of Comcast stock, or about 7.3% of the cable operator's outstanding shares.

Comcast stock has been battered along with the rest of the market over the past year, although it has weathered the storm better than some. Shares of the nation's largest MSO were down about 7% in 2008, outperforming its peers, which were down a collective 22% in 2008.

The stock took a beating Jan. 20 — the first day of trading after the SEC filing — dropping 8.6% ($1.31 per share) to $14.02 each. That decline was likely more due to the overall decline in the market — the Dow Jones Industrial Average sunk 332 points that day and all MSO stocks lost ground.

Microsoft's decision to bail out of Comcast had more of a symbolic impact than a financial one. The software giant gave cable a massive boost when it invested $1 billion in Comcast in 1997, a move that instantly legitimized the industry in Wall Street's eyes and led to the nearly 10-year rally in cable stocks.

The move also signaled Microsoft's aggressive foray into cable — the $1 billion investment carried the caveat that Comcast was to buy 500,000 set-top-boxes powered by Microsoft software. The Comcast investment was just the beginning of Microsoft's TV strategy — that year it bought the ill-fated WebTV for $425 million and prior to that had dipped its toe in the programming waters by forming a joint venture that later became MSNBC.

In 1997, Microsoft chairman Bill Gates outlined a strategy that seemed to be centered on using the cable pipe to pump advanced services into the home. “Our vision of connecting the world of PCs and TVs has long included advanced broadband capabilities to deliver video, data and interactivity to the home,” Gates said in a statement announcing the $1 billion investment. He added that the investment “will enhance the integration of broadband pipes and content to expand the services offered to consumers.”

Comcast chairman Brian Roberts in a statement at the time called the investment an “endorsement of Comcast's vision to use its cable networks as a broadband vehicle to homes, schools and businesses.”

But what had started with such promise turned out to be a major bust. Comcast did buy those set-tops, but according to published reports let most of them gather dust in a warehouse. And the aggressive launch of Microsoft's interactive programming guide — Comcast's Seattle system, near Microsoft's Redmond, Wash., headquarters was the first market — never gathered the anticipated steam. In 2007, Comcast pulled the plug on that market, replacing Microsoft's interactive programming guide with its own IPG.

It is likely that the shares Microsoft sold off over the past 12 months stem from Comcast's 2002 purchase of AT&T Broadband. As part of that deal, Microsoft agreed to exchange $5 billion in preferred AT&T securities for 115 million shares of Comcast stock.

Although the most recent filing did not say when Microsoft sold the stock or at what price, at Jan. 16 prices ($15.33 per share) the 150.9 million shares would have been worth about $2.3 billion.

Neither Microsoft nor Comcast would comment on the sale. According to several published reports, Microsoft may have been motivated by a need for cash — last year, it was in the midst of a failed takeover of Internet search engine giant Yahoo. And last Thursday, the software behemoth said it would lay off 5,000 employees — 1,400 immediately — as a result of the sluggish international economy.

The impact on Comcast is minimal and might actually help the stock in the long term.

In a research note, Sanford Bernstein cable and satellite analyst Craig Moffett said that the Microsoft investment has become more of an overhang on the stock of late because investors anticipated that the software giant would eventually liquidate its holdings. Microsoft's decade-old vision of connecting the PC and the TV has evolved into providing IPTV software and a program guide to telco AT&T's video service U-Verse.

Moffett said in his report last week that outside of AT&T, Microsoft has a modest software position in the Latin American market.

“Perhaps the best that can be said is that now the overhang is gone,” Moffett said in a research note. “And so too is the fiction that Microsoft will inherit the TV.”