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Microsoft-TCI Deal Hits Snag

As Microsoft Corp. battled claims of monopolistic behavior
at a Senate hearing last week, its big link into cable via digital set-tops seemed to be
suffering setbacks, as well.

In January, Tele-Communications Inc. executives worked
through the night to hammer out what TCI chairman and CEO John Malone repeatedly called an
"arm's-length agreement" for a minimum of 5 million copies of
Microsoft's Windows CE operating system.

The deal followed similar all-night negotiations the
previous evening with Sun Microsystems Inc. for its PersonalJava software, which will be
used as "middleware" for content developers that want to write applications for
the OpenCable platform.

But executive sources close to the discussions last week
cited lingering issues that may not be resolved quickly enough to meet TCI's
aggressive OpenCable schedule.

For starters, according to sources, Microsoft is not
comfortable with a request by TCI to put its source code -- the jewels of any software
program -- into a TCI escrow account.

Software escrow generally protects software purchasers
against great calamity, such as bankruptcy by the software provider or the emergence of
bugs that radically reduce performance.

Executives also pointed to the fact that Windows CE has
never run on a digital set-top, and they cited delays in Microsoft's development of a
"customized" version of Windows CE that it is developing for digital set-tops.

One cable engineer familiar with both Windows CE and
PersonalJava said that technically, the two should work together, but "where I'd
have concerns is with the performance and overhead costs of putting out such a fat
operating system with a relatively pudgy middleware layer on top of it."

Plus, the long history of antagonism between Microsoft and
Sun is seen by many as a potential roadblock to the level of cooperation that must
accompany the fast-track set-top environment.

TCI and Microsoft officials declined to comment on the
matter last week.

When TCI and Microsoft first forged the alliance, Malone
said the letter of intent was not exclusive, but he also said that he wasn't seeking
any other operating-system partners. Now, two months later, at least three other
operating-system providers are rumored to be watching hungrily from the wings: Sun, Sony
Electronics Inc. and PowerTV Inc.

Sony took a 5 percent equity stake in General Instrument
Corp. -- TCI's main set-top hardware vendor -- two months ago, citing its interest in
cable as an important contender in bringing digital entertainment to consumers.

In that deal, Sony purchased 7.5 million new shares of
GI's common stock, at $25 each, for a total of $185 million.

PowerTV, the Cupertino, Calif.-based operating-system
vendor, provided the operating system of choice for Scientific-Atlanta Inc., which starts
shipping its Explorer 2000 line of set-tops this month to Time Warner Cable and eight
other operators.

TCI and Microsoft have a long history of difficult
negotiations, dating back to a scheduled, then scuttled, batch of interactive-television
tests in the Seattle and Denver markets four years ago.

Regardless, TCI remains bullish with its plans to furnish
its own systems and those of its "friends and family" -- meaning TCI affiliates
and takers of its Headend in the Sky service -- with 11 million or more digital set-tops
manufactured by GI.

The MSO issued a set-top request for proposals in
mid-December, and it subsequently handed to GI a $4.5 billion order for between 6.9
million and 11.5 million of its forthcoming DCT-5000 advanced digital set-tops, to be
delivered over the next three years.

As part of that arrangement, TCI maneuvered a complex
equity deal that ultimately gives the MSO and nine other operators between 16 percent and
26 percent of GI's equity, in the form of warrants that become active after the MSOs
take delivery of the set-tops.

TCI has yet to select a microprocessor for the platform,
but it is still leaning toward a 200-MIPS (millions of instructions per second) platform,
executives have said.

Malone has also said that the more pressing issue of memory
and how much is needed -- given the hefty needs for both the operating system and
PersonalJava -- will be sorted out shortly.

High-speed-data service @Home Network is also expected to
factor heavily into TCI's OpenCable plans by leveraging its wide suite of aggregated
broadband content to work on television sets.

Two weeks ago, @Home -- in which TCI is a major investor --
said it had reached an agreement with TCI to develop IP (Internet-protocol) services and
to provide integration services for the 11 million advanced digital set-tops.