Microsoft, which is buying a 29.9% stake in Telewest Communications PLC, agreed to sever its contractual links with the second major shareholder of the cable company, thus preventing the U.S. software giant from exercising joint control over Telewest, at least on paper.

By distancing itself from AT&T Corp.'s Liberty Media, which owns 25% of Telewest, Microsoft assuaged the commission's fears that the two companies, acting in concert, could potentially coax Telewest into choosing Microsoft's software for its cable set-top boxes. (Telewest's remaining ownership is split among an array of other investors.)Having stripped the joint-control element from its investment, Microsoft has escaped the commission's imminent rejection of the deal, which was threatened last week. Since the transaction has been modified and no longer entails a change of control of Telewest, the commission no longer has jurisdiction over the deal, and Microsoft is free to proceed with its investment.

Keys to control
Both Microsoft and the commission's antitrust regulators claimed victory Friday. Microsoft was happy to salvage its investment from the regulatory ax. And the commission was equally happy to make Microsoft formally give up the authority to tell Telewest what to do.

Friday's compromise capped months of wrangling between Microsoft and the commission, which had been critical of the deal from the start.

Left unrestricted, Microsoft's foray into digital television through joint control of Telewest "could have substantially reduced the technological alternatives available to customers and led to potentially higher prices for households, which are expected to embrace digital TV as the main means to access the Internet and e-commerce," the commission said. It was also concerned about Microsoft's small stake in Telewest competitor NTL Inc.

In the course of the commission's antitrust inquiry into the Telewest deal, Microsoft has always pledged that it wouldn't attempt to influence Telewest's software choices and that its investment was designed to be a "learning experience." Indeed, Telewest doesn't use Microsoft software in its set-top boxes.

"None of the economics [of the deal] has changed," said John Frank, a senior corporate attorney for Microsoft in Paris. "We want Telewest to go to market with great services for consumers and we want them to consider our technology." But that's a decision for Telewest to make, he added. Telewest said that it "will greatly benefit from Microsoft's support as a major shareholder in our business."

Commission officials were also content with the outcme. "Microsoft paid all this money to be a passive player," said one. Microsoft agreed to drop its contractual abilities to coordinate key votes with Liberty Media, to veto any change of Telewest's chief executive and to give"reasonable approval" to nominees to Telewest's board of directors, among other similar measures.

The commission had been unwilling to accept Microsoft promises about future conduct.

Defining digital regulation
In the course of the investigation, which started in February, the commission and Microsoft clashed over market definitions used to assess the antitrust aspects of the deal, according to people familiar with the situation.

While the commission defined the market very narrowly, saying that cable set-top boxes would be the dominant means of accessing digital television, Microsoft and some of its allies argued that digital television can be accessed through a variety of means, such as high-speed phone lines and satellite dishes.

This disagreement underscores the difficulty of regulating nascent high-tech industries, about which even experts have only vague predictions.

Still, the commission laid out its approach to regulating the digital television market as such: "Since the final consumer cannot decide on the software and the digital services that are delivered to their homes via the set-top boxes, it is of the utmost importance that cable operators be able to make technology decisions on the basis of fair and equal competition."According to people familiar with the situation, even within the commission's antitrust department not everyone saw eye to eye on the Microsoft case. Some in-house lawyers argued that the commission's case against Microsoft was based on a shaky ground, these people said. One commission official dismissed this theory as "complete nonsense.

-- The Wall Street Journal