The Redmond, Wash.-based software giant will buy 24.6 million special common shares for $500 million, as well as $500 million of newly issued preferred shares, convertible into 21.2 million common shares at an initial price of $23.54 a share.

The transaction, for the first time, gives Microsoft partial control of cable television distribution. It already has strengthened its position as a content provider with the creation of MSNBC, its cable news operation jointly owned with General Electric Co.'s NBC.

Microsoft's strategy, analysts said, is now to provide the internal software that drives the cable networks from switching equipment to the set-top boxes. This may also allow the company to take advantage of a shift over to high-definition television.

In addition, the deal positions Microsoft to supply the infrastructure as cable operators expand high-speed Internet access to consumers.

"Our vision connecting the world of PC's and TV's has long included advanced broadband capabilities to deliver video, data and interactivity to the home," said Microsoft Chairman Bill Gates, who previously has criticized the industry for the sluggish pace at which companies convert to newer technologies.

More importantly, said Rick Sherlund, software analyst at Goldman Sachs, the deal gives Microsoft a better chance at establishing Windows as the controlling software for a new generation of digital television. (118K WAV) or (118K AIFF)

Still, some experts say the Comcast deal alone may not be enough to enable Microsoft to set digital TV standards.

"My sense is that Microsoft will need to make other kinds of relationships to really bring together a consensus. Remember, there are still a lot of people out there who are suspicious of Microsoft and worried that anything Microsoft touches it will eventually dominate," said Roger McNamee, general partner of Integral Capital Partners.

Analysts also look for the two companies to cooperate on Internet commerce and other common goals.

"Comcast's other leading asset is QVC, the country's leading electronic reader over cable today. That's a tremendous building block that can be used as the Internet opens up and electronic commerce emerges perhaps as one of its biggest applications," said John Tinker Sr., media analyst at Montgomery Securities.

The transaction is expected to close this month.

Shares of Microsoft (MSFT) ended the day up 1-1/4 to 125-1/4 and stock of Philadelphia-based Comcast (CMCSA) climbed 2-15/16 to 21-3/8.

Analysts generally agree the deal represents Microsoft's need to plan for the future. For the same reason, it announced on April 7 its intentions to buy WebTV.

Since Comcast is also in the cellular phone business, analysts expect Microsoft to try to put Windows not only on PCs and TVs, but on cell phones as well.