Microsoft Buys $5 Billion AT&T Stake

Two giants will work together on TV set-top devices and broadband services.

Nancy Weil and Marc Ferranti, IDG News Service

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The agreements also call for the companies to work together on deploying broadband and Internet services to U.S. households. Executives from both companies emphasized that aspect of the deal during a press conference on Thursday.

AT&T currently has a commitment to use Windows CE in 5 million set-top boxes, and the new agreements call for it to use the operating system in at least 2.5 million to 5 million more devices.

The deal will mean "more set-top boxes sooner that will result in more choices for consumers, more real competition for local exchange carriers, more effective penetration of these [broadband] markets," said Michael Armstrong, AT&T chair, at the press conference.

AT&T also will see more growth in video, data, and voice markets, added Armstrong, who touted the arrangement with Microsoft as "a really strong endorsement by an outstanding company of the [AT&T] broadband strategy."

AT&T also has agreed to use other Microsoft software for e-mail and interactive television services.

Showcasing Cities--and CE

The two companies plan to deploy the Microsoft software in two "showcase" cities by the second quarter of 2000, and AT&T also will use Microsoft software with another company's server software in a third city, officials said.

They did not identify the cities except to say that one will be a large city, and the second will be a small city where AT&T's owned and operated systems pass 50,000 homes. The third city will involve testing of devices using an open operating system platform.

Executives also declined to name which other vendors will be involved in the deal, but did say that the agreement between AT&T and Microsoft is not exclusive. Armstrong pledged that AT&T will remain dedicated to open environments.

However, AT&T executives emphasized that they believe Windows CE is a superior platform for the markets in question.

Stock Swapping

The pact also calls for Microsoft to purchase MediaOne Group's 29.9 percent interest in Telewest Communications in a stock swap agreement. Earlier this week, MediaOne accepted an AT&T acquisition offer valued at about $60 billion.

AT&T's acquisition of MediaOne will be scrutinized separately from the deal with Microsoft, but there is some crossover because of the interest the software giant will have in Telewest. The agreement with Microsoft should have a positive effect on the scrutiny federal regulators will give to the MediaOne purchase, Armstrong said.

"I think it helps us deploy faster. The biggest question I get is 'Why can't you show up sooner?' " Armstrong said of comments he hears from customers clamoring for set-top boxes and broadband access. "I think when it gets scrutinized, they'll see that it complements what we're trying to do."

Sun Scoffs

Not everyone is singing the praises of the deal. Long-time Microsoft nemesis Scott McNealy, chair and chief executive officer of Sun Microsystems weighed in with his opinion even before the agreement was officially announced.

"The only way Microsoft can get people to use their stuff is if they buy a stake in them," McNealy said on Monday in New York at the launch of a Sun support program for service providers. "Microsoft should not be permitted to buy into tech companies with the monopoly money they have earned," from selling the Windows operating system and applications.

AT&T agreed to the deal with Microsoft because it didn't want Microsoft to help ComCast, a rival MediaOne bidder, sweeten its bid, he asserted. ComCast had entered into an agreement to acquire MediaOne--a deal that was thwarted by AT&T's superior offer. AT&T "didn't want to get into a bidding war with the richest man in the world," McNealy said, referring to Microsoft chief Bill Gates.

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