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Alan Breznick
By investing $5 billion for a 3% stake in AT&T Corp., Microsoft Corp. may not be gaining as much as it wanted. But, as with its earlier $1 billion investment in Comcast Corp., the computer software giant is hoping for a big payoff down the line.
Rewarding Microsoft for not teaming with Comcast to counter its $54 billion bid for MediaOne Group, AT&T agreed last week to boost its deployment of Microsoft's operating system software in digital cable set-top boxes. AT&T now plans to license Microsoft's Windows-CE based software in 7.5 million to 10 million digital set-tops, up from 5 million boxes that was part of an earlier preliminary agreement.
AT&T also agreed to try out Microsoft's client/server TV software in three advanced digital markets by next spring. In two of these test markets, a large, undisclosed city and a smaller region with up to 50,000 homes, the MSO will use Microsoft's software exclusively, at least at first, to offer bundles of video, voice and data services.
In addition, Microsoft gains the right to buy MediaOne's 29.9% stake in Telewest Communications, a large British cable operator, from AT&T once the phone giant closes its pending acquisition of MediaOne. With $500 million invested earlier this year in NTL Inc., which has been trying to acquire Telewest for the last year, Microsoft could well end up with a big stake in Britain's largest MSO.
What Microsoft is not getting from AT&T, however, is the exclusive deal for its interactive TV software that the computer giant has been urgently seeking from cable operators for several years. As Comcast did, AT&T pointedly rejected Microsoft's demand that it gain a lock on digital set-top box technology.
Last week, C. Michael Armstrong, chairman/CEO of AT&T, reiterated his strong opposition to exclusive deals with any vendor, including Microsoft.
"We have relationships with a number of vendors," including set-top box providers, Armstrong said. "That number will only increase over time."
Nevertheless, Microsoft emerged from the MediaOne wars with an edge over Sun Microsystems and its other rivals. By increasing the deployment of Windows-CE to as many as 10 million AT&T digital set-tops, Microsoft doesn't leave room for Sun to get its Java software into more than 2 million to 5 million AT&T digital boxes, according to Michael Harris, president of Kinetic Strategies Inc.
Microsoft also finally gets to strut its stuff by supplying the interactive TV software for AT&T's three digital showcase systems, or "model cities."
Analysts said the AT&T/Microsoft agreements make a merger between Network and Road Runner more likely. With the MediaOne acquisition, AT&T will hold stakes in both and Road Runner, while Microsoft will own pieces of Road Runner and two partners, AT&T and Comcast.
The big loser last week appeared to be America Online Inc., which dropped out of talks to help Comcast outbid AT&T when the price rose too high. Analysts expect AOL to redouble its efforts to swing high-speed data deals with Baby Bells and press for unfettered access to cable's broadband lines.
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