Microsoft will buy a US$5 billion stake in AT&T, as part of a series of agreements that call for AT&T to use more of Microsoft's software in television set-top devices,.
The agreements also call for the companies to work together on deploying broadband and Internet services to US households. Executives from both companies emphasised that aspect of the deal during a press conference.
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 chairman, 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.
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, 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.
The pact also calls for Microsoft to purchase MediaOne Group Inc.'s 29.9 percent interest in Telewest Communications PLC in a stock swap agreement. Earlier this week, MediaOne accepted an AT&T acquisition offer valued at about US$60 billion.
AT&T's acquisition of MediaOne will be scrutinized separately from the deal with Microsoft, but there is some cross over 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."
Not everyone is singing the praises of the deal. Long-time Microsoft nemesis Scott McNealy, chairman and chief executive officer of Sun Microsystems Inc. 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 yesterday in New York at the launch of a Sun marketing and sales 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 Windows applications.
AT&T agreed to the deal with Microsoft because they didn't want Microsoft to help rival MediaOne bidder, ComCast Corp., sweeten its own bid for MediaOne, he asserted. ComCast had entered into an agreement to acquire MediaOne -- a deal that was thwarted by AT&T's superior offer. "They (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. [See, "Comcast to End MediaOne Bid, Agrees Deal with AT&T," May 5.]
The deal could eventually result in dramatic changes in home and business communications, joining Microsoft's computer applications with AT&T's cable and telephone operations, analysts said.
"What Microsoft bought is a platform that gives them entry to the biggest cable operator in the country," said Van Baker, director of consumer marketing research for Dataquest Inc., a subsidiary of the Gartner Group. "They will be able to deliver applications in the entertainment and information areas to consumers via the AT&T pipeline.
"We talk about convergence," Baker continued. "This has the potential for the (TV) set-top box to be a gateway for all forms of entertainment and communications, including high-speed Internet, and voice and video telephony."
The deal also has the potential to give the Microsoft and AT&T a powerful say in the development of communications strategies, said another analyst.
"It's a real powerful partnership that could make it real difficult for anyone else to compete," said Tim Bajarin, president of Creative Strategies Inc., a high-tech consulting firm. "It will depend on how much AT&T pushes for the use of products from multiple sources."
Microsoft was down 1.187 points to $77.93 at the end of trading today on the Nasdaq stock exchange. AT&T stock was up 5 points to close at $61.94.
(Jack McCarthy in the San Francisco bureau contributed to this report.)