Powerfully underlining its cable ambitions, Microsoft Corp.
will pump $5 billion into AT&T Corp. to cement its role as the dominant software
platform on the largest U.S. broadband network.
Using the bargaining position it got from stepping into
AT&T's pursuit of MediaOne Group Inc., Microsoft agreed to buy a 3 percent equity
stake in the telecommunications giant.
In return, Microsoft got commitments by AT&T to
possibly double the number of digital set-top boxes running the Windows CE operating
system and to license Microsoft's client-server software for its headends.
Accompanying those deals were plans for a new joint
AT&T/Microsoft initiative to gauge consumer preferences and drive demand for advanced
broadband voice, video and data services by launching three "showcase" markets
next year, with rebuilt AT&T cable systems deploying WinCE-powered digital set-tops.
Some analysts cautioned that the agreements appeared to be
put together in a hurry, adding that an earlier deal between Tele-Communications Inc. (now
AT&T Broadband & Internet Services) and Microsoft to license WinCE took months to
close after a letter of intent was announced at the 1997 Western Show.
Even the showcase concept has bombed once before: TCI and
Microsoft had said in 1994 that they would conduct a large interactive-TV trial in
Seattle, but it was later abandoned because of development costs.
"I've seen this movie before, and I hope it has a
better ending this time," Paul Kagan Associates Inc. senior analyst for broadband
technologies Leslie Ellis said last week.
Still, the arrangement does seem to bring more of a
strategic benefit than Microsoft's 1997 investment in Comcast Corp., which helped to
jump-start a cable-stock rally that has continued to this day.
"Microsoft's $1 billion [investment] in Comcast has
been very good for them from an equity standpoint, but from a strategic standpoint, you
can argue that it didn't necessarily bear a lot of fruit," said Ted Henderson, cable
analyst for Denver-based Janco Partners. "AT&T provides more critical mass to get
their OS in more boxes."
AT&T said it would add 2.5 million to 5 million units
to the year-old commitment by TCI to buy WinCE for 5 million digital set-top boxes. Based
on AT&T's goal of 80 percent-penetration for its digital services, this could account
for 10 million of the MSO's projected 14 million digital subscribers.
Analysts said this kind of scale creates a huge incentive
for the massive army of Windows-software developers to design applications for the
platform, generating new applications that could encourage other operators to adopt WinCE.
"I don't think it's as strategically important for
AT&T as it is for Microsoft," said Gerry Kaufhold, a software analyst for Cahners
In-Stat Group (a sister company to Multichannel News). "They wouldn't be
dropping this kind of money in AT&T if they didn't expect to get the full benefit of
that commitment."
AT&T stressed that even with closer Microsoft ties, it
remains committed to using open-network platforms and multiple hardware and software
vendors. For example, AT&T said, one of the three unnamed showcase cities would deploy
third-party server software to work with Microsoft's client platform.
"The denominator we're shooting at is very high
penetration, hopefully in relatively short periods of time," AT&T Broadband
president Leo J. Hindery Jr. told reporters. "This arrangement is a wonderful start
in that direction, but it certainly doesn't cover all of the needs we have by far in this
area."
Analysts said the equity commitment and the sheer scope of
the expanded relationship clearly signaled where Microsoft will be in the future pecking
order.
"The truth was that there wasn't much fiscal
foundation to that [AT&T Broadband-Microsoft] relationship prior to today," said
Richard Doherty of Seaford, N.Y.-based consulting firm Envisioneering Group. "Now you
have a $5 billion investment and 5 million to 10 million boxes committed. That is a major
change overnight."
Analysts said an equally significant element was AT&T's
plan to license Microsoft's "TVPack" -- a combination of Windows NT server
software for digital-video and data services with a migration path to telephony, all tied
to the WinCE client.
TVPack enables end-to-end Windows solutions that could
diminish the potential roles of rival AT&T vendors such as Sun Microsystems Inc.
"The WinCE substantiation this week suddenly changes
everything for even the next half-dozen suppliers to AT&T," Doherty said.
"There are very few times in this planet's history when there were 7.5 million units
of anything ordered at one time -- maybe in World War II with the M-1 rifle. Everyone who
doesn't develop for it is suddenly in a second-class situation."
Microsoft has been trying for years to broaden its
influence in new digital platforms through WinCE, a stripped-down version of its flagship
Windows operating system designed for small electronic devices such as hand-held
computers, mobile phones or embedded products.
Sega Enterprises Ltd.'s new "Dreamcast" video
game, for example, runs on a WinCE operating system that may someday be used to enable
other applications, such as e-commerce or Internet access, through the same machine.
But, Kaufhold said, "WinCE has quite a bit more work
to be done in development before it's ready for set-top boxes -- not unlike [Sun's] Java,
which nobody is using as an operating system yet, either."
Analysts also said the deal might not necessarily diminish
Sun's involvement in set-tops. Concurrent with its Microsoft deal last year, TCI also
agreed to incorporate Sun's "PersonalJava" applications-software platform into
its advanced set-tops -- a relationship Sun said has not changed.
Sun's director of product marketing for its consumer and
embedded division, Curtis Sasaki, said TCI/AT&T had committed to PersonalJava because
of its ability to run on top of various operating systems, including WinCE.
He also noted Sun's strength on the server side, but he
would not say whether the company had been trying to get AT&T server business, as
well.
"We continue to work very closely with them. As a
matter of fact, we had a big meeting with them today," Sasaki said. "I think
it's pretty clear if you listen to [AT&T chairman C.] Michael Armstrong that he wants
to have multiple vendors that are interoperable participating in his network."
Further, advanced set-tops will generally use a variety of
software solutions side by side. General Instrument Corp. last week reiterated its plans
for third-quarter, multiple-operator deployments of its "DCT-5000+" advanced
set-top, along with a new, more streamlined look for the production model.
Denton Kanouff, GI's vice president of marketing for
digital systems, said OS and software configurations would vary from operator to operator,
AT&T included.
"Their software stack includes different elements --
an operating system, home-networking elements," he said. "They'll be able to use
the WinCE operating system, PersonalJava and Sony [Corp.'s] home-networking
software."
Microsoft's investment in AT&T will be for 30-year
preferred securities paying a 5 percent dividend and convertible into 66.7 million
AT&T common shares at a price of $75 -- a premium of more than 20 percent over
AT&T's market price at the time the deal was announced.
Microsoft also gets three-year warrants to buy 40 million
more common shares at $75 apiece, giving the company a potential total stake of roughly 3
percent in AT&T.
In addition, Microsoft will buy MediaOne's 29.9 percent
stake in U.K. cable and telephony operator Telewest Communications plc -- the latest in
the Redmond, Wash.-based giant's string of major international cable investments.
The new AT&T/Microsoft relationship sprouted after the
software company emerged as a possible white knight for Comcast, which saw its $48 billion
buyout deal with MediaOne topped by AT&T.
Armstrong admitted that the situation was a catalyst for
"bringing our resources together," although analysts speculated that Microsoft
probably used the implied threat of a bidding war to do so.
