In AT&T Deal, Microsoft Buys Stake in Future of Cable TV
By STEVE LOHR -- May 7, 1999
NEW YORK -- With a $5 billion investment in AT&T
Corp., Microsoft Corp. on Thursday secured an
inside
track in supplying software for the high-speed
communications networks of the future. But it has by no
means assured that it will be the dominant supplier, as
it is today in the personal computer industry.
In addition to a small stake in AT&T Corp., Microsoft's
investment bought it a pledge that a version of its
Windows operating system will power as many as 10
million next-generation set-top boxes in AT&T's growing
network of television cable systems. That would be
twice as many boxes as were originally supposed to run
Windows.
What Microsoft did not get, though, may eventually
prove more important. Taking a lesson from 1981, when
IBM unwittingly set Microsoft on a course to dominate
the computer industry by making it the exclusive
supplier of the operating system for the IBM PC, AT&T
confined Microsoft to a larger chunk of what will
remain a highly competitive market.
AT&T's negotiations with Microsoft, according to people
involved in the deal, were guided by two objectives:
Get the money, but prevent the software giant from
repeating its dominance of the PC business in the
industry now being assembled around ultra-fast data
networks known as broadband.
"What Microsoft got was the opportunity to get on the
inside with us as we develop the technology for
broadband," said John Petrillo, executive vice
president for corporate strategy at AT&T. "What
Microsoft did not get is an exclusive deal. It is not
going to be the only company supplying us software for
set-top boxes or anything else."
Thursday's announcement of the AT&T-Microsoft pact
produced new details of a deal whose broad outlines had
been previously reported. The companies have agreed to
deliver digital services -- from interactive television
to Internet shopping -- to homes in three cities next
year. The local markets for the "model cities program"
were not named, but Denver would be a likely choice for
one pilot effort, according to one person close to
AT&T.
Under a previous accord, AT&T had agreed to use
Windows CE software in 5 million set-top boxes. AT&T
said on Thursday that it would increase that commitment
by another 2.5 million to 5 million set-top devices.
The 7.5 million to 10 million set-top boxes running
Windows software represents 30 percent to 40 percent of
the 25 million households to be served eventually by
AT&T's cable networks -- after AT&T completes its
acquisition of Mediaone Group and, as part of that
deal, the swap of some cable operations with the
Comcast Corp.
AT&T and Microsoft executives emphasized that the main
purpose of the deal was to accelerate the deployment of
high-speed services over cable networks. The goal is to
upgrade the high-capacity pipes of the cable networks
to deliver digital television, telephone service and
high-speed Internet access to millions of homes.
C. Michael Armstrong, the chairman of AT&T, said that
the pact was proof Microsoft "shares our strategy of
using broadband cable to bring a new generation of
digital communications, information and entertainment
services to millions of American families."
AT&T will use Microsoft's $5 billion to help pay to
upgrade the cable networks, enabling them to handle
two-way communications needed for telephony, Internet
messaging and interactive TV.
Microsoft is paying for a favored place in the next
generation of high-speed Internet-based computing. Some
analysts have called this future the post-PC era
because they think the personal computer may not play
the central role that it does today. Internet
appliances of the future will likely include set-top
boxes, handheld devices, digital wallets, cell phones
and many others. That diversity represents a huge
challenge to Microsoft, the technology standard-setter
of the PC era.
The $5 billion, to be sure, represents only a slice of
Microsoft's cash hoard of $22 billion. "This deal is
not all that important financially, but it is of great
strategic significance for Microsoft," said Richard
Sherlund, a Goldman, Sachs & Co. analyst. "Broadband is
a fat digital pipe to the home, and Microsoft
desperately wants to be at end of that pipe."
In an interview, Armstrong said that Microsoft could be
a major supplier to the broadband industry but it would
not control the essential software technology as it
does in the PC industry.
"The architecture of Windows is owned by Microsoft," he
said. "Microsoft can dictate the technology
specifications and programming interfaces."
But the broadband industry, Armstrong asserted, is a
"very different situation."
In 1997, fearing that Microsoft could control the cable
industry if it came to dominate set-top box software,
the leading cable companies at the time said that Cable
Labs, the industry's research consortium, would set the
technology standards for digital set-top boxes. The
industry's objective was to not become overly dependent
on a single software supplier.
AT&T executives reiterated that commitment on Thursday.
"We invite and solicit other vendors," Armstrong said.
And Petrillo, the AT&T strategist, said that one reason
his company selected Microsoft as the set-top box
supplier for the three test cities was that at this
early stage Microsoft had the most complete product.
"This gets us to market faster," Petrillo said. "And we
see Microsoft kind of as the rabbit in this game. Our
judgment is that other software companies will respond
to Microsoft and get going."
Sony Corp., with its Aperos operating system, is among
the other leading suppliers of set-top boxes.
Sun Microsystems Inc.'s Java, an Internet programming
language, is a software layer that runs on top of
set-top operating systems, allowing software developers
to write programs independent of the operating system
underneath.
"We think that anything that drives the broader
deployment of broadband is good for us, as long as
Microsoft cannot move to undermine Java's role as an
independent programming environment," said Alan
Barantz, president of Java Software, a unit of Sun.
Still, by securing a larger role for Windows CE,
Microsoft helps assure that its software will mesh not
only with set-top boxes but also with many other
Internet devices for which it is also developing
software. That extra measure of compatibility, some
analysts say, could give Microsoft a competitive edge
in the post-PC era.
"The key is not what Microsoft earns, or not, from
set-top box software but the spillover to all the other
Internet devices in the home," said David Yoffie, a
professor at the Harvard Business School. "This is a
very smart move for Microsoft, and it is still
uncertain how it will play out."
In the early 1980s, Yoffie noted, no one in the
industry thought that Microsoft's basic DOS operating
system was an issue. "People did not appreciate the
software hooks Microsoft could put into DOS to make it
so hard for users to switch, insuring a technology
lock-in," he said.
Microsoft's investment in AT&T is complex financially.
Microsoft will purchase interest-bearing securities
that are convertible to AT&T shares during the next
three years at a price of $75 a share. That is well
above AT&T's current share price, which closed up $5 on
Thursday, to $61.9375.
Also part of the deal, Microsoft will purchase a 29.9
percent stake in Telewest Communications PLC, a British
cable TV company.
In a day when many high-technology shares dropped
sharply, Microsoft closed down $1.1875 on Thursday at
$77.9375.
Copyright 1999 The New York Times Company |
