Mark, all,
Interesting article on T, MSFT and "gang" from WST [For personal use Only, of course]
Microsoft Windows heads to TVs as part of AT&T investment deal
By David Bank, Don Clark
and Rebecca Blumenstein
THE WALL STREET JOURNAL
msnbc.com
May 7 — Microsoft Corp.'s Windows software is headed for as many as 10 million U.S. television
sets. But it may not dominate the new market for interactive TV the way it does the
personal-computer industry.
AT&T CEO C. Michael Armstrong comments on the company's new alliance with Microsoft.
AS PART OF A BROAD AGREEMENT with AT&T Corp. that included a $5 billion investment
by Microsoft, AT&T agreed to use Microsoft's Windows CE software in at least 2.5 million set-top
boxes that will deliver digital-television and telephone service and high-speed Internet access. AT&T
has an option to buy another 2.5 million copies; the new order is in addition to the five million units
that Tele-Communications Inc., now a part of AT&T, agreed to use last year.
The pact — more than five times the size of Microsoft's previous largest investment — reflects the
importance the software company places on the non-PC devices that may eventually outnumber
traditional PCs. (Microsoft is a parter in the joint venture that operates MSNBC.)
But AT&T was adamant that the deal won't give Microsoft a lock on future software and services
within AT&T's expanded cable territories. “This is a nonexclusive agreement,” said C. Michael
Armstrong, AT&T's chairman. “The cable industry will continue to remain open.”
SIDE DEAL TO MEDIAONE PACT
The agreement comes as a side deal to AT&T's move to buy MediaOne Group Inc. for $54 billion in
stock and cash. A definitive pact between those two companies was announced Thursday, capping a
bidding war that began in mid-March.
People familiar with the matter said the complex MediaOne deal includes a $1.6 billion breakup fee if
MediaOne backs out of the pact, a move aimed at giving MediaOne additional incentive to stay with
AT&T. The long-distance phone company had pushed for a substantially bigger fee, perhaps mindful
of the fact that it enticed MediaOne away from its former suitor, Comcast Corp. And in a somewhat
unusual move, AT&T agreed to fund MediaOne's $1.5 billion cash breakup fee to Comcast, which
was wired to the Philadelphia-based cable operator Thursday.
Mr. Armstrong, however, said buying MediaOne won't accelerate AT&T's ability to offer phone
service through cable lines. Although the vast majority of MediaOne's cable lines have been updated
to handle voice calls, he said he still must wait for regulatory approval.
The timing of MediaOne's integration is significant because AT&T is already under pressure to
deliver on its huge cable investments. And if the regional Bells gain permission to offer long-distance
service, AT&T will be under the gun to get into the local phone business quickly to offset lost
long-distance revenues.
TERMS OF MICROSOFT DEAL
In exchange for its cash, Microsoft will receive a combination of AT&T convertible preferred
securities and warrants. The preferred securities were priced at $50 each and carry a 62.5-cent
quarterly dividend. They are convertible into 66.7 million common shares at a price of $75 each for as
many as 30 years, though the conversion feature can be terminated under certain conditions after three
years. Microsoft also received warrants that would allow it to purchase 40 million AT&T common
shares at $75 each.
The pact — more than five times the size of Microsoft's previous largest investment — reflects the
importance the software company places on the non-PC devices that may eventually outnumber
traditional PCs.
If Microsoft exercises all options, it will wind up with 106.7 million common shares, or about 3.4%
of AT&T.
Investors had mixed reactions. AT&T's shares rose $5, or 8.8%, to $61.9375 in New York Stock
Exchange composite trading Thursday. Microsoft's chief financial officer, Greg Maffei, said the deal
wouldn't dilute Microsoft's earnings, but the company's stock declined $1.1875 to $77.9375 in
Nasdaq Stock Market trading.
“This is one of the most complex deals, with more smart players and more congruent and conflicting
interest than I've ever seen,” Mr. Maffei said in an interview.
Indeed, almost overlooked in the deal making was Microsoft's expanding presence in the overseas
cable market. Microsoft agreed to exchange stock for MediaOne's 29.9% share of Telewest
Communications PLC, a cable provider in the United Kingdom. Earlier, AT&T estimated that stake's
value at as much as $3.5 billion, but Microsoft is believed to have paid considerably less. Exact terms
weren't disclosed.
MICROSOFT'S GOALS
Throughout the negotiations, Microsoft focused on two primary goals: accelerating the deployment of
“broadband,” or high-speed digital networks, to consumers, which Microsoft believes will drive
demand for all kinds of software; and increased deployment of its “platform,” or operating system.
On the first point, the deal is widely regarded as a win for both sides. AT&T has more financial
resources to upgrade networks at a faster rate than traditional cable companies, and Microsoft's money
should help that mission, Mr. Maffei and other industry executives said.
But there seems less chance that Microsoft will achieve the kind of technical advantages it has in the
PC industry, where most of the popular programs work only on computers that use Windows.
AT&T's negotiating team, led by Mr. Armstrong, insisted that Microsoft make firm commitments to
interoperability, to allow AT&T to mix and match software and hardware from multiple vendors.
In addition to two “model cities” in which AT&T will test an all-Microsoft system next year,
Microsoft will participate in a rollout in a third city, which will also involve other companies.
“All applications have to work from city to city,” said John Petrillo, AT&T's executive vice president
of strategy and business development. “If they don't, then Microsoft is going to fail the test.”
OTHER CONTENDERS
Other contenders for AT&T's business include Sony Corp., which is pushing its Aperios operating
system as an alternative to Windows CE, and Sun Microsystems Inc., which last year got a
commitment from TCI to use its Java technology.
Alan Baratz, president of Sun's Java Software division, said AT&T executives have assured him the
new deal doesn't change the commitment to base new interactive services on Java. “It's interesting that
Microsoft has to spend $5 billion to get a company to use their product,” Mr. Baratz said. “Sun hasn't
spent $5 billion to get any company to use Java technology.”
The extent of Microsoft's role in AT&T's future may depend on how well it performs in Denver, the
larger of the two cities where Microsoft will show off its “TVPak,” the company's end-to-end cable
system. Microsoft has long argued cable operators could deliver next-generation services more
quickly if only they would let Microsoft handle everything. Microsoft will serve as the system
integrator in Denver and a smaller city that wasn't identified.
OTHER MICROSOFT PRODUCTS
In addition to Windows CE, AT&T agreed to use the forthcoming Windows 2000 server operating
system and elements of Microsoft's WebTV service. Microsoft says the system can download
software updates automatically, diagnose problems and personalize services for consumers, as well as
integrate into existing billing and customer-support systems.
“We're stepping up and saying, ‘We'll make it work,' ” said Alan Yates, director of Microsoft's
cable-software systems.
In an interview, AT&T's Mr. Armstrong acknowledged that the company didn't have much interest in
striking an accord with Microsoft until it looked like the software company might enter the bidding
war for MediaOne. “It is true that the MediaOne situation was the catalyst that brought us together,”
he said.
And even if Microsoft's software ambitions don't pan out, it will still own a valuable piece of AT&T.
“Microsoft very rarely does a bad deal,” said Michael Kwatinetz, an analyst with Credit Suisse First
Boston. “This isn't an expenditure on Microsoft's part. It's an investment.”
Copyright © 1999 Dow Jones & Company, Inc.
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