Settops & AT&T..............................
newsday.com
AT&T's Great Digital Experiment
Microsoft's investment in cable TV
By Harry Berkowitz
Staff Writer
AT THE HEART of software giant Microsoft's new $5-billion investment in AT&T is a vast experiment that will determine what array of new services consumers will get through their set-top cable TV boxes - and which companies will play a role in creating them.
With Microsoft playing a key role, AT&T will start testing a new generation of digital boxes by the second quarter of 2000 in three cities where it already provides cable TV service. The tests will try to figure out what kinds of interactive TV services people want and how much they will pay.
''We're going to do something real in three real cities,'' AT&T chairman C. Michael Armstrong said in a telephone press conference yesterday with Microsoft.
Microsoft announced it will invest $5 billion in AT&T and could end up with a 3 percent stake in the company. AT&T said it will use Microsoft's CE Windows software in between 7.5 million and 10 million set-top boxes, up to double the previous commitment by Tele-Communications Inc., which AT&T acquired. But that does not mean Microsoft will be the exclusive supplier, AT&T executives stressed, adding that they welcome competitors.
The investment provides cash to help pay for AT&T's deal to acquire MediaOne Group, which if completed will raise AT&T's number of cable subscribers to 16 million after Comcast Corp., which bowed out of the bidding war, gets 2 million from AT&T. Armstrong said the MediaOne deal spurred talks with Microsoft.
The new cable-box digital services could include dozens of extra channels, video-on-demand and audio and even games on demand, e-mail, high-speed Internet services, phone service, local sports and weather information, financial services and home shopping via remote control.
For years, the promise of interactive TV has been the holy grail for the cable industry, but the effort has gone more slowly than had been hoped. Armstrong said the Microsoft-AT&T alliance and the tests will speed things up.
''It will get this stuff out that we've been talking about for years and put it in the hands of real consumers,'' said David Nagel, AT&T chief technology officer. ''Some [services] will be fantastic and others will be not so great and will get better.''
Scientific Atlanta, Sun Microsystems and Oracle Corp. are also vying to provide similar cable-box software.
AT&T hopes eventually to convert 80 percent of its cable customers to enhanced digital boxes.
AT&T stock yesterday jumped for the second day in a row, gaining $5 per share to $61.93, while Microsoft fell $1.18 to $77.93 3/4.
''The set-top box could be the gateway for the home, and all data, voice and video content could come into this box and get delivered to various devices throughout the home,'' said Van Baker, director of consumer market research at Dataquest in San Jose, Calif. ''But it's very much an open question as to which parts and pieces of this will be valued by the consumer and do they want it on the television.''
Baker added, ''If you go from 50 channels to 100 channels, I may not care. It depends what the channels are.''
Time Warner, which has 12.9 million cable customers, has been experimenting with interactive television for years and began testing digital cable boxes last month in Austin, Texas, and Tampa, Fla. It hopes to start rolling out boxes in 20 areas by the end of this year, but has not said when its biggest system, New York City, would get them.
Time Warner Cable spokesman Michael Luftman said yesterday there is a strong market for video-on-demand, adding that the best price for such a service appears to be $3.95 per movie. ''When you get too far beyond that [service] there are some unknowns,'' he said.
Cablevision Systems Corp., which had hoped to begin rolling out digital cable boxes in the New York area by the fourth quarter of 1999, instead now expects to begin testing them by the end of this year and rolling them out at a later date because of technology delays.
Under the deal announced yesterday, Microsoft would buy MediaOne's 29.9 percent stake in TeleWest Communications, England's second-biggest cable company, from AT&T.
Armstrong said that AT&T is open to negotiating a deal for America Online to offer its Internet services via AT&T cables, as AOL has demanded, but that talks between them keep breaking down. ''We stop and we start,'' he said. ''Everytime we start there seems to be some event that stops us.''
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