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Strategies & Market Trends : The Thread Formerly Known as No Rest For The Wicked -- Ignore unavailable to you. Want to Upgrade?

To: Sosmartinov who wrote (37781)	5/8/1999 8:05:00 AM
From: D.Austin	Respond to of 90042

I know that MSFT bores most people on this thread but bore u I must. Details on AT&T and Microsoft Deal This morning Microsoft and AT&T announced an extension of their existing partnership that calls for Microsoft to invest $5 billion via convertible preferred shares and warrants. Microsoft will receive 100 million convertible preferred shares priced at $50/share which can be converted into 66.7 million AT&T shares at $75/share. AT&T holds the right to call the shares after three years if its stock price is $90 or higher. The preferreds pay a 64.5 cents per share dividend on a quarterly basis equating to $62.5 million per quarter, or $250 million annually, to Microsoft. This works out to a 5% annual return which we believe is about what Microsoft earns on its cash balance. Microsoft also will receive a warrant to purchase 40 million shares of AT&T at $75/share that can be exercised after three years. This investment should be non-dilutive but the warrants and the preferred convertible option will allow Microsoft to participate in future upside of AT&T shares. AT&T has agreed to expand its Windows CE license to include a total of 7.5 million to 10 million set-top boxes. AT&T's previous license covers 5 million boxes The two companies plan to showcase their technology in three model cities. AT&T has agreed to use Windows CE as the operating system for its set-top boxes in these showcase cities. In addition to Windows CE, in all three cities, streaming media technology that enables the set-top box to receive streaming audio and video from the server will be integrated. A WebTV-based display technology is also expected to be implemented which reformats Web sites for proper display on TV screens rather than PC monitors. In addition, Microsoft Media Player capabilities are likely to be included with the set-top boxes. Although, any revenue stream from the initial licensing of Windows CE is likely to be immaterial to Microsoft, this announcement is a very important move by Microsoft to push its set-top operating system technology AT&T has agreed to incorporate Microsoft's server technology in two of the three showcase cities. Microsoft server-level technology that AT&T is expected to use include Windows NT/2000 server, SQL Server, streaming media technology, and perhaps Exchange Server. Although this in a non-exclusive arrangement, if Microsoft's products perform in the initial three city deployment, we see no incentive for AT&T to look to Microsoft's competitors for alternative technology. With the close of the MediaOne purchase by Ma Bell, AT&T's cable reach will include approximately 26 million homes, or 25% to 30% of all homes in the U.S. In that the company sees the potential that 80% of these homes will eventually sign up for digital TV services, apparently 20.8 million potential homes in AT&T's reach may require at least one set-top device. With this in mind, we would not be surprised to see the current agreement between Microsoft and AT&T expanded even further in the future to include more Windows CE licenses. AT&T has agreed to integrate other Microsoft Internet infrastructure technologies in two of the three initial deployment cities. Using Microsoft products and services, AT&T plans to deliver enhanced TV features including streaming digital video, digital audio, Internet telephony, and other Internet services. Although it has not been confirmed, from our one-on-one conversations, it sounds to use like Microsoft's Internet content and services may indeed play a large role. With Windows CE and WebTV technologies providing the interface to the end consumer, Microsoft should be able to leverage its position to guide users to its MSN portal and subsequently generate revenues from advertising and e-commerce transactions. In theory, an enhanced TV user looking to buy a new car could flip on the TV, switch to the auto purchasing channel, and search through the current inventory. Microsoft clearly would benefit if this auto channel was, in fact, Microsoft's Carpoint service. This scenario can be expanded to include Microsoft's other Internet properties and services including Expedia, Home Advisor, MSN Investor, Gaming Zone, and HotMail. Microsoft is expected to buy MediaOne's 29.9% interest in Telewest Communications, UK largest cable and telephony provider. Pricing details have been confirmed but have yet to be revealed other than this will be a tax-free stock transaction. At today's price, this deal would be about $3 billion. This investment in addition to Microsoft's $500 million stake in NTL Inc, another UK cable and telephony provider, gives Microsoft a strong position in the UK market. We expect deployments in the UK similar to those detailed today by AT&T and Microsoft. Microsoft should clearly benefit from the sales of its software infrastructure products and Internet technologies that this relationship should foster. In addition, as Windows CE deepens its penetration within the consumer base, Microsoft should increasingly be situated to leverage its position to attract potential customers to its Internet properties and make Windows CE ever more desirable. By teaming up with the largest telephone and cable provider in the U.S. as well as the UK, Microsoft, today, has taken a large step towards this goal. Short term, we believe that any incremental revenue from this deal will be immaterial, but the foundation that is presently being laid should pay off big in the long-term. D.A. :-) have a nice morning everyone