Microsoft investing $5 billion in AT&T

Windows CE to go into millions of cable TV boxes

Is Gates paying too much?


May 07, 1999|By BLOOMBERG NEWS

REDMOND, Wash. -- Microsoft Corp. said yesterday that it will invest $5 billion in AT&T Corp., giving the world's biggest software maker the right to install its programming in the set-top boxes that AT&T will use to offer cable television and Internet services.

Microsoft will buy 100 million AT&T preferred shares at $50 each and get three-year warrants to buy 40 million common shares at $75 each. That would give Microsoft a 3 percent stake. AT&T will install Microsoft's Windows CE in 2.5 million to 5 million cable TV boxes under a nonexclusive agreement, which may double AT&T's use of the software.

Chairman Bill Gates is linking Microsoft to AT&T as the long-distance phone company acquires MediaOne Group Inc., making it the No. 1 cable TV provider.

AT&T Chief Executive Officer C. Michael Armstrong gets cash to help pay for his cable acquisition spree, while avoiding a contract that would have tied AT&T to a sole provider.

"How much is Microsoft really going to get in terms of preferential treatment for that kind of dough?" said Arthur Hogan, chief market analyst at Jefferies & Co. in Boston. "It doesn't seem they're getting a lot of bang for their buck."

The AT&T investment, Microsoft's largest to date, comes after AT&T worked out an agreement with Comcast Corp. to clear its purchase of MediaOne Group for $62.5 billion. Comcast had sought help from Microsoft and America Online Inc., the top Internet service provider, to sweeten its earlier offer.

"The MediaOne situation was catalytic to helping us bring our resources together," Armstrong said.

AT&T agreed to pay MediaOne investors 0.95 AT&T share and $30.85 in cash for each MediaOne share. MediaOne paid Comcast $1.5 billion for breaking their merger plans. As part of the AT&T agreement, Microsoft said, it will buy MediaOne's 29.9 percent stake in TeleWest Communications PLC, the United Kingdom's No. 2 cable TV company.

Shares of AT&T rose $5 to $61.9375, while Microsoft fell $1.1875 to $77.9375. The stocks were the two most actively traded in U.S. markets.

Microsoft is expanding its software beyond personal computers, to include set-top boxes, phones, cars, and electronic and consumer devices such as hand-held computers. It wants to team up with AT&T to sell more of its Windows CE system, the brains behind TV set-top boxes that link TV sets to the Internet, offering digital TV and high-speed World Wide Web access.

After AT&T completes its pending cable purchases, it will have 16 million customers and networks that pass 26.5 million homes. AT&T expects that about 15.2 million cable customers will subscribe to the new digital services within five years.

The agreement could put Microsoft software in as many as 10 million AT&T set-top boxes, giving it about two-thirds of the AT&T customers expected to sign up for the services. At worst, Microsoft would get half of the existing customers.

Microsoft investment underscores AT&T's new place at the top of the cable industry.

"What it's enabling us to do is see those cable assets in a broader light," said Blake Bath, an analyst at Lehman Brothers Inc. "AT&T has crafted a very strong position in that market."

Still, the agreement does not make Microsoft the exclusive provider of such software to AT&T -- which Microsoft was seeking. Microsoft's Windows CE trails rivals such as Scientific-Atlanta Inc.'s Power-TV system, in the emerging market for such boxes.

Scientific-Atlanta, Sun Microsystems Inc., Oracle Corp. and other Microsoft rivals could still sell similar software to AT&T. AT&T has committed to using Sun's Java software in some boxes.

But Microsoft's good name will help lend credibility to AT&T's $120 billion bet on cable networks.

AT&T and Microsoft said they will set up three test markets to help make the services ready for customers next year. AT&T will also license Microsoft software that supports a range of digital services such as e-mail and interactive television entertainment.

The companies will deploy Microsoft's client/server TV software in two cities by the second quarter of 2000. AT&T also plans to use Microsoft's client software with third-party server software in an additional city.

The deal at a glance

Microsoft agreed to:

* Buy $5 billion of a new issue of AT&T 30-year convertible preferred securities. The preferred issue will be priced at $50 a security.

* Acquire MediaOne Group Inc.'s 29.9 percent stake in British cable group Telewest Communications PLC through a tax-free ex-change of an undisclosed amount of Microsoft shares.

AT&T agreed to:

* Pay $30.85 in cash plus 0.95 of an AT&T share for each MediaOne share.

* Expand its use of Windows CE-based licenses to cover an additional 2.5 million to 5 million set-top devices in its cable system.

* License Microsoft client/server software that supports a range of digital services such as e-mail and interactive television.

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