AT&T and Microsoft Corp. today announced a wide-ranging broadband deal that calls for the two companies to work together to provide digital cable services.
Under the terms of the deal, which has been rumored for several days, Microsoft will buy US$5 billion worth of AT&T securities and warrants. The securities will be convertible into some 66.7 million shares of AT&T -- around 3.7 percent of the company -- at a price of US$75 per share. Microsoft will also get warrants to purchase 40 million more shares of AT&T, which would bring its ownership up to around 5.9 percent of the company.
In return, AT&T will agree to use Microsoft's Windows CE operating system in its digital set-top boxes. The deal -- which is not exclusive -- calls for AT&T to use Microsoft technology in an additional 2.5 million to 5 million devices.
MediaOne the spark
The deal was sparked by AT&T's bid for cable company MediaOne Group. MediaOne had previously negotiated a deal with Comcast, which then looked to Microsoft and other companies to help it fight off the higher AT&T offer. But AT&T eventually won out.
Once the deals are completed, AT&T will control cable services in approximately 25 million homes.
AT&T also agreed today to license Microsoft client/server software for development of interactive television. The two companies plan to set up such systems in two cities by the second quarter of 2000. AT&T also plans to use Microsoft software, along with a third-party platform, in an additional city.
Microsoft has also agreed to purchase, with stock, MediaOne's 29.9 percent interest in Telewest Communciations plc, Britain's second largest cable company.
Armstrong: Accelerating the strategy
The deal "is a strengthening of our relationship with Microsoft and a commitment ... to accelerate the [AT&T] broadband strategy," said AT&T CEO C. Michael Armstrong during a teleconference this morning.
The thrust of the partnership is to "accelerate the deployment of these digital services," including digital television, digital Internet access and IP-based telephony, Armstrong said.
The arrangement with Microsoft "is going to make [these services] real," added David Nagel, head of AT&T Laboratories. "We can create some exciting applications ... and get them out there in the hands of people."
"The most important part is that it's an open system" in terms of enabling content from multiple providers and other operating systems to work on the AT&T and Microsoft platform, Nagel said.
Although the deal deepens AT&T's commitment to use Windows CE software in 7.5 million to 10 million households (out of the approximately 25 million homes that will be served by its cable systems), "we will continue to have an open [vendor] environment," including a deal with Sun Microsystems Inc. for Java-based operating systems, Armstrong said.
AT&T also is determined not to own or control any of the content delivered over its system and is open to partnerships with any interested content companies or Internet portal operators, he said.
"We are looking for many suppliers to participate in a multivendor environment to drive interactive TV," Armstrong said.
For Microsoft, the deal "takes a big step toward opening up the power of the Internet and new digital services to millions of consumers," said Greg Maffei, the company's chief financial officer.
Maffei said the AT&T investment will not dilute Microsoft earnings.
AT&T CFO Dan Somers said he now expects AT&T's pro-forma 2000 earnings to be 10 percent below previous guidance levels because of its acquisition of MediaOne, down from a former estimate of 25 percent, partially as a result of Microsoft's investment.
