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Microsoft eyes TV future
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May 6, 1999: 12:52 p.m. ET
Deal with AT&T solidifies strategy of offering solutions beyond the PC
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NEW YORK (CNNfn) - AT&T Corp.'s agreement to use Microsoft Corp.'s operating system for consumer devices represents an important step for the software giant's future beyond the personal computer, analysts said Thursday.
The two companies had an existing deal under which AT&T (T) will use Microsoft's Windows CE operating system in 5 million set-top devices -- equipment designed to control both cable and Internet access on TV sets.
Under the new agreement, AT&T will implement Windows CE in an additional 2.5 million to 5 million set-top boxes in exchange for a $5 billion investment from Microsoft.
AT&T will also license and deploy Microsoft's client/server interactive television software in two undisclosed cities by the second quarter of 2000.
Telecom and Internet firms are scrambling to gain a foothold in various high-speed Internet access services. Cable-based access can provide service up to 300 times faster than services over traditional phone lines.
Windows CE already has a strong foothold in such consumer devices as palmtop computers, but Microsoft (MSFT) has been working to make "Windows lite" the standard operating system for high-speed Internet access through consumer devices.
Though its cable holdings -- Tele-Communications Inc. and now MediaOne Group (UMG) -- AT&T-controlled wires will pass through more than 26 million homes. That also translates into a lot of potential customers for Microsoft.
Microsoft shares have soared in the last three years
Analysts said the deal is unlikely to have much of an impact on Microsoft's earnings or stock price in the near term, but it could mean a windfall of new revenue down the road.
"This is a very important strategic deal for Microsoft to move beyond the PC," said Brian Goodstadt, an analyst at S&P Equity Group.
Betting on TV access
Microsoft, which has become infamous for playing catch-up in the Internet market, is pushing hard to be among the leaders in high-speed access -- a market analysts expect to take off in the next two years.
Right now, the Redmond, Wash.-based company is betting that access through television set-top boxes will become the dominant mode of connection. Whether that will actually be the case, however, is another story.
@Home Corp. (ATHM), a rapidly growing cable-based Internet access provider, offers its service through cable modems.
Unlike cable modems, which link cable lines to a PC, set-top devices facilitate communication between a TV and the cable network, bringing both Internet and cable content to a TV set.
Internet access via modem has a head start in the market, and the concept of users accessing the Internet through TV is anything but a sure bet.
"It's really tough to say how that will pan out," said Jeffrey Maxick, an analyst at Madison Securities. "[Set-top devices] could be one of the major avenues of getting on the Internet. For the masses who don't deal with computers on a regular basis, they'll feel more comfortable with using a TV for access."
However, a push by AT&T and Microsoft -- two of the heaviest technology heavyweights -- could tip the scales in favor of set-top boxes.
"You have two powerhouses getting behind the deployment of these services," Goodstadt said. "That's what's important."
Other deals likely
AT&T's deal with Microsoft is nonexclusive, meaning the company intends to find other firms to provide software for its set-top devices. Also, Microsoft officials have said the company intends to acquire more stakes in cable and telecommunications firms.
In 1997, for example, Microsoft invested $1 billion in Comcast Corp. (CMCSK) -- which originally agreed to acquire MediaOne before AT&T stepped in.
"They're trying to diversify their bets," Maxick said. "They don't know who will be the leader in this space, and they want to have a presence with whoever has the potential to be the leader."
Microsoft shares were up 7/8 at 80 in midday trading. AT&T shares climbed 4-3/4 to 61-11/16.
-- by staff writer John Frederick Moore
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