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Microsoft Makes Sure It Gets In on the Action


SEATTLE — It appears Microsoft Corp. will emerge a big winner in the AT&T-MediaOne Group deal, skillfully negotiating for itself a big piece of the cable television future.

The software giant is in talks to invest as much as $5 billion in a deal with AT&T Corp. that could help put its Windows CE software on the digital set-top boxes of millions of households that will be linked to AT&T's extensive cable properties, people familiar with the talks said.

Details of the agreement, which could include an exchange of assets and/or a Microsoft equity investment in AT&T, have yet to be hammered out. The talks could involve a complex swapping of assets in an effort to avoid taxes, analysts said.

Any favoritism AT&T shows toward Windows CE could play an important role in helping Microsoft make the tough transition from the computer desktop to the consumer's living room.

"A lot of people believe the set-top box will become the gateway to the home. This gives Microsoft a platform in the home," said Van Baker, an analyst at San Jose-based market researcher Dataquest. Home computers, he argues, will be networked and connected to the set-top box in the future so all devices can have high-speed access to the Internet through the cable line.

Microsoft got a seat at the AT&T/MediaOne Group negotiating table by threatening to support a competing bid for MediaOne from Comcast Corp., a cable company in which Microsoft has a $2.3-billion investment.

According to one scenario, Microsoft would give up its stake in Comcast in exchange for Comcast's international broadband operations in Britain and elsewhere. Microsoft would also receive MediaOne Group's stake in Telewest, Britain's second-largest cable company.

It appears that Microsoft's primary motive for getting involved in the AT&T-MediaOne deal is to get AT&T's backing for Windows CE, the scaled-down version of the Windows computer operating system that Microsoft has been promoting as the software for the set-top boxes that will connect the TV set to the Internet.

Although Windows CE was roundly criticized as clumsy when it was first released, analysts say the product has been vastly improved over the last year.

Microsoft scored an important victory last year when it persuaded cable giant Tele-Communications Inc., now a part of AT&T, to agree to put Windows CE in 5 million of its TV set-top boxes. Scientific-Atlanta Inc. and General Instrument Corp., the two leading manufacturers of cable set-top boxes, have both recently agreed to offer Windows CE as an option, as have Matsushita Electric Industrial Co. and Sony Corp., Japan's leading consumer electronics manufacturers.

Analysts said many of these companies have adopted Windows CE only as a hedge and continue to promote their own operating systems. But a strong agreement by AT&T to offer Windows CE on its digital set-top boxes could bring the entire cable industry behind Microsoft's software.

Analysts expect a deal to be announced within two weeks.

Beyond the shuffling of assets, the talks are likely to focus on what Microsoft will charge for Windows CE. The company typically charges $45 to $90 a copy, a price that would make set-top boxes too expensive.

Still, analysts don't believe any impending agreement will guarantee Microsoft's software will become the standard. In a conference call with reporters and analysts Wednesday, AT&T Chief Executive C. Michael Armstrong insisted that any deal the company signs would not be exclusive.

"Microsoft wants strings attached, while AT&T is trying to snip those strings," said Richard Doherty, a director of research at Seaford, N.Y.-based Envisioneering, who has spoken to technical advisors involved in the talks.

"Armstrong is no dummy," said Baker of Dataquest, pointing out that the AT&T CEO was clearly aware that broadcasters, cable companies and entertainment companies don't want Microsoft to have the same power over television that it has over personal computers. "He doesn't want to dance with the devil any more than anybody else."

Microsoft stock closed Wednesday at $79.13, up $1.06, on Nasdaq.

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