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Microsoft Targets Internet via TV


SEATTLE — By agreeing to invest $5 billion in AT&T Corp., Microsoft Corp. has bought itself the rights not only to put its Windows CE software in digital set-top boxes, but also to play a central role in building the infrastructure required to offer e-mail, Internet access and other services through TV sets, according to details of the agreement announced Thursday.

Under the deal, 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. If Microsoft exercises the options, it will have a 3% stake in AT&T.

In exchange, AT&T will install Microsoft's Windows CE in 2.5 million to 5 million cable TV boxes. The agreement comes on top of a previous deal between Microsoft and Tele-Communications Inc. (now owned by AT&T) to put Windows CE on 5 million set-top boxes.

AT&T has also agreed to use Microsoft's Windows NT server software to handle such critical "back end" functions as billing and e-mail in major deployments of digital cable TV in three cities by next summer. Microsoft will work exclusively with AT&T to develop the systems in a large and a small city while the two companies will also work with alternative providers in a third city.

Although Microsoft has a similar system in place to support subscribers of its WebTV Internet service, the deal with AT&T is the first major deployment of the software on a cable system and will provide an important showcase to help sell the system to other cable operators. It also could be a major boost for Windows NT, which is often regarded as the weaker player against more powerful Unix software from companies like Sun Microsystems.

In spite of Microsoft's rapidly growing presence in the field, most experts predict Microsoft won't dominate the cable industry in the way it has dominated the computer industry.

"We think [cable] technologies are developing in a very competitive way" despite the AT&T deals, said William C. Myers, chief executive of the U.S. Internet Council, a nonpartisan group of state government officials and industry leaders active on Internet policy issues. The emergence of alternative means to reach the consumer, including satellite and wireless, assures that competition will be "vibrant," Myers added.

Nevertheless, the Microsoft agreement may be more far reaching than it initially appears. AT&T has now agreed to license Windows CE for a minimum of 7.5 million set-top boxes in coming years. When AT&T completes its recently announced $62.5-billion purchase of MediaOne Group, it will have about 16 million customers. Because AT&T expects 80% of those customers, about 12.8 million,to buy digital set-top boxes, the commitment to Microsoft represents a 59% share of the customers of AT&T, the nation's dominant cable provider.

The deal not only gives Microsoft a significant lead in its effort to make Windows CE the national standard for set-top boxes, it also boosts the credibility of the software at a time when Microsoft is struggling to persuade manufacturers to use it in everything from hand-held computers to cars.

Times staff writer Jube Shiver Jr. in Washington contributed to this report.

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