Redmond's latest gambit--apparently a quid pro quo deal to invest $5 billion in AT&T in return for expanded use of a stripped-down version of its Windows software--demonstrates the software giant's increasingly prevalent strategy for making sure it is not left out of emerging technology opportunities. Armed with plenty of cash and a $1 billion investment in Comcast--the original suitor for MediaOne--Redmond garnered a better deal for its software business and closer ties with a rapidly transforming telecommunications powerhouse.
The AT&T deal illustrates a time-tested Microsoft game plan: Use market clout and financial muscle to gain entree in new areas, even though it may have a weaker or even inferior product.
In the cable company acquisition saga that played out over the past week, Microsoft's role also revealed a point underlining the company's increasing presence in all corners of high tech: For Microsoft, decisive expansion is a strategic necessity, given Wall Street's expectations for the high-growth firm.
Microsoft has one of the richest men in the world for a chief executive, 90 percent of the consumer operating system market, and cash reserves of more than $20 billion at its disposal. Its ambitions and aggressive business practices have landed the company in antitrust hot water.
But in stark contrast to the wide swath Microsoft has cut across the computer industry and the debate it has sparked on antitrust regulation and innovation, the company has at times failed to follow through in delivering on its premise as a company: building software. The company's Windows CE operating system--which AT&T plans to use in up to 10 million cable television set-top boxes--has found little traction in the market thus far and is far from optimized for the needs of the cable industry, according to some.
As an example, the software has not yet supplanted the technology running inside hardware from subsidiary WebTV Networks, which specializes in allowing consumers to surf the Web using their television.
No better time for Microsoft to wield its market clout, it seems.
"Microsoft wants a seat in the new broadband environment, and they bought that seat," said Jim Balderston, an analyst with market watcher Zona Research.
"For Microsoft, having $20 billion in the bank certainly helps. And, in the AT&T deal, $5 billion helps to erase a lot of reservations [about Windows CE's capabilities]."
AT&T executives said they remain committed to keeping their broadband network open to all technologies, including Java-based software from Microsoft rival Sun Microsystems.
The set-top box has been a battleground before. Amid rumors Sun would swing a deal with what was then Tele-Communications Incorporated early last year, Microsoft swooped in and--in an 11th-hour alteration--made sure its own software would be part of TCI's plans as well.
"Is this indicative of the way Microsoft will do business in the future? Sure," said Ted Shadler, an analyst with industry consultants Forrester Research. "Look at AT&T--what did it do to reinvent itself? Bought its way into a new business.
"MS is such a behemoth--when you have that sort of penetration on the desktop and you're used to 30-35 percent returns every year--you have to keep looking for new revenue opportunities," Shadler noted.
In the early 1990s, Microsoft pushed its way into the then-booming handwriting recognition market with Pen Windows, a hastily re-tooled version of Windows 3.1 roundly criticized for its flaws. In the process, Microsoft outflanked Go, a startup widely considered to have superior technology.
Another example is the desktop database market, where for years Microsoft lagged competitors. Even though the first version of Microsoft Access was considered buggy and slow, it eventually captured the market lead and in the process virtually erased long-standing competitors, such as Borland's Paradox.
Despite the state of CE, Microsoft has once again wedged its software into a new niche. "I'm sure the fact that Microsoft can cut a check for $5 billion annoys the hell out of their competition--Sun for instance," said Zona's Balderston.
In the end, industry observers believe Microsoft may be able to chalk up another win, safe in the knowledge its software will play a large role in what is expected to be a booming market for services delivered over broadband pipes.
"It's huge in terms of the strategic message," said Michael Stanek, analyst with investment bank Lehman Brothers. "Microsoft can't take the company to the next level until the bandwidth sorts itself out."