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Microsoft, RadioShack in surprise deal

Microsoft invests $100 million in RadioShack and announces an alliance to promote Web technologies and consumer products within Radio Shack retail stores.

Microsoft and RadioShack have formed an e-commerce alliance to promote high-speed Internet connections and other services, a surprise move aimed at revitalizing the software company's Web strategy and boosting the consumer electronics chain's revenues.

Microsoft has also made a $100 million investment in a newly launched e-commerce site called RadioShack.com that will be featured on Microsoft's MSN Web portal. Under a five-year deal, the two companies plan to establish a Microsoft "store within a store" in as many as 7,000 RadioShack locations nationwide.

Although the dollar investment is relatively small for Microsoft, the deal carries ramifications on several fronts. The move indicates that Microsoft is determined to forge ahead with aggressive plans to expand, less than a week after receiving significant criticism from the judge presiding over its federal antitrust case.

From a strategic perspective, the alliance may infuse energy into Microsoft's Web operations, which have often struggled in areas ranging from its MSN portal to content ventures such as Sidewalk. The arrangement will also give Microsoft a vast outlet to sell its stripped-down Windows CE software for TV set-top boxes, handheld devices, and other consumer products as Internet usage quickly expands beyond desktop computers.

Through RadioShack's mass marketing and the MSN Internet service, Microsoft will provide more direct competition to America Online. In fact, according to a Merrill Lynch report, AOL also tried to strike a deal with RadioShack.

"We're partnering with RadioShack to take on the next frontier of computing: getting America connected to the Internet," Microsoft chief executive Bill Gates said in a conference call with reporters today.

For Tandy, RadioShack's parent corporation, the alliance is hoped to increase current income levels of $61 million by fourfold in 2004. Perhaps even more important in the long run, the association with Microsoft will update public perception of the RadioShack brand, which many believe has long been in need of a makeover.

The companies will immediately begin designing the Microsoft store concept and expect to begin deploying the sub-stores during the third quarter of next year, the companies said.

Microsoft
at a glance

HQ: Redmond, Washington  
CEO: Bill Gates  
President: Steve Ballmer  
Employees: 32,902  
Annual sales: $19.7 billion  
Annual income: $7.8 billion  
Date of IPO: May 1985  
Ticker: MSFT  
Exchange: Nasdaq

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Source: Bloomberg 11/11/99

RadioShack has several similar "store within a store" alliances with other major electronics companies including partnerships with RCA to sell satellite TV systems, a Compaq Computer center, and Sprint's cellular phone sales stand.

"We basically looked at Microsoft as really providing that partnership for our entire home strategy, which goes beyond the ISP," Tandy chief executive Len Roberts said in explaining why RadioShack chose Microsoft over other ISPs. "It goes on to all the products and devices we'd be selling and the services associated with those."

Microsoft already owns a handful of its own branded retail stores nationwide. The software giant said the alliance is intended to promote adoption of regular dial-up and high-speed Internet access using its products and services.

This morning, trading in shares of Tandy was halted twice on the New York Stock Exchange as rumors surrounding the deal began to leak on Wall Street.

Tandy shares jumped 6.19 to 71.38 in the first 30 minutes of dealing on the New York Stock Exchange before trading in the stock was halted pending a news announcement. Tandy closed up 6.25 to 71.44. Microsoft shares closed up 2.50 to 89.62, a sign of confidence from Wall Street that the company is not flinching in the face of antitrust issues.

"Aggressive acquisition of customers is something we will continue to do," Microsoft vice president Richard Belluzzo said. "We will be aggressive in bringing new subscribers online, and we'll share that benefit with RadioShack."

The timing and nature of the deal is particularly sensitive for Microsoft, given U.S. District Judge Thomas Penfield Jackson's findings of fact only days ago that said the company already holds a monopoly status in computer operating systems with its ubiquitous Windows software.

At a shareholders meeting yesterday, however, Gates steadfastly refused to relent on his company's right to continue technological advancements despite the federal antitrust trial over which Jackson presides.

Microsoft has made a series of investments over the past year intended to boost its position in high-speed, or broadband, Internet access. Microsoft took a $5 billion stake in AT&T this spring and has made many other investments in Baby Bells and other communications companies.

"We're making sure every store has broadband connectivity so it can demonstrate it to customers," Microsoft president Steve Ballmer said today, referring to high-speed DSL connections for RadioShack customers.

Puppet masters: Who controls the  Net On Friday, Microsoft invested $200 million in broadband service provider Teligent. That's on top of a $200 million stake in telecom Qwest, $600 million in wireless player Nextel, $300 million in Dutch cable leader United Pan-Europe Communications, and $500 million in NTL, Britain's third-largest cable-TV operator.

Before the AT&T deal, Microsoft's largest broadband investment was a $1 billion stake in Comcast, one of the nation's largest cable-TV operators, in June 1997.

Microsoft further owns a 10 percent stake in Road Runner, Time Warner's cable Internet service.