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Microsoft drops out of college deal

The tech giant pulls out of a controversial deal with the California State University system, saying it wouldn't have made enough money.

Saying it won't get enough bang for its buck, Microsoft has pulled out of a controversial ten-year deal that would have made it a money-making business partner with the world's largest university system.

California State University's newly appointed chancellor, Charles Reed, said today that the software giant and Hughes Electronics are no longer part of the negotiations to create a limited liability corporation known as the California Education Technology Initiative, or CETI.

As previously reported, the plan has been under fire by Microsoft competitors as well as students and faculty who were worried the companies would get exclusive access to the CSU's 350,000-person community. CSU sought out the corporate partners to help finance a $300 million technological retrofit for its 23 campuses by the year 2000.

GTE and Fujitsu are still in on the proposed deal, which has been on shaky ground since the state legislature held public hearings in January. A final business plan has yet to be released detailing how revenue generated by the partnership, estimated at $3.8 billion, would be divided among the partners.

The plan was expected to be released by April 1, to be followed by a 45-day public review period. But now the CETI business plan--or any deal at all--may not be delivered until the fall.

"Our negotiating team has worked seven days a week over the past several months trying to put together the best possible agreement for the CSU, its faculty, and students," Reed said.

"It may be well into the next academic year before we know for certain whether a CETI agreement can be reached with GTE and Fujitsu. Microsoft and Hughes will not be CETI partners," he added. "The CSU is continuing to work with Microsoft on an appropriate relationship."

Microsoft and Hughes were unable to agree with CSU on how the revenue earnings and investment risk liability would be broken down among the university and partners.

"We also couldn't reach an agreement on how much revenue would be generated," said Ken Swisher, a spokesman for the CSU chancellor's office. "We're still talking with Microsoft about something that would be complementary to CETI."

Microsoft said it is withdrawing from the deal because the company would not make enough money from its investment.

"Basically it was a mutual decision. We were being asked to make a financial investment at a level that we were not comfortable with," Liz King, general manager of Microsoft's education customer unit, said today.

But, she added that Microsoft still is interested in selling technology to CSU. "We hope to be able to supply technology to the partnership as it evolves," King said.

And although the CETI partnership is in flux, Reed said he is convinced that the state can't provide the funding CSU needs. So the system will keep searching for a private-public solution.

"CETI--or a similar public-private partnership carefully negotiated to be in the best academic and financial interests of the CSU, its faculty staff and students--is still the way to go," he stated.

"As someone who joined the CSU after CETI negotiations were well under way, I feel comfortable expressing my great pride at the vision, the foresight and the entrepreneurial courage of those who began this project more than two years ago," he added. "We look forward to working with everyone to make sure the CSU has the best technology available for the 21st century."

From its conception, CETI has been bombarded with criticism, which was only fueled by the federal antitrust probe into Microsoft's business activities. Foes argued that the software maker would be able to boost its already-strong presence throughout the system and brand generations of consumers through the new products the companies were expected to create and market. Adding to the controversy, Microsoft rivals such as Apple Computer and Netscape Communications were not invited to submit proposals to CSU.

However, CSU had long contended that the deal would not make Microsoft or other contractors the exclusive technology providers for its campuses, and that other firms' products would still be purchased. To get private financing, CSU said its partners could develop revenue streams that all parties could benefit from--such as launching a CSU local telephone company.

The initial CETI agreement also pegged Microsoft's Windows operating system and Office suite as the best-suited programs for CSU. Netscape Navigator, however, was to retain its spot as the system's dominant Net browser.

But the controversy over CETI hasn't quelled Microsoft's ambitions in the education market. Last month, Indiana University said it would spend $6 million under an agreement with Microsoft to upgrade the university's infrastructure and to supply its 100,000 students and faculty with Microsoft Office, Windows 98, and Internet Explorer Web browser for their home computers.