AT&T snubs Sun in digital TV plan

In what could turn out to be a major blow for Sun, AT&T is siding with Microsoft's CE operating system for a new breed of digital TV services following a $5 bn (£3bn) broadband deal announced today.

The pact sees the software giant take a 2 to 3 percent stake in the US telecoms behemoth -- around $5 bn (£3bn) in AT&T securities -- and, most significantly, the adoption of Windows CE software in 7.5 to 10 million set top boxes. AT&T aims to wire up more than 80 million digital subscribers.

Today's deal sees the creation of three "model cities" in the US in which customers, many of them already customers of AT&T and its subsidiary TCI, get to test "an enhanced TV experience" -- as Microsoft chief financial officer Greg Maffei put it. At the heart of these services is Microsoft's TVPack, a client-server package that supports services from email to interactive entertainment, although details about this were sketchy.

But journalists and analysts quizzed AT&T and Microsoft bosses about favouring Windows CE and the fate of Sun's deal with TCI in which Java is the set-top box operating systems platform.

David Nagel, AT&T's president of AT&T Labs, insisted that about the deal did not go against the grain of the industry's open platform goals. "We've agreed to use client software from Microsoft. Although Sun software could run on the devises too," said Nagel.

One of three showcase cities will be an "interoperability demo" using Microsoft software with a third party server system, according to Leo Hindery, head of AT&T's broadband and Internet business. Microsoft's investment will help the telco bankroll the rapid development and deployment of interactive services and suggests that AT&T was unhappy at the speed of progress of its current broadband project. "We needed a quicker deployment of services and more inventory, which Microsoft is providing," said Hindery.

"We aim to convert long-distance business into any-distance business," said AT&T Chairman Michael Armstrong.

European IDC analyst Michael Arnbjerg believes the ongoing DoJ trial has forced the software mammoth into diversifying. "Set-top box software is not the only reason for this deal. Microsoft's monopoly situation is forcing it to diversify and strengthen its position in the converging telecoms and ISP market," said Arnbjerg. "Just like the browser in Windows saga, Microsoft wants more control here," he added.

The pact is another step in the metamorphosis of the telecoms industry which is forging partnerships with Internet, hardware and software players almost every week. Only last week, AT&T agreed to buy US no.3 cable operator MediaOne for $54 bn, shoving rival bidder Comcast , in which Microsoft has a stake, aside. But not completely. In a sneaky side-deal, Comcast gets another 2 million cable subscribers while AT&T gets the cream by securing last mile access into Comcast customers' homes.

IDC predicts the European set-top box market will exceed 12 million by the end of 2002, by which time European Web users will top 135 million. Set-top boxes and other devises, not PCs, will drive Net uptake, according to IDC.