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Microsoft signals

Co. may opt for set-top box deal with AT&T

NEW YORK — Software giant Microsoft Corp. is expected to invest $5 billion in AT&T, sources said Wednesday, in exchange for a guarantee that Microsoft software will be used in set-top boxes shipped to AT&T cable customers.

The expected investment also signals Microsoft will not proceed with any independent bid for MediaOne Group, making an AT&T victory almost certain in the wake of Comcast’s withdrawal from the bidding Tuesday night. Neither AT&T nor Microsoft returned calls.

Meanwhile, Comcast’s stock price rocketed $8.90, or 13%, to $75.59 Wednesday as investors applauded its abandonment of the bidding war. In exchange for its withdrawal, AT&T agreed to sell cable systems serving 2 million customers to Comcast, including a key Philadelphia-area system.

Most other cable stocks rose sharply: AT&T, which becomes the biggest cabler in the nation with about 14 million subscribers, saw its stock rise $5.31 to $56.87 while Time Warner stock rose $4.18 to $71.25.

Cablevision Systems Corp. stock rose $2.50 to $80.93 while Cox Communications stock added 75¢ to $79. MediaOne stock, in contrast, fell $1.31 to $76.31 as chances for a higher offer collapsed.

Good for cablers

Bear Stearns analyst Ray Katz said in a note to clients that the deal was good for cablers generally because it increases the chances of AT&T telephony joint ventures for the rest of the industry, adding another income stream for cable operators.

AT&T and Comcast execs met the press on a conference call, where Comcast president Brian Roberts explained that his rationale for buying MediaOne was to add subscribers and improve its geographic “clusters.”

“We feel we have achieved both of those outcomes in this deal,” Roberts said. Indeed, while Comcast would have paid $52 billion to buy MediaOne’s 5 mil-lion subscribers, as well as a huge array of international investments it would have had to sell off, it is paying $9 billion to buy 2 million subscribers.

People close to Comcast said Wednesday the cabler was confident of getting enough financial backing from Microsoft to finance a higher bid. But even while it continued to work on a new bid, it began talking with AT&T earlier this week and quickly began comparing what it could get from AT&T with what a new bid would entail.

Making a higher bid would almost certainly hurt Comcast’s stock price, sources said, and would invite an even higher bid from AT&T.

As for Microsoft, it is expected to get a guaranteed order for its Windows CE software for AT&T set-top boxes in exchange for the $5 billion investment in the telco giant, sources said, although AT&T chairman Michael Armstrong refused to comment on the discussions when asked by reporters Wednesday.

Lawmakers unhappy

In Washington, D.C., the reaction from Capitol Hill to AT&T’s apparent victory in the MediaOne bidding war was not positive. Sen. Mike DeWine (R-Ohio.), who heads the Senate antitrust subcommittee, wasted no time in scheduling a June hearing on the merger.

“We need to closely examine all competitive aspects of this proposal to ensure competition is preserved and consumers are protected,” DeWine said in a statement released by his staff.

DeWine and his Sen. Herb Kohl (D-Wis.,), the ranking Democrat on the subcommittee, acknowledged that the deal could spur local telephone competition, but added, “the jury is still out on how it will affect the cable/video market.”

House Telecommunications Subcommittee Rep. Billy Tauzin (R-La.) said he is “gravely concerned” about the deal and will urge the FCC and the Justice Dept. to take a close look at it. His first reaction, according to a Tauzin spokesman, is to oppose the deal. Congress can encourage agencies to give the deal a thorough examination, but has no authority of its own to block the deal.

(Chris Stern in Washington, D.C., contributed to this report.)