January 30, 1996

MCI and Microsoft Plan Internet Venture


In the promiscuous world of digital technology, where most companies prefer playing the field to going steady, MCI Communications announced Monday that it had signed an Internet alliance with Microsoft Corp.

This, even though it already has an on-line partnership with Rupert Murdoch's News Corp.

Under the terms of the deal, MCI and Microsoft will jointly develop and market an array of on-line and Internet services. Microsoft said it had chosen MCI as the primary distributor of its commercial on-line service, the Microsoft Network. And MCI said it would promote Microsoft's Internet software and browser throughout its network.

MCI is already developing an on-line service with News Corp. But MCI chairman and chief executive Bert C. Roberts, , said his company would reduce its 50 percent equity stake in the venture to a minority interest.

"We are pushing our boat into Microsoft's waters as we go forward," Roberts said in a telephone conference call.

Microsoft chairman Bill Gates said MCI would help Microsoft as it tried to build the Microsoft Network into a on-line service rivaling America Online or Prodigy. Microsoft's service has 600,000 subscribers, while America Online has 4.5 million.

"MCI and Microsoft have a lot in common," Gates said. "We both see a lot of opportunities on the Internet." He added that no money was changing hands in the deal. But he said Microsoft would take in some revenue as MCI used its software and Internet browser.

Analysts said the deal would benefit MCI by relieving the long-distance carrier of the expense of designing its own on-line service. Since Microsoft will also promote MCI's regular telephone services, MCI will have access to the 80 million customers who use Windows software.

"If the name of the game is everybody competing with everybody else," said Jack Grubman, an analyst at Salomon Brothers, "then the more stuff you can sell to your customers, the better."

MCI's deal is a setback for its other venture with News Corp. MCI had originally promoted on-line services as the centerpiece of its $2 billion alliance with News Corp. News owned the struggling Delphi on-line service, and both companies planned to use Delphi as the base for a much larger service.

"It seems clear that MCI has been frustrated by the slow pace of development there," said Emily Green, an analyst at Forrester Research in Cambridge, Mass.

Delphi still has fewer than 100,000 subscribers, and the company has said little about new marketing or technology initiatives.

Scott Kurnit, chief executive of the MCI/News joint venture, said MCI's priorities had changed since it struck its alliance with Murdoch last May. He added, "We are pursuing several other companies about becoming partners with us."

Executives familiar with the venture said that Wednesday it would announce that Oracle Corp., the software developer, was taking a 40 percent equity stake in the venture. News Corp. will also own 40 percent, while MCI's interest will drop to 20 percent.

For his part, Roberts pointed out that the MCI/News Corp. partnership was expanding in other ways. The companies plan to collaborate in delivering satellite television, using a high-powered orbital slot that MCI won in a government auction last week for $472 million.

Analysts said News Corp. would provide entertainment programs to the satellite venture through its Fox television network.

In a sign of just how Byzantine the deal-making has become, MCI has a deal with News Corp. and Microsoft, while Microsoft has a separate deal with another television network, NBC. Microsoft and NBC plan to start a 24-hour news network and on-line service, MSNBC.

Executives at NBC did not return calls seeking comment on how Monday's announcement might affect their deal with Microsoft.

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