Microsoft wins multibillion-dollar cloud deal from AT&T

Key Points
  • All AT&T Communications employees will use Microsoft 365, which includes Windows 10 and Office 365.
  • AT&T will move applications to Microsoft's Azure cloud.
  • The deal is not exclusive, as AT&T announced a separate deal this week.
AT&T and Microsoft announce strategic alliance worth more than $2 billion
AT&T and Microsoft announce strategic alliance worth more than $2 billion

Microsoft just scored a marquee deal for its cloud business, announcing Wednesday that AT&T will use the company's Azure infrastructure and move most of its employees to the Microsoft 365 package of productivity apps and security services.

The multiyear deal is worth more than $2 billion, according to a person familiar with the matter who asked not to be named because the terms are confidential. For Microsoft, which is chasing Amazon Web Services in the cloud infrastructure market, AT&T represents both a hefty buyer and a highly recognizable brand with significant data storage and computing needs for its more than 250,000 staffers.

Beyond AT&T's own internal use of Microsoft technology, the companies are working together on developing tools for artificial intelligence and high-speed 5G wireless, and plan to announce additional services later this year.

"With things like 5G coming together, we absolutely think the combination of AT&T and Microsoft can really go fulfill the demand which is going to be very broad-based across what is commercially led innovation," Microsoft CEO Satya Nadella told CNBC in an interview. "This next phase of, I'll call it the cloud and edge and AI era, will be led by what I would broadly call more production versus just consumption."

Accenture estimated last year that U.S. telecom operators will spend $275 billion over seven years to build out communications networks for autonomous cars and the world of connected devices, or internet of things.

AT&T Communications CEO John Donovan speaks during the Department of Homeland Security's Cybersecurity Summit on July 31, 2018 in New York City. 
Kevin Hagen | Getty Images

Many of Microsoft's big wins of late have come in the retail market, where companies like Gap, Kroger, Albertsons and Walmart's don't want to finance Amazon, their biggest competitor, especially as the e-commerce leader pushes further into physical retail. AT&T is a longtime customer of Microsoft and, in moving its technology to the cloud and the latest apps, underscores how Microsoft can use its existing position in the enterprise market as an advantage over AWS.

"The ability to work with someone who has a really strong track record in how enterprises are creating, recreating themselves into a digital form is a very important part of why we selected Microsoft," John Donovan, CEO of the AT&T Communications business, said in an interview with CNBC.

The deal is not exclusive, and AT&T is permitted to use other cloud providers in addition to Azure, Donovan said. On Tuesday, IBM announced a deal with AT&T that involves cloud migration.

Microsoft investors are counting on continued expansion out of Azure, which grew 73% in the latest quarter, though the company still doesn't break out numbers from the business. Its achievements in cloud have been the driving force behind Nadella's success since he was elevated to CEO in 2014, and have catapulted Microsoft past $1 trillion in market cap to become the world's most valuable publicly traded company.

Shareholders are so bullish on Microsoft's prospects that they now value the company at more than 26 times earnings for the next 12 months, the highest multiple since 2002, according to FactSet.

AT&T says it's becoming a "public cloud first" company, moving applications from its data centers to Azure and employees in its communications business to Microsoft 365, which includes Windows 10, Office 365, and mobility and security services. AT&T Communications accounts for about 78% of total company revenue.

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