According to a report in the Wall Street Journal, Microsoft's problems shipping its Windows CE-based interactive TV software are going affect AT&T as well. As reported previously, Microsoft got into hot water with Pan-European Communications (UPC) earlier this month when the European cable giant announced that it would simply drop Microsoft if the company didn't deliver on schedule. Microsoft admitted that the software was running late, but stated that it would rather ship it in usable form than meet an arbitrary schedule. But now the company is in danger of losing a crucial contract with AT&T, which had hoped to use the software in over 10 million set-top boxes in the United States.

Sources close to the company say that the interactive TV software has run into a number of major issues and Microsoft met with AT&T officials to discuss these problems a month ago. After planning on shipping the interactive boxes to customers in major U.S. cities this summer, AT&T has been forced to scale back its plans considerably because of Microsoft. Instead of the previous plan, the company now hopes to be able to perform technical trials early next year in a limited number of locations.

But like UPC, AT&T says that it can no longer wait on Microsoft. The company has a non-exclusive contract with the software company, meaning that it can ship software from other vendors if it likes. But the loss of 10 million units would be a tough defeat for Microsoft, which has had precious little success with Windows CE in any market. The company has foisted the ill-received OS on users of handheld and palm-sized computers, so-called Auto PCs, embedded devices of every possible variety and, now, set-top boxes. In the interactive TV market, competitors abound, and these companies don't have the spastic multiple market targets that saddle Windows CE. Companies such as Liberate and OpenTV hope to fill the gap left by Microsoft's inability to deliver, and both companies are already talking with UPC. Representatives from both companies declined to comment on their relationship with AT&T