By Stephen Nellis and Angela Moon

(Reuters) - Microsoft Corp and AT&T Inc on Wednesday said they reached a deal under which the telecommunications company will tap Microsoft's Azure cloud service for its computing needs and use Microsoft 365, which includes Office productivity software, for much of its 268,000-strong workforce.

Under the deal, Microsoft and AT&T will also work together on so-called edge computing, which will see Microsoft technology deployed alongside AT&T's coming 5G network for applications that need extremely small delays in passing data back and forth, such as air traffic control systems for drones. The multi-year deal is worth more than $2 billion, according to a person familiar with the matter.

The agreement is a major win for Microsoft, which will become AT&T's "preferred" cloud vendor and is fighting to gain market share from Amazon.com Inc's Amazon Web Services, the biggest provider of public cloud services. Cloud service customers run their software applications in data centers managed by the cloud provider.

AT&T will remain responsible for its own core networking operations for cell phones and other devices. But John Donovan, chief executive of AT&T Communications, told Reuters the deal is a fundamental shift for the telecommunications provider to become "public cloud first," meaning that it will predominately rely on data centers built by others to power the rest of its business.

"This is one of the most far-reaching initiatives we have put together because of it being so comprehensive," he said.

For Microsoft's part, the company will also gain a partner to sell its edge computing services, which will help software developers write programs for situations like factories whose machines are fitted with sensors to collect data or retail stores fitted with sensors and cameras to help keep inventories up to date.

"Our general heritage of being a developer tools company, combined with the network capabilities of AT&T, is unique," Microsoft Chief Executive Sayta Nadella told Reuters.

The deal between Microsoft and AT&T came a day after AT&T said that its AT&T Business Solutions unit will tap International Business Machines Corp to help modernize its software for the cloud and move it back and forth across data centers. An IBM spokesman confirmed that the deal is worth billions of dollars over several years but did not provide a precise figure. The Financial Times earlier reported the IBM deal value.

Ed Anderson, an analyst with research firm Gartner, said too little is known yet to say how important the 5G and edge computing aspects of the deal will be.

"In addition to (AT&T) being an important customer, you've got two big important technology companies starting to come together to think about what some other possibilities are," Anderson said. "But at this point, it's really kind of left to the imagination to kind of figure out what those possibilities are."

(Reporting by Stephen Nellis in San Francisco and Angela Moon in New York; Editing by Cynthia Osterman and Steve Orlofsky)