Microsoft changes channel on TV plans

After spending billions of dollars and the better part of a decade trying to make inroads in the high-stakes world of television, Microsoft is changing the channel on its plan to connect TVs to the Internet and push software into consumers’ living rooms.

The new focus is on delivering interactive digital TV applications (IDTV) that financially troubled cable companies can both afford and easily use to differentiate themselves from satellite companies offering rival digital services, while at the same time supporting Microsoft’s long-term strategy of becoming the premier content gateway to the home.

Though MS TV Advanced software, designed for a new generation of set-top TV boxes that never made it to market, has failed to capture any big customers, Microsoft is putting the finishing touches on new software for the installed base of “thin client” set-top boxes that have been deployed by cable companies.

The Interactive Programming Guide (IPG), released last year and designed to make it easier for TV watchers to find shows and customize their viewing, was the first shot in a salvo of new software from the company’s MS TV unit. New services are slated to be trialed and unveiled late in the second quarter, according to cable industry executives and sources briefed by Microsoft.

“I’m interested in the software because of the revenue that can be derived from the new services,” said Neal Schnog, president of Uvision LLC and a director of Willamette Broadband LLC, two tiny Oregon cable companies that have started deploying IPG. Later this year, the companies will be rolling out services including video-on-demand navigation tools and the ability to add video-on-demand subscribers.

Upcoming software, to be incorporated into the MS TV thin-client client platform with IPG, is designed to enable operators to offer features including multiplayer trivia games and local-content management of instant info services for local news, sports and weather, according to sources familiar with Microsoft’s plans.

The new product line represents a change in direction for Microsoft. For all its R&D, marketing might and the approximately $10 billion spent on stakes in cable companies, the Microsoft TV product family has been bested in the market for cable television software by rivals with far fewer resources.

Now, bowing to market reality, a humbled Microsoft is trying again. MS TV software will be tested by cable giant Comcast in the second quarter, in addition to software from Microsoft’s financially ailing rival, Liberate Technologies Inc., according to cable company executives.

“If Microsoft succeeded in a deal with a big company like Comcast, it would send shock waves through the industry,” said Jim Brancheau, an analyst with Gartner Inc. Such a deal would signal that Microsoft’s perseverance has started to pay off, Brancheau said.

Microsoft went on an investment spree in the late 90s, snapping up $5 billion worth of AT&T Corp. and $1 billion in Comcast, as well as varying amounts in companies outside the U.S., including Globo Cabo SA in Brazil, United Pan-Europe Communications NV (UPC) in the Netherlands, NTL Group Ltd. and Telewest Communications PLC in the U.K., and TV Cabo Portugal SA. While some of these companies tested Microsoft’s software, only Globo Cabo and TV Cabo ended up actually deploying the technology.

Microsoft got a black eye when reports surfaced in 2000 that it could not meet timetables for delivery of set-top box software to AT&T. Economic pressures later forced AT&T to scrap plans for advanced interactive TV services.

Last year, Microsoft’s stake in AT&T went to Comcast when Comcast acquired AT&T Broadband. As part of that transaction, Comcast, which has more than 6 million digital TV subscribers, made a deal to trial Microsoft software this year.

In the U.S., Microsoft’s other TV-related initiatives include Ultimate TV, a service for DirecTV satellite subscribers that lets them play digitally recorded programs at any time, and the MSNTV services, formerly called WebTV, which lets TV viewers access the Internet. However, Microsoft last year drastically scaled back R&D for UltimateTV. MSNTV, though it reaches about 1 million users, is not expected to grow very fast.

“Why buy a special box for ‘Net access on a low-res TV monitor when you can go get an eMachines computer for $300 to surf the Web?” noted Greg Ireland, an analyst with market researcher IDC in Framingham, Massachusetts.

In fact, expectations about what “interactive” television would be all about have changed drastically over the past few years, noted Ireland and other analysts. “In the late 90s there was talk of the ‘triple play’ set-top box,” which would meld Internet access, TV and telephony, all coming in from a broadband pipe to the home, said Ireland.

But this vision was dashed against the hard rock of economic reality when, as the Internet bubble burst, AT&T announced it would not roll new advanced or “fat-client” set-top boxes, he said. Other operators followed suit.

Largely as a consequence, Microsoft failed with MS TV Advanced, which, among other requirements, needed cable operators to deploy costly new fat-client set-top boxes with high processing and memory capabilities, according to Jason Armitage, senior analyst with IDC in Spain.

“The focus on triple-play service wasn’t only Microsoft’s fault; the cable operators wanted this services and, quite frankly, they still need this service to differentiate themselves from satellite companies,” he said.

In a highly publicized move, UPC dumped Microsoft’s advanced TV software after several months of testing the product in favor of Liberate, which won NTL and Telewest as customers, as well.

“TV Cabo continues to act as Microsoft’s guinea pig for TV Advanced, which is still receiving some attention but is no longer a priority,” said Hellen Omwando, an analyst at the Amsterdam office of Forrester Research Inc. “If Microsoft is truly serious about getting a foot in the door of the cable market in Europe and the U.S. for that matter, then it needs to focus on applications. The middleware market is locked up.”

ITV in Europe is dominated by Liberate, Liberty Media’s OpenTV unit, and Canal+ Technologies, according to Omwando. These players offer software that incorporate server functions, client applications and the middleware that is necessary to run the applications on set-top boxes, each of which has its own operating systems.

The middleware layer is being commoditized, however, with the advent of European-driven Multimedia Home Protocol (MHP), Omwando said.

MHP is a set of open specifications for middleware that incorporate Java and HTML and allow content developers to write their applications in a format capable of running on diverse operating systems for set-top boxes and multimedia PCs, among others.

In countries, like Germany, where financially beleaguered operators have yet to digitize their terrestrial cable networks for interactive services, only companies supporting MHP have a chance, Omwando said.

However, despite MHP’s many advantages, the technology is not without its drawbacks. Perhaps the biggest is the potential need to retire existing set-top boxes. While officials at the Digital Video Broadcasting (DVB) project in charge of MHP standardization contend that MHP can be downloaded to existing set-top boxes and run in parallel with other middleware products, Omwando has her doubts. “The boxes currently deployed in the market lack the capacity to have two middleware systems running in parallel,” she said.

Microsoft will support European MHP set-top box standards and the related U.S. OCAP (Open Cable Application Protocol) specification, “when they become a reality,” said Ed Graczyk, director of marketing for Microsoft’s MS TV unit.

The client – set-top box – side of MS TV software is only one component, however. With IPG Microsoft rewrote MS TV software, paring down the code that runs on the set-top box. Application processing takes place on the back end, with the set top box running only the code needed to present an interface to the user and send back user commands to the server, Graczyk said

On the server side, MS TV software runs on top of Windows 2000 Server and Windows 2000 Data Center Server and integrates SQL Server query features. Capabilities include the ability to track advertising, for example, to record how many people clicked on a certain ad.

While Microsoft had initially set out to sell operators a complete “take it or leave it” package of features including middleware for advanced set top boxes, it is changing its approach, according to Gartner’s Brancheau and other analysts.

“The software for the advanced platform was an all-in-one type of thing where Microsoft wanted operators to buy everything, e-mail services and all kinds of features,” said Gartner’s Brancheau. “Now Microsoft has taken a more component-centric approach, where they are offering different services that the operator can pick and choose.”

However, even though the number of IDTV-enabled households in Western Europe is expected to rise, with IDC forecasting growth from 5.5 million in 2002 to over 19 million by 2006, the MS TV unit, has no public timetable for rolling out IPG in Europe, according to Graczyk.

Though Microsoft wants to renew efforts to get into the market, the European cable operators are in such bad shape that they can’t contemplate building out new services at the moment, he says.

Elsewhere, a development team in China is working on products for the national TV market there. Graczyk had no timetable for the release of a product in China, nor in the rest of Asia.

One task MS TV faces: the need to port its set top box software to the various devices’ operating systems, and different TV signal standards around the world.

Meanwhile MS TV products are part of a bigger picture, “the vision of the ‘connected home’,” Graczyk said.

“The triple play may still happen, but on different devices,” Graczyk said.

In fact, some analysts believe that Microsoft isn’t betting on any one technology to control the broadband gateway into the home, but a number of different technologies, ranging from its PC-based Windows XP Media Center to its game console Xbox. “Microsoft wants to have all elements of technology to sell to the various folks in the delivery chain of content to the home,” said Ford Cavallari, senior vice president of broadband and media services at the consultancy Adventis. “The company is putting several chips on the table. It’s not clear which chip is going to hit the big number.”

With its deep pockets, though, Microsoft can afford to bide its time and invest without an immediate return. That counts for a lot in the current economic climate, with companies like Liberate being delisted from the Nasdaq exchange and UPC undergoing bankruptcy reorganization.

“The winner in the market may be the provider who is in the position to hold its breath the longest,” IDC’s Ireland said.

“We may not be market share leader today but you know we’re not really worried about trying to capture the 2 million set-tops Liberate has,” Graczyk said. “We’re focused on the bigger opportunity which is how we bring the services to a much broader population of users around the world. You can’t say that the game is lost in the first half of the first inning of a game that will go into overtime.”