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Microsoft sees a future on the small screen
Seattle Times technology reporter
It took 12 years and more than $10 billion, but one of Microsoft's biggest dreams may finally be coming true: The company is close to becoming a major player in the television business.
This is not about PCs that play video — the company has done that for years — but rather a whole new platform for delivering television over the Internet, through software that's mostly invisible to consumers.
The company is helping phone companies build a new infrastructure for delivering bleeding-edge television services, superfast Internet and phone services over a single line to the home. It's a test of how far Microsoft has evolved beyond desktop software and whether it's ready to join the elite fraternity of tech companies that can power massive, ultrareliable "carrier grade" systems used by the telecommunications industry.
Consumers will see cool new features — imagine four live pictures on a screen at once — instant channel changes and more options for on-demand video rentals, including high-definition content. Microsoft TV also merges phone services, so incoming messages, e-mail and caller ID can be displayed on users' television screens.
Microsoft hopes its Internet protocol television system (IPTV) will also be used in India, China and other developing countries, where it could provide education and government services as well as entertainment via the television.
With PC sales slowing as the market saturates, Microsoft is salivating over the potential of faster-growing areas such as television and mobile phones.
"When we look at those two areas — mobile phones and TVs — we see huge potential for software to improve and really expand the experience for consumers and the type of value that those devices and the services attached to those devices deliver," said Microsoft TV Division Vice President Moshe Lichtman, a 14-year company veteran who took over the struggling TV group in 2001 and now runs it remotely from his native Israel.
Fits and starts
1994: Announces "Tiger" software for interactive television devices, plans test in the Seattle area.
1997: Invests $1 billion in Comcast, buys WebTV for $425 million.
1999: Announces first iteration of Microsoft TV product and invests $5 billion in AT&T and $4 billion in European cable companies.
2000: Microsoft TV division created.
2001: Major deployment in Portugal announced.
2002: Portuguese product performs poorly, UltimateTV group cut, 168 jobs cut.
2004: Comcast agrees to use TV Foundation products on up to 5 million set-top boxes, usage debuts in Washington state; SBC signs $400 million, 10-year contract to use Microsoft TV IPTV Edition platform.
2005: Microsoft forms alliance with Alcatel, signs contracts with Verizon and carriers in Western Europe.
Sept. 22, 2005: Verizon deploys Microsoft-based TV service in Keller, Texas.
Lichtman, 48, said the product "has really caught on fire," but he does worry that it may undo some of the productivity gains that Microsoft's PC software brought to the world.
"I like to think that what we do is 100 percent goodness for humanity, but since my 15-year-old daughter increased her TV consumption almost two fold, I'm wondering about that," Lichtman said. "It's a captivating experience, especially our IPTV system — from the moment you pick up the remote and hit the on button, it really draws you into the experience."
The system also won over phone companies, which are racing to add television services to defend their turf from cable companies, which are increasingly offering phone services.
Off to a slow start
Over the past year, four of the five major phone companies in the U.S. and others in Europe and Asia have signed contracts worth up to $400 million to use Microsoft's TV software. Those companies cover 75 percent of the U.S. and much of Western Europe. Globally, Microsoft has contracts with companies providing 26 percent of the world's phone lines.
It may be some time before the service gets to the Seattle area. Qwest is the one phone company that has not signed a contract with Microsoft and hasn't committed to providing Internet-based TV services here. Verizon could bring its Fios service to the Eastside within a few years, but it's not disclosing any plans for the area yet.
Microsoft TV appears ready, but phone companies are starting slow, testing and tweaking the system before widespread rollouts over the next two years. Discs containing the final version of the software were delivered on Aug. 31, and on Sept. 22 Verizon started delivering the service in Texas. Verizon charges $39.95 a month for the starting package with 180 channels and free installation of a fiber-optic cable to the home.
But just because the systems are being installed doesn't mean it will work well or that customers will sign up, said Josh Bernoff, an analyst at Forrester Research in Cambridge, Mass. His market research firm predicts 2.2 million people will use the service by 2009, making Microsoft about the ninth or 10th largest television operator.
"To the extent that Microsoft TV can actually be deployed and work, it's fantastic," Bernoff said. "We have some skepticism about just how rapidly the telephone companies are going to be in a position to deploy."
SBC is also starting in Texas, where a statewide regulatory approach has made entering the television business relatively easy for phone companies.
With or without Microsoft, IPTV is expected to be a huge market, particularly as China expands its infrastructure. Subscribers are expected to increase from 2.7 million worldwide this year to 25.9 million in 2010, including 4.9 million in China and 3.4 million in the U.S., according to London-based research firm Informa Telecoms & Media.
Series of grand schemes
Talk of a Microsoft TV platform may seem like déjà vu. Over the years, the company has unveiled one grand scheme after another to provide TV services.
It first tried to merge the PC and the TV with a ballyhooed system called Tiger that it announced with Intel in 1994. Oracle and other competitors scoffed that Microsoft didn't have the experience to deliver such a system. It couldn't even get the prototypes to work when Chairman Bill Gates demonstrated them to a utility association in Seattle.
"You can see it's not going to happen overnight," Gates said at the time.
Then the company spent years developing sophisticated cable boxes. It also bought a California company called WebTV, which made devices for surfing the Web on a television, and continues to offer that service as MSN TV.
Partly to open doors with potential customers, the company invested more than $10 billion in phone and cable companies, including a $5 billion investment in AT&T, which later merged with Comcast. But that did little to move its early TV products.
Microsoft's cable boxes were ahead of their time. After cable operators scaled down plans after the tech bubble burst, the boxes lost potential customers. So far they're being used only by Comcast in the greater Seattle area and by three companies in Mexico.
"They never give up"
Four years ago, after an earlier version of its platform failed miserably after its debut in Portugal, Microsoft decided to regroup. It assessed its collection of TV technology and where it thought the industry was heading, and decided to focus on two areas. It would continue to produce software for cable boxes and it would develop an entirely new platform for delivering TV services over the Internet. It also cut the UltimateTV division that produced a TiVo-like device for satellite TV customers and laid-off 168 employees.
Microsoft stopped buying companies and investing in carriers in 2002. Instead, it recruited industry insiders and built a network of partnerships with Motorola, Sigma Designs, Tandberg and others that developed specialized TV technology.
"Once we put together the overall story, the overall strategy, it was pretty much smooth sailing," Lichtman said. "Both Bill [Gates] and Steve [Ballmer] are huge supporters of this business. They see the opportunity very clearly and we have been extremely prudent in how we have grown this business."
Two years ago the company announced the Microsoft TV IPTV Edition, a front-to-back system that extended from network centers to the set-top box that delivers television and other services via the Internet. It's designed so that companies can use the entire system, or mix and match with other components.
In some ways it's the classic Microsoft story: The company kept banging away until it got it right.
"They never give up, they don't lose, they just lose a round and come back," Bernoff said, noting that many other companies pursuing advanced television fell by the wayside. "It's just a brutal, brutal business and that favors someone with an infinite amount of capital and a lot of perseverance and a long view."
The timing also improved for Microsoft. Its platform arrived just as phone companies were scrambling to upgrade their networks and add television and other products to compete with cable while offsetting their losses to wireless services. Microsoft also works with cable companies, but that industry is pursuing a new standard that includes an old Microsoft rival, Sun Microsystems' Java platform.
The complete system offered by Microsoft appealed to SBC, the second largest phone company in the U.S. and the first to install the entire Microsoft platform from end to end.
"We made the decision, should we go get best-of-breed in every single little piece that we could, or should we get one provider that has a common vision about where television can go, and we saw the future very similar to the way Microsoft TV sees the future," said Jeff Weber, vice president of product and strategy.
It's not exactly a turnkey system, however. SBC's broad rollout of the service is about six months behind its original schedule. It is aiming to reach 18 million homes by mid-2008, instead of the end of 2007, although it's still on track to start deploying it in Texas this year.
Weber said Microsoft's software was on time and met SBC's quality standards, but it's a complicated project. The company is extending fiber optic lines to neighborhoods, connecting a series of "nodes" that may serve 300 to 400 homes. Existing phone lines connect the nodes to homes, and unlike advanced cable services, the system doesn't require a cable box with a tuner.
Weber said the company is "hitting our milestones" but it's challenging to keep the project and the different companies involved in sync.
A compelling vision
Verizon is using a hybrid system that includes Microsoft software and products from other vendors. It began offering television with its Fios broadband service last month in Texas but the jury's still out on how Microsoft's product will perform, whether customers will pay for it and how well the company can support the carriers, said Shawn Strickland, vice president of Fios TV-product management.
"Microsoft still has to deliver," he said. "We're all as an industry waiting for that to happen. Their vision is compelling. It remains to be seen how it will be taken up from a consumer perspective. Ultimately it's going to come down to how well telcos deliver on the promises — it doesn't matter how pretty it is, because if it isn't reliable, nobody's going to buy it."
Lichtman is confident it's going to fly. He said it's just a matter of getting the systems in place and remotes into user's hands.
"The big challenge obviously is creating the first incarnation of the technology, making sure that the ecosystem delivers their part of the equation," he said. "Once customers are going to start deploying these technologies, it will be a virtuous cycle where you're going to see more success, more customers jumping on the bandwagon, more services, more value."
Brier Dudley: 206-515-5687 or firstname.lastname@example.org
Copyright © 2005 The Seattle Times Company