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  A Bit of Bill in Every Box

By Elizabeth Corcoran
Washington Post Staff Writer
Sunday, August 10, 1997; Page H01

Bill Gates wants to be inside your television.

His reason is simple and echoes the lessons he learned 20 years ago at the onset of the personal computer revolution. He is headed where the money is. Gates understands the fundamental rule of the information age: Those who build the core technologies reap the profits. In the days of the California gold rush, the money was in providing the picks and shovels. With computers, it has been in turning out the software that controls the basic functions of the machines.

The personal computer wars are over. Gates's Microsoft Corp. has won. Nothing more clearly signaled the end of the ideological clash between Microsoft and Apple Computer Inc. than the events of last week, when the Redmond, Wash., software giant pledged to invest $150 million in the ailing Cupertino, Calif., computer maker and continue making software for its Macintosh machines.

So Gates is racing toward the next frontier, one that could have an even wider impact than his work on the PC.

He is working to be as important in the future of "smart TV" as he and Microsoft are in today's PC. If he succeeds, Microsoft will confirm its position as one of the most dominant corporations on the American landscape; it also will have enormous influence on what home entertainment will look like for the next generation.

Over the past two decades, Microsoft has risen from a start-up to a high-technology giant with a stock market value almost four times that of General Motors Corp. Its Windows operating system software, which controls the basic functions of a computer, is as essential to computing as a steering wheel is to a car. Better than 70 percent of the PCs in U.S. corporations use Microsoft Office, a "suite" of word processing and spreadsheet programs, and Microsoft is gaining ground in "back office" software that runs corporate networks.

So with all that, why bother with television?

Because over the past two years, consumers' enthusiasm for buying new PCs has begun to wane. People who already own PCs are buying more, sometimes replacing an old machine, sometimes buying a second or even third machine. But the growth in the overall number of people buying a computer for the first time is slowing.

About 40 percent of U.S. households have personal computers and "it doesn't look like the needle will move up dramatically" in the immediate future, Greg Maffei, Microsoft's chief financial officer, told a recent gathering of journalists and financial analysts.

Despite the best efforts of Microsoft and others, most consumers still find computers hard to use and expensive. There are, however, other electronics boxes that Americans buy for their homes in great numbers – televisions and telephones.

As these instruments are rendered smart – packed with computer chips that can store commands and data – they will need software. So will powerful machines that cable and broadcast companies use to send entertainment to consumers. And the companies will use software to create the movies and programs and games. Just as in the early days of the PC, Microsoft wants to create that software.

At a recent meeting with financial analysts, Gates said that he is always surprised when the press debates whether Microsoft will become a media mogul. He stays focused on technology. "Our center of gravity is [being] a software company," he said.

For the past couple of years, Microsoft engineers have been developing a streamlined operating system called Windows CE that can run on a variety of devices, including hand-held personal organizers and TV set-top boxes.

And within the past five months, Gates has spent more than $1.5 billion to acquire stakes in companies that are trying to lay the foundation for the next generation of entertainment technology. Among the deals:

In April, Microsoft said it would spend $425 million to buy WebTV Networks of Palo Alto, Calif., which sells a box that lets consumers use their television to browse the Internet and send electronic mail. Justice Department antitrust officials cleared the deal on Aug. 1.

In June, Microsoft said it would invest $1 billion to buy a 11.5 percent stake in cable television operator Comcast Corp. of Philadelphia.

In early July, Microsoft took a 10 percent position – worth about $30 million, analysts estimate – in Progressive Networks of Seattle, the leading developer of technology for sending audio and video signals across the Internet.

In late July, Microsoft took a minority stake and board seat on start-up company Navitel Communications Inc. of Menlo Park, Calif. Navitel has been developing software and hardware that marries telephone and Internet technology.

Last week, Microsoft said it had bought VXtreme, a small Sunnyvale, Calif., company that, much like Progressive Networks, makes technology for broadcasting video over the Internet.

A `Web Lifestyle'

Gates is betting those building blocks will give Microsoft's software a strong shot at becoming the basis for what he calls a "Web lifestyle," in which people turn day in and day out to the Internet for advice, information and shopping.

To do that, a consumer needs a personal computer. WebTV may change that. The company was founded in 1995 by engineers from Apple with the goal of creating a low-cost device that could nicely display information from the Internet on TV screens. (The Washington Post Co. was an early investor in WebTV and holds less than a 5 percent share.)

The product made its debut last Christmas. Just as PCs plug into a telephone outlet to reach the Internet, so do WebTV boxes. But rather than running conventional Web-browsing software, WebTV engineers wrote their own software that makes using the equipment almost as simple as using cable television. "We really think we can reach just about every home," said Steve Perlman, chief executive and co-founder of WebTV.

In late July, Perlman reported that there were 115,000 subscribers, "more than double [the number] in April." Though that is a small number in the context of the Internet, they are an alluring group. More than a quarter are over the age of 50. Sixty-five percent don't own a personal computer. They are intrigued by the information they can find on the Internet – and are relieved that WebTV isn't steeped in the techno-clutter that computers are. There is no computer mouse, for example. Instead, WebTV relies on a remote control much like a television's, and a wireless keyboard.

If the WebTV concept is to succeed, it will need to click with such people as Stuart Gordon, special counsel to the Washington area law firm Duane, Morris and Heckscher. Gordon hates the computer in his office. On its monitor, he has taped a crayon drawing by his granddaughter, Madeleine. He has draped a T-shirt across the keyboard. He has no patience for learning to navigate computer icons or to double click with a mouse. There is, however, a piece of electronic gear that Gordon loves: his television. For that, he's willing to pay up: He owns one of Sony's most lavish models, a 61-inch set.

The WebTV Test

At the request of The Washington Post, Gordon recently tried out a WebTV. "I knew when I saw the remote control I was going to be in better shape," he said. After several hours of using it, Gordon was cautiously upbeat. "The computer in my office [represents] work – this is play," he said.

That's precisely what Perlman and his colleagues had in mind. Even Perlman doesn't use WebTV when he's trying to do work. But he does use it at the end of the day to tune into news and entertainment. WebTV "is more about replacing the television," he said. "What the TV does today is just a subset of what the Internet will do in the future. We won't call it the Internet. It will just be digital TV."

With the acquisition of WebTV finalized, Microsoft plans to move its Windows CE software into the device. Beginning last year, a few makers of hand-held personal organizers, such as Casio Inc., NEC Corp. and Philips Electronics NV, began selling devices that use Windows CE. Microsoft also is licensing the software to many other manufacturers, who may use it in devices as varied as home alarm systems and television sets. "There's no reason why you can't use Windows CE to run a thermostat," said John Browne, who heads the effort at Microsoft.

Windows CE could be the software for a next generation of cable boxes as well. By agreeing to invest $1 billion in Comcast, Gates accomplished two goals. First he boosted the cable industry out of its stock market doldrums. Cynthia Brumfield, a senior analyst with Paul Kagan Associates Inc., said the aggregate market value of the 11 cable companies the research group tracks most closely has risen about 10 percent since Gates announced his investment.

That boost helps those companies win the confidence and funds that they need to build networks that can deliver the Internet to consumers' homes. "There's no doubt that we're at the beginning of a long-term trend where the cable TV set-top will serve many communications functions in the home," Brumfield said.

Getting Industry's Attention

Gates's investment also bought Microsoft the ear of the industry as it chooses the technology for its next generation of set-top boxes. Richard Green, president of Cable Television Labs Inc., (or CableLabs), the cable industry's Louisville, Colo., research consortium, said that the group is looking at competing designs from the likes of Microsoft and Navio, a joint-venture of Netscape Communications Corp. and Oracle Corp. The industry hopes to settle on a choice soon – some analysts believe it will as early as this fall.

Although Green would not pick a favorite, "Microsoft is putting substantial effort and resources into its design," he said. Within 18 to 24 months, consumers may see the first products based on the design winner, Green suggested.

Microsoft's other deals – with Progressive Networks, VXtreme and Navitel – are intended to help supply some of the underlying technology that will make the Internet more consumer-friendly. Progressive Networks, for example, has been the market leader in transmitting audio signals and more recently video signals over the Internet.

For PCs to receive video signals, the data must be massaged to make the picture look less jerky. Allen Weiner, an analyst with the San Jose research firm Dataquest Inc., said that by working more closely together, Microsoft will get first dibs on intriguing technology, and Progressive Networks will get help wooing customers. VXtreme's work adds balance to the mix as well.

The deal with Navitel is a bit different. Navitel, barely a year old, had developed a promising design for a telephone with a small video screen that could receive e-mail and selected information from the Web. Now, Navitel plans to work harder on its software, which is based on Windows CE.

"We expect to be able to produce software that will run on millions of appliances," said Jeff Spirer, Navitel's chief operating officer. "And we feel strongly that Windows CE will be the platform of choice" for Navitel and others to work with.

With these investments in hand, Gates is well on his way to making Microsoft's software a mainstay in homes throughout America – with or without the PC.

"The business model stated by Gates more than a decade ago . . . was `Windows everywhere,' " said Rick Doherty, an industry analyst who directs the Envisioneering Group in Seaford, N.Y. "The vision hasn't changed much."

All that's changed, Doherty said, is that Windows will show up on a lot more than computers.

© Copyright 1998 The Washington Post Company

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