A case of remote control gone awry

For some executives at WebTV, it was the beginning of the end.

After Microsoft acquired the company a few years ago, the software empire assigned an executive from corporate headquarters to represent WebTV at a National Association of Broadcasters convention. The young Microsoft emissary met with WebTV executives to outline his agenda for the conference, an event where powerbrokers descend each year from television fiefdoms as diverse as Rockefeller Center in Manhattan and Universal Studios in Hollywood.

The main topic of his presentation: a "white paper on dual-platform architecture."

"This is a trade show of television programming executives. The only platform they'll know is on a subway," recalled Stacy Jolna, then head of content for WebTV and now a vice president at rival TiVo. "Microsoft brought about 1,000 copies of the white paper and handed it out to executives in Armani suits--who took one look at it and quickly threw it away."

The experience epitomizes the problems Microsoft has encountered in the three years since buying WebTV, a deal originally cast as a historic bridge into the future of media and technology. Some see WebTV as a classic case of a passionate upstart whose altruistic goals met with cold economic reality and eventually surrendered its spirit to the Prussian personality of a large corporation. Along the way, the three idealistic WebTV cofounders who met at Apple Computer two decades ago have seen their friendships strained and their professional credibility challenged.

In interviews with CNET News.com, former executives and others familiar with Microsoft's TV operations say the WebTV transition has been a sometimes-farcical exercise fraught with unclear direction, shameless politics and technological blunders that have already cost both companies untold sums in lost opportunity--if not their assured leadership of the entire interactive TV industry. Former employees say that conflicting goals and rising tensions eventually clouded the company's vision, stunted hardware innovation and ultimately led to one of the highest customer turnover rates on the Internet.

"Honestly, the WebTV folks really didn't want to be part of Microsoft," said a former senior executive from company headquarters in Redmond, Wash. "They had their own identity, their own vision, and they wanted to maintain it as separately as possible. The cultures were very different and hard to blend."

Beyond these operational issues, many believe a much larger problem has blocked progress: a fundamental clash of culture and agenda between the computer and television industries. TV executives fear losing control of their business to a technology they don't fully understand, the theory goes, and companies such as Microsoft feed those worries with piranha-like reputations and aggressive business practices. The result is an eternal series of false starts involving competing technologies, dubious partnerships and little tangible benefit to the consumer.

In recent months, Microsoft has been blamed for some high-profile delays, including deals to develop software for cable boxes distributed by AT&T and European cable giant United Pan-Europe Communications. Perhaps most damaging, some sources say, is that Ultimate TV--Microsoft's successor to WebTV as the TV box of the future--may miss its promised deadline for availability this holiday season.

WebTV engineers were particularly offended by Microsoft's technology development, chastising the company's notorious tendency to overload software with extraneous features and throw products embarrassingly off schedule. They say this practice clearly contributed to the recent loss of Microsoft TV deals with AT&T and other cable companies.

"It's a thin client--a cheap box with limited memory," a former employee said of WebTV and other TV set-top boxes. "Microsoft always wants to add features, writing bloated code. They just didn't get it."

Microsoft used WebTV as a "petri dish," one source said, and effectively cast it aside once it learned how it worked. "People in Redmond were angling over who was going to have WebTV report to them," a former WebTV executive said. "It was disgusting but amusing."

Today, the assimilation of WebTV appears complete, with little left of the original company's culture or staff. Although president Steve Perlman remained in charge for a year after the acquisition, sources say Microsoft headquarters had an increasingly strong influence on the company's direction, most notably through resources and marketing.

The WebTV brand itself has a limited future, its mission confined to the slow business of dial-up Internet access through the TV set. Development of true two-way interactive television is overseen by a Microsoft group known as Microsoft TV, a line of authority underscored by senior management changes in recent months.

The issue of leadership surfaces repeatedly in conversations with former WebTV employees. If the company's direction was sometimes confused in its early stages, many say it became downright indecipherable once Microsoft took over.

"Microsoft didn't know how to manage the situation," a former Redmond executive said. "As a result, it provided inconsistent management of the WebTV team with inconsistent strategies and inconsistent results."

Those at WebTV assessed the situation more bluntly. "It got so political, so crossed up. Nobody knew who was calling shots, who was safe, who was on the same team--or was it the enemy within?" one former employee said of WebTV after the merger. "Certain engineers got so fed up. One said, 'OK, here's the deal: I live three minutes away from here. I've got two cars. I'll leave one car in the lot and a set of keys in my desk drawer. When you guys figure out what you want to do, come to my house and get me.'"

Some former executives blame Bruce Leak, WebTV co-founder and successor to Perlman, for not standing up to Microsoft and setting a clear direction. Although Leak is an affable man who wins praise for his grasp of technology, sources say he never commanded the respect held by Perlman and was largely seen as a figurehead that Microsoft installed to maintain the appearance of continuity after the merger.

In a lengthy interview with News.com, Leak scoffed at that notion. He accepts full responsibility for everything that happens at WebTV, good or bad, and that includes the issue of leadership.

"Microsoft never stationed anyone down here to run the business," Leak said at his office on Microsoft's new Silicon Valley campus in Mountain View, Calif., where WebTV moved late last year. "I've heard some of those concerns, and I think that the difference is I would blame it on me and my management team. I can't blame it on Microsoft; Microsoft doesn't tell me what to do."

Still, others say that Leak--at times known as an office eccentric who occasionally would stroll the hallways with a pet parrot perched on his shoulder--has given in to the inevitable. As it has done with so many other acquisitions, sources say, Microsoft forced WebTV into a corporate mold rather than give it room to thrive as an independent subsidiary with its own philosophy and talent.

Former employees say Microsoft's insistence on corporate hegemony stifled the creative, albeit chaotic, Apple-like environment that allowed for much of WebTV's early success. Everyone willing to speak about their experiences says they were drawn and became addicted to the intoxicating sense of purpose that pervaded their deceptively mundane warren of cubicles at the original site in Palo Alto, Calif.

In addition to the dynamic personality of its co-founders, many early WebTV employees say they were drawn to what they saw as a pioneering mission to create interactive TV content and a ground-breaking service that promised to combine the most popular medium ever with its fastest-growing counterpart, the Internet.

"There was so much excitement because everyone saw that this was going to become a mass medium, and they didn't understand exactly what characteristics it would take," said Phil Goldman, WebTV's third co-founder.

However, that same ambition--and the rewards that it could eventually reap--also engendered infighting throughout management and mistrust among WebTV employees toward parent company Microsoft. They point to a significantly lower level of energy and commitment since their offices were incorporated into Microsoft's campus in Mountain View, only a few miles north but a lifetime away from WebTV's first location in what used to be the garage of a car dealership.

"There was a joke at WebTV that people who visited Redmond came back with a scar behind their left ear, where the chip had been installed," one worker said.

To Microsoft, that apparently isn't a bad thing. Executives there say the decision to leave the interactive TV group in Silicon Valley exacerbated the transition problems.

"Microsoft does best with development done at headquarters in Redmond and has a much harder time figuring out how to do development elsewhere really well," a former senior executive said. "It's been a challenge for many years at Microsoft and why you see most acquisitions the company makes move to Redmond to get well-integrated."

Perlman initially appeared immune to much of Redmond's influence and was held in high regard both within WebTV and at Microsoft. Those who worked with Perlman say he and Microsoft chairman Bill Gates had a particularly close relationship. "It was almost as if a halo would appear above Perlman's head when he spoke at Microsoft meetings," one source said.

Many stayed on at WebTV, hoping that Perlman could do the impossible: run the company as a truly independent subsidiary. Over time, however, sources say even he could not stave off the encroachment of the mother ship. In one particularly frustrating struggle, former executives say he repeatedly tried to fire public relations agency Waggener Edstrom but was rebuffed by Microsoft's corporate communications division.

Microsoft's growing influence did not sit well outside of WebTV either. Where they once saw a young band of rebels who might jump-start a long dormant industry, competitors and partners alike viewed WebTV with a jaundiced eye once Microsoft's takeover was complete.

"Everyone's scared to death of Microsoft," said one former WebTV executive who worked on deals with other companies. "I remember one telephone company in particular was not interested in dealing with Microsoft at all."

Ironically, this perceived threat was felt most strongly in the industry WebTV was created to court: television.

"There is traditional friction between television and the new media side of the business. It runs both ways," said Kris Jacob, former director of business development for WebTV and now CEO of Alterlayer, a Web consulting firm. "In the TV industry, they say, 'I've been in this business 50 years, and you're not in position to tell us how to do things.' In Silicon Valley, there is such a tremendous focus on technology and engineering that it sometimes doesn't allow the perspective that we have a lot to learn."

In many circles, it is often thought that TV executives dismiss their computer counterparts as techno-nerds. But Microsoft is no ordinary technology company. If ever there was a software company with egos to rival those in the entertainment industry, it would be the Redmond juggernaut.

Before the merger, "we faced problems of getting bullied by huge cable operators, but at least we had a chance," one WebTV source said, adding that things changed seemingly overnight after the buyout. "People knew how Microsoft behaved, and they didn't want to have anything to do with that. People know when they're getting screwed."

Go to: For Apple refugees, a sense of d?j? vu