WebTV to add more entertainment options

Amid the company's first product rollout in almost a year, new details are emerging about WebTV's plans for the future, revealing a dramatic strategy shift.

WebTV has always insisted that its television set-top boxes have a very narrow mandate: offering simplified Internet access to new users. But sources say that the company's future plans indicate a shift for the company, as it attempts to blanket the consumer electronics market with a range of products appealing to everyone from sophisticated home entertainment users to its core audience of inexperienced Web surfers.

WebTV is in the process of developing a deluxe version of its TV set-top box, say sources close to the company, which will offer expanded television viewing options, including digital video recording. These new high-end devices will also have the capacity for recording and playing back music. At the same time, the company is expanding its low-end offerings to appeal to its core audience of first-time Internet users.

WebTV could not be reached for comment but in the past has declined to discuss future products.

The company yesterday introduced revamped versions of its Plus and Classic editions, and although these devices offer mainly incremental enhancements, the two boxes do reveal WebTV's strategy for covering the spectrum of the consumer electronics market.

In essence, WebTV plans to blanket the market with set-top boxes that will fit a variety of niches. By early next year, the Microsoft subsidiary's products could range from a $500 home entertainment set-top box with premium digital services to a $50 Classic device offering limited email and electronic programming guide, and almost everything in between, sources say.

"It makes perfect sense," said Sean Kaldor, an analyst with International Data Corporation. "In this new category of products, technologies converge, but products diverge?There's no reason for them not to experiment."

Competing against other digital recorders
The high-end device, like the announced product WebTV is developing for satellite television and Internet provider EchoStar, will incorporate a hard drive to record digital video. Unlike the announced EchoStar box, which offers a 9GB hard drive, the upcoming high-end box will likely include a hard drive up to 20GB, or enough for a few hours of video, sources say.

This type of digital recording device would compete head-to-head with products already announced from Tivo and Replay, a fact that is apparently not lost on company executives. "We're definitely very concerned about Tivo and Replay," said one source at WebTV, who preferred not to be named.

"They should present formidable competition for Tivo and Replay," an industry insider said. This home entertainment device could easily be updated to decode and play back MP3 sound files, taking on the role of a home stereo, Kaldor said.

On the other end of the spectrum, WebTV is in the process of exploring ways to offer limited versions of their service, making up for much lower service fees with advertising revenues.

Prices may drop
Under one scenario, WebTV would slash prices on its existing Classic and Plus boxes to $50 and $100, respectively, by the end of the year, an industry source said. The company would then market pared-down services such as limited email and Web surfing to go along with the cheaper devices.

"It costs so much in terms of service, because people are logging on and staying online," said Kaldor, noting that that WebTV could easily appease manufacturers by subsidizing the cost of the hardware. "If they get to a point where they can eliminate the service charge and just make money on the advertisements, that makes perfect sense."

Still, other observers doubt WebTV is on the verge of such deep discounts. "I'd bet we stay with the $99 and $199 [for the Classic and Plus] at least through Christmas," said the WebTV executive. "There's a limit to how much money Microsoft is willing to lose to get a large early customer base for WebTV," he said.

"WebTV is a delivery mechanism for something on the back end," said Greg Blatnick, of Zona Research. "As such, it's not going to have a tremendous premium."