May 10, 1999 1:30 PM PDT

Microsoft deal prompts hardware questions

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Computer companies such as Compaq are eyeing the market for digital set-top boxes, but it is uncertain whether they will line up with Microsoft or Linux--or both.

Compaq Computer, the world's largest PC maker, has been working on a set-top box design that uses parts of the Linux operating system to control what is basically a stripped-down PC with an Intel processor, said industry sources.

Yet after last week's $5 See related story: The new world order billion investment by Microsoft in AT&T to ensure that at least 7.5 million cable set-tops would use Microsoft's Windows CE software, however, Compaq may have to keep an eye on Microsoft after all.

"Prior to [the deal], it wasn't clear that Windows CE would be a dominant player in the set-top box platform. [The] announcement raises some serious questions for the strategy of industry players as to who the winners and losers will be," said Mark Bunzel, of PricewaterhouseCoopers .

Compaq declined to comment on any set-top plans.

Before the deal, there were any number of companies that supply low-cost embedded operating systems that toil unseen in cable set-tops, and a number of companies have been working on using pieces of the Linux operating system as well. Aside from some technical reasons to avoid consideration of the Windows CE software, cost becomes a major factor in a device that's supposed to retail around $300. That's why Compaq and others are eyeing alternative operating systems.

Compaq isn't the only company investigating its options outside of the Windows camp.

Intel is working with Be Incorporated, makers of the BeOS software, to use the multimedia-oriented operating system on information appliances such as set-top boxes, Intel executives said at a recent financial analyst meeting, as well as Linux developers.

Sony, which is an investor in General Instrument, the largest set-top maker in the United States, has developed its own operating system, called Aperios for use in these devices, and has shown prototype digital cable set-tops at trade shows that use IEEE 1394 digital interconnect technology to link up with various other digital devices in a home.

Although Gateway's plans for this area are not known, the company has the technology to enter the market too, with the Amiga operating system it purchased in 1997.

The end result for Compaq may be impossible to predict. The company is in tumult with the recent ouster of former chief executive Eckhardt Preiffer, and strategies are currently being re-evaluated, one source said.

That Microsoft is suddenly a factor in this market shows how crucial an opportunity this is--not just for Microsoft, but for the companies that make cable set-top boxes such as General Instrument and Scientific-Atlanta, as well as for PC companies in the future.

Many industry observers believe such devices will be at the center of an emerging opportunity for interactive TV services, such as Web surfing and video-on-demand, for example. The market for services enabled by next-generation set-top boxes is anticipated to be huge--that's because there is the potential to reach not only the audience of PC owners, but the rest of the consumers who may never buy a PC but want to have a simplified Internet access device.

"Microsoft had to do this to be recognized as a player. A number of major players were about to launch major set-top box efforts with Be, Linux, and other legacy [embedded] operating systems such as Microware's OS9," said one industry source, who spoke on the condition of anonymity.

Analysts think the deal has secured Microsoft a position on the launch pad. Now the company has to execute on its promises.

The deal means that "Microsoft is not going away ever, they will certainly be a presence in the interactive digital market for very long time. Whether or not this particular deal gains them a lot of yardage remains to be seen," said Cynthia Brumfield, principal analyst with Broadband Intelligence.

 

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