Microsoft's ultimate challenge in interactive TV

With the recent unveiling of UltimateTV, Microsoft is hoping to spark demand for digital programming while quietly moving its earlier, more limited experiment in interactive television off the prime-time lineup.

UltimateTV--which hit retail shelves this month--takes elements of Microsoft's WebTV, a television-based e-mail and Web surfing service, and combines them with a DirecTV satellite service and digital video recorder (DVR) technology.

The additional features, which are becoming increasingly popular, allow customers to watch one station while recording another, surf the Internet, send e-mail and view electronic program guides.

Microsoft's push to create enhanced television services, such as those offered through UltimateTV, sounds a quiet death knell for WebTV. Mark Mullen, a senior director at Microsoft TV, told CNET News.com that although many elements of WebTV would live on in the UltimateTV service, the brand may have run its course.

"WebTV is targeted at a niche market, but it is an industry leader. It is a different service and for a different audience than the one UltimateTV addresses," said Mullen. "We'll continue to support WebTV, but you could say that we're playing it down since it isn't growing quickly."

The brief life of WebTV raises questions about the staying power of yet another "enhanced" television venture in a market that has seen less-than-spectacular debuts of services such as ReplayTV and TiVo. With hardware costs that exceed most other digital television offerings, UltimateTV may face problems similar to those of its predecessors.

UltimateTV costs $450 for hardware, including a satellite dish, plus steep monthly subscriptions fees of up to $113.

RCA Thomson and Sony have signed up to

Gartner analyst Van Baker says the success of Microsoft's UltimateTV hinges on the software giant's ability to establish partnerships with a major satellite provider and cable operators. see commentary

manufacture DirecTV receivers, with RCA's product now available in retail stores. Sony receivers aren't expected to hit shelves until early April. According to Microsoft representatives, both brands will be available at Circuit City, Best Buy, RadioShack and Good Guys.

Perhaps more importantly, consumers who already seem unable or unwilling to set the clocks on their VCRs may be intimidated at the learning curve associated with UltimateTV, said Josh Bernoff, an analyst at Forrester Research.

"With so many features, setup and everyday use needs to be easy," said Bernoff. "With interactivity, video recording and Web browsing capabilities...with all those features, it needs to be easier to program than your VCR."

Making it simple
Gartner analyst Mark Snowden agrees, saying the burden of demystifying the product falls on the shoulders of Microsoft.

"UltimateTV will have to do a really good job in marketing this type of enhanced TV product because they are out ahead of everyone else a bit...so they'll not only have to define their product but really this entire category," said Snowden. "TiVo and ReplayTV had some troubles with this."

Bernoff added that Microsoft has so far done a good job of marketing UltimateTV, so its adoption rate

The cost of UltimateTV Microsoft's latest interactive TV effort doesn't come cheap. People must purchase hardware, a satellite subscription and an UltimateTV subscription. Hardware • DirecTV satellite subscribers can upgrade to UltimateTV by purchasing RCA's DirecTV DWD490RE receiver for $399.  • For new DirecTV subscribers, RCA's DirecTV DS4290RE receiver with a dual low-noise blocker dish costs $449. DirecTV subscription • Select Choice of about 50 channels, $21.99 per month.  • Total Choice of about 105 channels, $31.99 per month.  • Total Choice Platinum of about 105 channels, plus all premium channels, $82.99 per month. UltimateTV subscription • Up to 35 hours of digital video recording and three hours of Internet access through Microsoft's WebTV ISP, $9.95 per month.  • To use one's own ISP for unlimited Internet access with UltimateTV, $5 per month in addition to the ISP charges.  • For unlimited digital video recording and WebTV ISP for unlimited Internet access, $29.95 per month.

may be relatively high because consumers can better understand its features. Other DVR companies have not been as successful communicating to consumers what the service is capable of, he said.

Additionally, DVRs have been notorious for a complicated setup procedure, which UltimateTV also is guilty of, said Bernoff.

Regardless of the setup hurdles, Microsoft is showcasing the DVR functions rather than e-mail or Web surfing.

"The combination of parts is greater than the individual services, but (DVR) will be the selling point," said Tim Bucher, a Microsoft vice president of consumer products.

DVR as a stand-alone product has had limited success. ReplayTV, one of the first companies to market DVR services, refocused its company away from making hardware to licensing its technology to set-top box makers. ReplayTV was recently acquired by Sonicblue.

Unlike ReplayTV, the other DVR company, TiVo, did manage to launch an initial public offering. But its stock has fallen drastically to single digits from a 52-week high of just over $38--although its decline mirrors an overall slide in tech shares.

WebTV: A short start
With UltimateTV, Microsoft is hoping to have a popular successor to WebTV, which allows users to surf the Web and send e-mail. Since it bought WebTV four years ago, the service has attracted about 1 million customers--although the growth rate has recently stagnated.

"The early experiments of interactive TV, with the Internet on TV, didn't make sense," said Accenture partner and media analyst David Brodwin. "The poor resolution on the TV made viewing Web pages a bad experience and the market for selling this type of service proved to be small."

IDC analyst Mary Jo Scafidi echoed these concerns. "WebTV didn't do as well as people thought it should have because people don't want to view just a half page of Internet content on a TV," she said.

Brodwin explained that selling the Internet on TV meant selling the Internet to consumers who understood the benefits of the Internet but didn't own a PC. And that's a market that is shrinking as PC prices have fallen.

Mullen agreed: "The market that WebTV addresses is not growing significantly as PCs have become more affordable."

After spending its time as a separate division within Microsoft, WebTV will be folding into Microsoft's MSN.

The shift in strategy from Net TV to enhanced TV, with DVR as the selling point, makes sense according to analysts.

"Anyone with a VCR will understand this," said Accenture's Brodwin.

While consumers may not necessarily want to pay for the other services separately, as a package the deal is more appealing, said Bucher.

While it tries to win over consumers, Microsoft also must overcome some deep-pocketed competition.

AOL Time Warner is a similar service providing access to America Online services, such as e-mail, instant messaging and an extensive program guide that can remind viewers when a favorite show is scheduled.

AOLTV's set-top box is being manufactured by Philips Electronics and doesn't include digital video recording capabilities. An AOLTV and DirecTV set top box will be available later this year.