April 22, 2001 10:00 PM PDT

Perlman's Rearden Steel raises $67 million

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Two years after leaving Microsoft and his struggling brainchild, WebTV, Steve Perlman has scored one of the largest Series A funding rounds in history--led by Microsoft archrival America Online.

Rearden Steel, founded by Perlman in January 2000 and headquartered in Palo Alto, Calif., secured $67 million in the massive funding round, which was joined by Cisco Systems, EchoStar Communications, Mayfield, Vulcan Ventures, The Barksdale Group, The Washington Post Company and Macromedia Ventures.

The start-up and its investors, announcing the funding in the midst of a brutally parsimonious venture market, declined to comment on its product beyond saying Rearden Steel was "building innovative hardware and software products for the consumer marketplace."

But sources close to the company said it was devising a television set-top box that will receive, record and store a wide array of digital programming, allowing consumers to pause live programs and interact with televised content. It would also handle music files, video and other content downloaded over the Net.

"Think of it as TiVo on steroids," said one source familiar with the start-up's plans, comparing the product to a competing digital television recorder that lets users pause live programming. The set-top box will act as a central entertainment server in the home, the source said, funneling a variety of entertainment and information media through it.

While competing products can record only one to two channels at a time, Rearden Steel's set-top box could record dozens.


Meta Group says Rearden Steel may be planning a home-entertainment system that includes advanced digital services delivered via broadband and set-top boxes. But the market is a ways off.

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Such a product would put the AOL-backed Rearden Steel head to head with Microsoft, where Perlman's WebTV unit has evolved into Microsoft's recently launched UltimateTV initiative. UltimateTV, however, is focused squarely on televised programming.

Rearden Steel also appears to be competing at least in part with TiVo, a struggling digital video-recording device company with a heavy investment by AOL; and with the recently restructured ReplayTV, which counts AOL Time Warner as a customer.

Rearden Steel's investors appear to have placed their historically large bet on a company that is facing significant competition in a market that has stubbornly refused to take off.

That gives some analysts pause.

"I don't see how a new company starting up right now is going to be able to displace anybody else," said Gartner analyst Mark Snowden. "I think even TiVo is going to have trouble going forward as an independent company. Meanwhile, all the set-top box manufacturers are incorporating personal video features into the next-generation boxes, and cable companies are looking at introducing new services."

Amid an uncertain market and expanding competition, Snowden sees three problems that have grounded the set-top box market: high consumer confusion, inadequate marketing and the steep price for the more advanced boxes.

Perlman compared TiVo, UltimateTV and others with the early, but ill-fated handheld devices like Apple's Newton. Ultimately, he noted, a successful product came along, in the form of the Palm Pilot, that ignited the market. And that, he says, is what Rearden Steel intends to provide.

"I would agree with (Snowden) generally, that someone without the right partnerships in place cannot make it in this market," Perlman said. "But if you do have those partnerships, and you have endorsements by the major stakeholders in the entertainment market, and those stakeholders say 'we want what you're doing and we're going to help you do it,' then that's a different story."

Though he declined to comment on the product, Perlman clearly has ambitious designs on a wide array of home entertainment media.

"We are in the home entertainment space, and you'll find there's some overlap (with UltimateTV)," Perlman said. "But our approach is quite different from any products we know of. Our partners get briefed on everyone out there, and what we're doing is really different than anything else they've seen."

Rearden Steel, which Perlman started early last year as an incubator, now employs about 110 employees, some of them recruited from the recently closed Geocast Networks. Geocast, funded by Kleiner Perkins Caufield and Byers, Institutional Venture Partners, and Mayfield, was building a device to receive cached Web pages, video, software and other digital files from both terrestrial and satellite digital-broadcast sources.

In addition to some employees, Rearden Steel acquired all of Geocast's intellectual property, leading some to speculate that the company's set-top box may at some point be able to receive data directly and circumvent traditional cable, satellite and broadcast gateways.

"At this point, intellectual property is a really big part of this business," said Snowden. "They may be trying to do a box that is independent of any network. It could receive data through cable, a satellite dish or through terrestrial broadcast via the digital TV spectrum. That is potentially a big thing because it lets you rout around gatekeepers like cable companies and satellite companies and avoid paying their fees, negotiating data carriage, paying for bandwidth and so forth."

Perlman played down the significance of the Geocast IP acquisition, which sources said Rearden Steel bought for a mere $1.8 million.

"There are modules across the whole (of Geocast's IP) that we can use," Perlman said, declining to comment on the exact price paid. "We're not using the Geocast system the way they intended for their own products. Data reception wasn't the center of what we were interested in...When you're paying a very small amount of money, you don't have to worry about the details."

Ultimately, Rearden Steel's success may hinge on the same strategy that popularized the Macintosh--which Perlman worked on early in his career--and that brought WebTV its million novice users: simplicity.

"Why is it so hard to take a neat technology and make use of it?" Perlman asked. "We have all these disparate efforts in digital home entertainment and haven't really figured out a way to make things easy to use and make then intuitive. And the world really needs to have these problems solved."

Along with its funding, Rearden Steel also announced its executive team. Reporting to Perlman are Chief Operating Officer Bill Keating, formerly general manager of Microsoft's TV Platform Division, senior vice president of WebTV, vice president and general manager of General Magic--where he served with Perlman--and co-founder of SunSoft while at Sun Microsystems. Rita Brogley, also formerly with Microsoft's TV Platform Division, is vice president of sales and marketing.

The name "Rearden Steel" may sound familiar to readers of Ayn Rand's objectivist novel "Atlas Shrugged," in which it is the name of the protagonist's company. Perlman declined to comment on the literary connection, but said the name was chosen for its Industrial Age associations.

News.com's Richard Shim contributed to this report.

 

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