September 5, 2000 2:30 PM PDT

Will Microsoft's next OS run your TV?

Microsoft is retooling its interactive TV strategy yet again, incorporating its TV software into its next-generation desktop operating system, in a move some say indicates a retreat from the cable set-top box business.

Microsoft today confirmed that it will demonstrate PCs running the Whistler operating system with Microsoft TV software this week at the International Broadcasting Convention in Amsterdam. The strategy assumes that some interactive television will be provided via the PC, rather than cable set-top boxes.

Under the plan, the company will


Gartner analyst Neil MacDonald says Microsoft's announcement that it will add technology to the Whistler OS to support digital TV is another attempt to find life for Windows in the post-PC era.

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embed its Microsoft TV software into Whistler, the next version of its Windows 2000 operating system. Due out next year, Whistler is expected to target both the home and business computing markets.

Microsoft envisions entertainment-centric PCs that receive TV signals and interactive programming, run on the Whistler operating system and use a television set as a monitor. The PCs will serve as a sort of entertainment hub of a home network, powering digital video recorders and digital music jukeboxes, said Ed Graczyk, director of Microsoft TV. He spoke from London en route to Amsterdam for the conference.

"By no means does this mean set-top boxes are going away. This is a multipurpose PC device tuned for entertainment purposes," he said.

"It's a totally separate animal," Graczyk added. "In a lot of cases this would be complementary to a cable set-top box."

But some observers question the implications for Microsoft's TV business. A specialized PC designed to run an interactive television set has the potential to squeeze out cable set-top boxes altogether, some sources familiar with the plan believe.

"Everything is branding," said one source familiar with the project, predicting that PCs outfitted with special TV receivers may become more popular than digital video recorders, such as TiVo, or high-end cable set-top boxes. "The motive for the product is to chase the anticipated convergence of PC and TV."

But other sources familiar with Microsoft's interactive TV history believe the move may be part of the company's strategy to bring interactive programming back into the traditional Windows products, rather than leaving it in the ancillary divisions that are creating Microsoft TV software, the WebTV service and even the upcoming Xbox game console.

Microsoft has struggled with its interactive TV efforts, which have faced product delays and internal management shake-ups. The software maker has identified television as a potentially lucrative vehicle for Internet access and e-commerce but has had a hard time selling its software to cable providers and broadcasters.

Microsoft, which is celebrating its 25th anniversary today at its headquarters in Redmond, Wash., considers interactive television an integral part of its ".Net" initiative. With .Net, Microsoft is trying to create a landscape of devices, appliances, PCs and televisions that are all connected to the Internet, corporate networks and one another via computers running Windows 2000. Sales of Microsoft handheld computers, which are a part of the client side of the .Net strategy, have also been slow.

The biggest customer to date for Microsoft TV, the company's server software for interactive cable set-top boxes, has been AT&T, which agreed to distribute set-top boxes running on the Microsoft TV software after Microsoft invested $5 billion in AT&T. Microsoft's test versions of its AT&T interactive TV software have been repeatedly delayed, however, and AT&T has even explored using competitor Liberate Technology's set-top box software, in addition to or instead of Microsoft TV.

The Microsoft TV-Whistler announcement, reported first today in The Wall Street Journal, may be an attempt to divert attention at the conference from the AT&T delays, some sources said.

"The timing is completely coincidental," Gracyzk said.

Digital TV set-top boxes based on Whistler would perhaps attract more interest from manufacturers--as well as from the cable providers that eventually would distribute the boxes to their subscribers--if the set-top boxes were based on industry-standard hardware and software, one source said.

Hardware designed to run Whistler could be much less expensive to produce than that needed for set-top boxes running Microsoft TV or other specialized operating systems, one source said, because components optimized for PC hardware are manufactured in very large quantities. "Cable companies might want to support commodity hardware platforms instead of" specific set-top boxes, the source added.

By incorporating Microsoft TV into Whistler, Microsoft may also be signaling defeat in the cable market and indicating that it will more aggressively pursue interactive programming through its PC group, one source said.

"Microsoft has always wanted to bring interactive TV into the context of a PC--that's their comfort zone," said the source, who is familiar with Microsoft TV strategy, noting that Microsoft has much more influence and leverage in the PC business than it does in the cable or broadcasting world.

When homes are networked so that a television can be powered by a PC or another computing device, specialized TV set-top boxes will become only one means of offering e-commerce, interactive programs, and Internet content via the television.

"Microsoft knows this, and this is why they've never fully committed to any of their TV products, and they continue to herd the market back to PC software--not set-top software," the source said.

 

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