This article calls it a tie - sort of.
January 12, 1998
TCI Set-Top-Box Pacts Pit
Microsoft Against Rival Sun
By DAVID BANK and LESLIE CAULEY
Staff Reporters of THE WALL STREET JOURNAL
Tele-Communications Inc. moved a step closer to ushering in the era of interactive television, reaching technology agreements for its new generation of cable set-top boxes that will pit Microsoft Corp. against rival Sun Microsystems Inc.
The separate agreements with Microsoft and Sun, completed in down-to-the-wire negotiations that ended early Saturday, launch a race between the two computer-industry leaders and their followers to develop an array of money-making services for the new medium. The deals also include provisions for them potentially to finance many of TCI's costs for deploying the millions of new boxes, according to people familiar with the discussions.
TCI selected Microsoft to supply at least five million units of its Windows CE operating system, a scaled-down version of the operating systems used in almost all of the world's personal computers. The cable giant also said it will license Sun's PersonalJava software as another way for software programmers to create applications for the new devices. The agreements were announced in successive speeches by Scott McNealy, Sun's chief executive officer, and Bill Gates, Microsoft's chairman, at the Consumer Electronics Show in Las Vegas.
The digital set-top boxes are expected to be available late this year or early next year and are being designed to deliver not only hundreds of new channels but also high-speed Internet access, Web-based enhancements to traditional television programming, interactive advertising, electronic programming guides and other new services.
Influence on Standards
The fierce jockeying to win pieces of TCI's order for the components of the new boxes is a measure of TCI's perceived influence in setting standards not only for the cable industry but for broadcast television and, by extension, much of the consumer-electronics industry. Cable companies, led by TCI, have agreed to buy at least 15 million advanced set-top boxes, and the number could increase to 25 million or more with purchases by cable companies affiliated with TCI.
By putting technology from Microsoft and Sun in the same box, TCI is attempting to maintain a high degree of competition and immunize the cable industry against any attempt by Microsoft to exert control over the cable industry. Some of the industry's executives, and TCI Chairman John Malone in particular, have stressed that they don't intend to allow Microsoft to achieve the same degree of dominance in the new arena that the software giant enjoys in the PC market.
Indeed, over the course of months of negotiation, Microsoft was forced to accept a smaller role than it first envisioned. But the agreement provides Microsoft a strategic foothold from which it can expand its influence in the future. By agreeing to base the new box on Windows CE, TCI gave the green light to Microsoft to use its $2.6 billion research and development budget and ample marketing muscle to create applications for the new box that in the long term could prove more valuable than the initial software licensing fees Microsoft is set to receive.
"Microsoft is increasing the investment we spend on Windows CE very dramatically," Mr. Gates said in his speech. "We're going to up our evangelization so those applications come very quickly."
Financing Issue
In a conference call, Mr. Malone said the agreement to use Windows CE was an "arms-length technology licensing agreement" that wasn't conditioned on an equity investment. Reports of such an offer by Microsoft have circulated for months.
In a side agreement reached early Saturday, however, Microsoft agreed to help finance TCI's purchase of the new devices, according to people familiar with the matter. The two companies signed a memorandum of understanding in which Microsoft agreed to provide, if TCI so requested, a set amount per box, which the sources said was far in excess of the fees TCI agreed to pay Microsoft for its technology. TCI and Microsoft officials declined to comment on any such arrangement.
Mr. Malone did say TCI is in discussions to establish a pool of financing to defray the cost of deploying the boxes, which could reach $3 billion or more. Participants in the fund will include partners seeking exclusive rights to provide applications and services through the new boxes, such as interactive advertising, he said.
"This is Internet meets television set, so impulse behavior can be entered into from the couch rather than from the desk," he said. "We're particularly focused on applications in which Microsoft has existing intellectual property that could fit on the platform," Mr. Malone said. Specifically, he mentioned banking services, such as bill presentment and payment, an emerging market Microsoft has targeted through its MSFDC joint venture with First Data Corp.
The deal with Microsoft is nonexclusive, but Mr. Malone said TCI wasn't seeking other operating-system vendors. "This is the horse we're going to ride," he said. Nonetheless, TCI and Microsoft have 60 days to resolve certain technical issues; if the two companies are unable to agree on specifications, TCI retains the right to go to other suppliers, sources said.
Java-Based Applications
During that same period, Sun will be racing to enlist developers to create another set of applications based on its Java programming language. TCI licensed Sun's PersonalJava for as many as 12 million units but said the number of boxes that include the software will depend on both the applications that are developed and the additional price of the computer chips that would be needed to run both Windows CE and PersonalJava. Mr. Malone said such a decision could take three to four months but said he expected Sun's software to be included on most of TCI's boxes.
People familiar with the negotiations said Sun agreed late Thursday to help cover the additional costs of adding the processing power needed for PersonalJava, which one outside observer estimated could run more than $10 per box. That sum would dwarf the licensing fee Sun will receive for its software, reported to be about $1 per box. That offer came in response to Microsoft's attempt to bump Sun from the deal altogether, those people said.
A Sun executive denied that Sun had agreed to provide any financing or investment. Instead, the executive said, Sun is aggressively signing up partners among banks, interactive-game companies and others to provide revenue-producing services attractive enough to spur TCI to make them broadly available. For now, PersonalJava is more likely to be used in higher-priced boxes with advanced features, such as video conferencing and Internet phoning. "We're going to make sure that those services and the financial payouts from those services are rich," the executive said.
With so many issues still unresolved, the negotiating frenzy is far from over. Moreover, TCI still has to make the critical decision of a supplier for its microprocessors as well as for additional graphics technology and software for Web browsers, e-mail and electronic programming guides. Intel Corp. is considered a front-runner to supply the microprocessors. |
