new article re: webtv set-top box profitability....
Wednesday January 14 3:06 PM EST
Sun, Microsoft Must Wait Years For Cable Windfall
By Kourosh Karimkhany
PALO ALTO, Calif. (Reuters) - If the past is any guide, Microsoft Corp. and Sun Microsystems Inc. may have a long wait before they reap big benefits from their foray into cable television set-top boxes.
Over the weekend, computer workstation maker Sun and then software superpower Microsoft announced contracts with cable TV giant Tele-Communications Inc. to provide software for the set- top boxes that control the reception of TV signals.
These souped-up boxes also will allow viewers to browse the Internet, send and receive electronic mail and receive additional information about TV programs, like sport stats or celebrity bios.
"Don't bet this stuff will be rolling out as fast as (TCI Chief Executive) John Malone says," said David Card, new media analyst with market researcher International Data.
"Billions and billions of dollars of build-out would have to be carried out," he said, such as upgrading the cable TV network to handle two-way communication.
TCI executives said they planned to use Microsoft's Windows CE operating system to control the functions of new digital set- top boxes that would let viewers pull up Web pages, send e-mail and watch hundreds of channels.
The nation's largest cable TV operator also will use Sun's PersonalJava computer programming language as the foundation for other software applications, like Web browsers.
TCI executives said they plan to introduce the boxes in the next few years, but industry analysts were skeptical.
They noted that in 1993 dozens of computer and media companies confidently proclaimed that interactive television services and whizzy set-top boxes would be available to consumers in one year.
High-tech companies such as Microsoft, Oracle, Silicon Graphics and Sun Microsystems boasted about their interactive TV technologies.
Media companies Time Warner and Viacom set up glitzy field trials in upscale neighborhoods to test which services people would order through their TVs.
Even telephone company Bell Atlantic and TCI contemplated merging to better compete in providing interactive services.
But in 1994, it all fell apart.
The industry faced the reality that not many people wanted to pay more on their cable bills for movies-on-demand and interactive takeout menus. And it would take billions of dollars to put high-speed telecommunications lines into the ground to make the services available in the first place.
So when Englewood, Colo.-based TCI announced its agreements with Sun and Microsoft over the weekend, investors mostly yawned. It will be years before any company makes a dime from the latest venture, analysts said.
Card estimated that just 10 percent of the nation's 65 million cable-equipped homes would be capable of getting Web- access, electronic mail and other interactive services on their television by 2001 -- a tiny market compared with the rest of consumer electronics.
Still, Redmond, Wash.-based Microsoft, Palo Alto, Calif.- based Sun and a host of other companies are expected to compete fiercely in the coming months to sell other bits of technology to cable operators. They need another class of low-priced, high- volume devices -- like set-top boxes -- to make up for maturing personal computer businesses.
As occurred this past weekend, they will announce contracts and partnerships with cable operators but will forgo serious money for years to establish a toehold in an unfamiliar business.
"I'm not convinced this deal is as meaningful as it reads in print," said Bob Alexander, principle of Alexander & Associates, a New York consulting firm that advises entertainment companies on technology.
Added IDC's Card, "I don't think there are any winners yet. "
TCI did not disclose financial terms of the agreements, but one analyst estimated it would pay Microsoft $25 a box to include Windows CE in up to 11.9 million boxes, to be built in the next several years. That translates to as much as $297.5 million for Microsoft.
That is pocket change for Microsoft, which had more than $8 billion in revenues in 1997.
In addition, TCI does not want to give control of an emerging market to Microsoft. TCI executives learned their lessons from International Business Machines, which mistakenly ceded most of the profits of the PC business to Microsoft and Intel in the 1980s.
For that reason, the cable operators will play the computer companies off each other for years, extracting deals that will not mean any profits for the computer companies, analysts said.
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