Microsoft Hunts Its Whale, the Digital Set-Top Box
By JOHN MARKOFF
Has Bill Gates become the Captain Ahab of the information age?
Gates' white whale remains an elusive digital set-top cable box that
his company, Microsoft Corp., is hoping will re-create the personal
computer industry by blending the PC, the Internet and the television set
into a leviathan living-room entertainment and information machine.
It has been an obsession for more than six years for Gates, whose
"Windows everywhere" software strategy has led the company to look to
extend its Windows operating system monopoly into every cranny of the
computing industry -- from mighty mainframes to the computers embedded
in cars.
Still, it is the tantalizing possibility of the computerized television set that
has fixated Gates most, leading to the construction some years ago of a
faux living-room laboratory in a building on Microsoft's office campus in
Redmond, Wash.
Presumably, that is because the prospect of digital television -- part PC,
part boob tube -- promises the greatest return on the company's research
and development investment. Digital television holds out the Holy Grail: the
intersection of the nation's most vibrant industries, including media,
computing, entertainment and telecommunications.
Small wonder, then, that Microsoft agreed last week to invest $5 billion in
AT&T, as part of that company's deal to add MediaOne Group, the cable
television company, to its recently acquired Tele-Communications Inc.
cable empire.
Television sets are in some 98 percent of American households, while
personal computers are having trouble breaking the 50 percent threshold.
Thus, a Windows operating system monopoly on the set-top box would
dwarf the scale of the PC industry.
"The television is the 3,000-pound gorilla," said Nicholas Donatiello,
president of Odyssey, a market research firm in San Francisco.
And yet, just as Captain Ahab's quest for Moby Dick led to a miserable
outcome, there is no certainty that Microsoft's quest for the television set
top will succeed.
As early as 1993, Microsoft proposed a joint venture with Time Warner
Inc., AT&T and TCI called Cablesoft, in an effort to harness the cable and
phone industries to the Microsoft Windows software operating system
standard. Since then Gates has repeatedly tried to forge pacts with
partners in those industries.
Though some have welcomed such overtures, like Comcast, the cable
company in which Microsoft acquired a 11 percent stake a few years ago,
others have held back. The laggards feared they would inevitably fall
victim to the same forces that enabled Microsoft to reduce many PC
hardware makers to mere purveyors of commodity goods.
But Microsoft's considerable financial heft has eroded most resistance.
Besides the Comcast stake, Gates' investments in his pursuit of interactive
digital TV have included WebTV, Time Warner's Road Runner, four
European interactive cable television investments and, finally, last week's
investment in AT&T.
In return for a $5 billion stake, AT&T has warily agreed to license a
minimum of 5 million copies of Microsoft's Windows CE operating system
and engage in several showcase tryouts of the software, the
consumer-electronics version of Microsoft's industry-dominating Windows
software for PC's.
The deal will ensure that Microsoft gets an inside track in the new
interactive television industry, which after years of delay appears to be
showing some signs of life.
Clearly Microsoft's chairman believes with great certainty that interactive
digital television is the Next Big Thing. And yet just as Gates, the visionary,
entirely missed the dawning of the Internet, there is growing evidence that
rapid technology transitions are not predictable -- let alone manipulable.
In pushing for multimillion-dollar test runs, Gates may be ignoring years of
consumer indifference and outright interactive television failures like Time
Warner's debacle in Orlando, Fla., a few years back -- not to mention the
rapid emergence of a range of alternative technologies for delivering
Internet content that may quickly bypass the living room.
The risk to Gates is that the interactive television set, upon which he is
betting most heavily, may prove a mirage that wastes billions of dollars of
investment capital and Microsoft development efforts.
The offspring of a dream that stretches as far back as the 1970s, digital
television has long been a Chimera pursued by high-technology executives
-- whether in the form of videotext, video on demand or, more recently,
Internet via television.
The new hope is that while no one has been able to figure out the
challenge of how to supply more than several channels of compelling
programming for a television audience simultaneously, the World Wide
Web would offer an easy solution.
Both AT&T and Microsoft envision that the DTC-5000, a set-top box due
this fall from General Instrument, will serve as a choke point for all the
digital information flowing into and out of the home.
The original vision of interactive cable has now stretched far beyond 500
channels to include telephone service, video on demand, stereo audio, video
games and Internet access. As a result of this "all things to all people"
impulse, the DTC-5000 has sometimes been derided as an information-age
Cuisinart.
Indeed, the joke inside AT&T labs, where engineers are testing the box, is
that DTC-5000 has so many connectors that the physical integrity of its
back panel has been compromised. The prototypes include connections for
cable, power, Ethernet and Firewire networks, Universal Serial Bus,
telephony, audio, video, infrared, PCMCIA card, smart card and computer
monitor.
While simpler and more compelling alternatives -- ranging from the home
PC to a growing array of wireless and hand-held computers and phones --
offer a seemingly more convenient way to obtain Internet data, Gates has
continued to pursue the parallels between the world of interactive digital
television and the personal computer industry, and to re-create a dominant
role for Microsoft. Indeed, forcing Windows CE on the cable industry has
become a virtual religious crusade inside Microsoft's headquarters.
"This is a big frontier, and Bill is scared to death that it's going to pass him
by," said a member of the AT&T team that negotiated the deal with
Microsoft. As described by Microsoft's deal-maker and chief financial
officer, Greg Maffei, the investment makes sense as a bet on the future of
high-capacity -- or broadband -- telecommunications networks.
"There is finally a plan to go out and deploy something, and that's a great
opportunity for us," Maffei said in a telephone interview Thursday, after
the deal closed.
Microsoft executives argue that a business rationale now exists for
interactive television -- as opposed to the Orlando interactive television
pilot that Time Warner started with great fanfare in 1994 only to
unceremoniously shut it down in 1997.
"Deregulation is allowing a single supplier and pipe into the home to provide
digital television, telephony and high-speed Internet access," said Hank
Vigil, vice president for consumer strategy at Microsoft.
Yet, the crusade to bring E-commerce to the family-room sofa is probably
no closer this week than before the arrival of last week's alliance between
the software and the telecommunications industry giants.
In particular, AT&T will be competing with other technologies challenging
cable as a means to deliver Internet data: fixed and cellular wireless
telecommunications; the phone industry's digital subscriber line and
interactive satellite systems from the Hughes Electronics subsidiary of
General Motors.
Moreover, other technologies -- including the PC, digital videocassette
recorders from companies like Replay Networks Inc. and Tivo Inc., as
well as a new generation of video game players from Sony, Sega and
Nintendo -- will all contribute to the accelerating fragmentation of the mass
cable-television market.
AT&T may even become its own largest competitor, especially for
providing consumers access to Internet electronic commerce. The
company has quietly accelerated plans for a nationwide introduction of
Internet-ready cellular phones, skipping 64 kilobits a second and going
directly to 384 kilobits.
Such a network will be ideal for a new generation of Internet-compatible
telephone-Web browsers now being shown by Nokia and Ericsson.
Though a shift to mobile Web browsing would be warmly greeted by
AT&T, it is likely to sharply limit the market for consumers willing to buy
an expensive additional Internet account just to permit them to browse the
Web on their TV.
And in the mobile and wireless world, Microsoft is already at a clear
disadvantage competing with the cellular phone industry, which has shown
little interest in a Microsoft Windows CE operating system.
Gates appears to have nearly infinite capital to invest in his dream, but
there seems to be little to ensure that he will be able to enact his vision.
That, of course, is the risk of being a visionary.
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