While You Weren't Looking, WebTV Grew
Mar 15 1999
Drive around Silicon Valley long enough, and you're bound to pass by a WebTV Networks building. There are six, to be exact, in Palo Alto and neighboring Mountain View. That's a lot of expensive real estate for a company with a reputation for doing little more than running an Internet service for senior citizens.
In fact, there is a lot more to WebTV than most people realize. Acquired by Microsoft in the summer of 1997, WebTV is at the heart of Microsoft's strategy for maintaining dominance in a world in which you won't need a Windows-based PC to get connected.
When Microsoft bought WebTV, the $425 million price tag struck a lot of people as ludicrous. The company had cumulative losses of $63 million, had signed up fewer than 100,000 subscribers and was struggling to gain shelf space in consumer electronics outlets.
But now Microsoft and others are betting they can transform channel-surfing couch potatoes into Web-surfing couch shoppers. WebTV is smack in the middle of that battle. At the same time, it is also battling for control of the huge data-crunching systems that sit underneath the network.
Without a doubt, WebTV has proved its mettle in the living room. Under Microsoft's wing, the service has grown gracefully from Internet-on-TV into an enhanced TV service. WebTV has vaulted past MindSpring, Netcom and the Baby Bells and now ranks among the 10 largest Internet service providers. And the service continues to gain ground: Steve Perlman, WebTV's president and cofounder, says the company signed on 200,000 subscribers during the 1998 year-end Christmas rush alone.
For Perlman, the challenge is to turn that vote of consumer confidence into a calling card when knocking on the doors of cable, satellite and telecommunications-network operators. Those companies will serve as the gatekeepers for future interactive services - and Perlman wants to sell them software to build their own WebTV-like services.
It won't be easy. Despite the autographed glossies of William Shatner and other TV stars on Perlman's office wall, Microsoft doesn't have many well-wishers in the broadcasting industry. While WebTV has thrived under the Microsoft umbrella, its protection comes at a price: No one wants to see Bill Gates extend his stranglehold on the PC desktop to the TV screen.
Microsoft has been touting WebTV and customized versions of its MSN.com Internet portal as a ready-made solution for cable and satellite networks looking to jumpstart their own interactive services. For example, EchoStar Communications, a satellite TV broadcaster, will start bundling WebTV with its service this spring.
But observers say Microsoft's TV-platform strategy, in which it lets cable and other service providers have their pick of underlying software, is a significant concession to the cable guys, who want to stay close to the customer. Perlman contends he's more than willing to work behind the scenes, despite his efforts to build WebTV's brand.
An early 1998 deal with cable giant Tele-Communications Inc. shows what he's up against. TCI licensed Windows CE, a stripped-down operating system for non-PC devices. Among other uses, CE's due to replace the old proprietary WebTV operating system in a planned digital set-top box. But TCI will pass on accepting the rest of Microsoft's offerings - the WebTV brand, the user interface and its hosting services.
In addition to suspicion, Microsoft must also face a more poweful enemy in the browser business, now that AOL has bought Netscape. It's a dangerous union, as AOL also seems likely to be Microsoft's strongest rival in the battle for the living room.
For a year now, AOL has been touting its "AOL Anywhere" initiative, promising to make its online service available on all the devices Microsoft wants to run with Windows CE. AOL believes it can play the same end-to-end game as Microsoft: The Netscape acquisition brings in sophisticated software, with Sun Microsystems providing the mammoth data centers to run everything from e-mail to e-commerce. AOL's huge subscriber base and high profile will most likely also be attractive to service providers.
Microsoft, though, has made some strategic investments that should bolster its ability to gain business in the cable world: In 1997, the company invested $1 billion in Comcast . Last year, it shelled out $212.5 million for a stake in Time Warner 's Road Runner cable-modem service. And in January, Microsoft paid $800 million for stakes in the European telcos UPC and NTL .
AOL's biggest weapon might be Netscape's stake in Network Computers Inc., an Oracle spin-off best known for its unsuccessful attempt to sell a WebTV-like consumer device.
David Limp, Network Computers' VP of corporate development, contends his company has an advantage, as it has tested its software on cable systems in Europe and Asia. WebTV has yet to see widespread deployment on cable networks.
"We were 15 months behind Steve when he started Artemis [WebTV's original code name]," Limp says. "Now we're 15 months ahead."
However, Limp concedes that not a single customer is now paying to use an NCI-based system. But he's banking on broadcasters' paranoia about Microsoft to give him an edge.
A former Apple Computer whiz kid, Perlman smiles when he discusses his mandate to tie WebTV, which was built to run on Unix, to Windows servers.
"It's easier to focus on one platform, and if you're a Microsoft subsidiary you'll probably choose NT," he says, laughing.
But it's no laughing matter. Once a service provider uses Windows CE and WebTV software to build a set-top service, Microsoft will have a foot in the door to sell them the Windows 2000 operating system as the back end.
All this means that the laid-back Perlman must shoulder a heavy burden: The choices his customers make are going to have a lasting impact on Microsoft's software empire.
America Online: 15 million
CompuServe: 2 million
MSN Internet Access: 1.5 million
ATT WorldNet: 1.4 million
IBM Internet Connection: 1 million
EarthLink Sprint: 1 million
GTE Internet Solutions: 824,000
WebTV Networks: 700,000+
MindSpring: 650,000
Prodigy: 643,000
Top sites as of Dec. 31, 1998
Source: Interactive Services Report, a publication of Telecommunications Reports International