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Gates Still Aims for TV Stardom

By Jay Greene Microsoft has made its fortune by dominating the screens that sit in corporate and home offices around the globe. Despite years of false starts, it longs for similar success on the screens in consumers' living rooms. Microsoft Chairman Bill Gates used his annual keynote address at the Consumer Electronics Show in Las Vegas Wednesday night to make the case that the company is zeroing in on that goal.

Gates pointed to Microsoft's (MSFT) consumer-electronics successes so far, and he gave a glimpse of future forays. Interviewed by late-night talk-show host Conan O'Brien, Gates detailed Microsoft's efforts to become the linchpin of all things digital -- from music players to cameras to mobile phones and gaming devices. It's the heart of Microsoft's plan to maintain the vibrancy of its Windows PC operating system by continually introducing new bits of technology that can connect to it. "What is key for us is to build up the ecosystem," Gates said.

The centerpiece of Microsoft's TV strategy is actually a computer, the Windows Media Center PC. The device works just like computer when someone types away at its keyboard. It also comes with a remote control and can be hooked up to a TV screen. Thanks to computing smarts, it can record programs just like a TiVo (TIVO) box, store and play music and photos, and connect to the Web for content created specifically for Media Center machines. Since its 2003 launch, 1.4 million units have been sold.

SCANT RETURNS. Microsoft also wants a spot in TV set-top boxes by providing the software that lets consumers find and record programs. And it's making a big bet on TV delivered over the Net -- so-called IPTV or Internet protocol TV. Gates has "no doubt this is where the world is going."

SBC Communications (SBC) agreed to pay Microsoft $400 million to develop the technology for its video-on-demand service, which stores programs on computer servers and lets consumers watch whenever they choose. And Gates announced a new deal to develop IPTV technology for BellSouth (BLS).

Microsoft even cut a deal with one of its rivals, digital video-recording pioneer TiVo, which has just announced plans to let some of its customers transfer programs to Windows PCs. Gates said TiVo customers who own Media Center PCs will be able to move their favorite programs to Portable Media Centers, a recently introduced breed of handheld devices that lets people watch video on the go.

Yet for all its effort build a business in the living room, Microsoft hasn't made a dime there yet. The Xbox gaming console has been a financial sinkhole, with Redmond pouring hundreds of millions of dollars into developing the business. It also has registered no significant business from its set-top box efforts, despite more than a decade of trying.

TOUGH COMPANY. "We've been investing in software for the TV probably for longer than we should have," Gates said, acknowledging the shortfalls and added: "It has been almost 12 years that we've been building on this." So for all the flash of Gates's presentation, Microsoft appears unlikely to see financially meaningful business anytime soon.

What's more, Microsoft competes with tough rivals such as Sony (SNE) and Apple (AAPL) -- the former a longtime consumer powerhouse and the latter a pioneer in merging consumer electronics with traditional tech. "It's just not clear if Microsoft's vision is the vision that will prevail," says Goldman Sachs analyst Rick Sherlund.

Nonetheless, after a dozen years in the TV business, Microsoft and Gates are clearly not about to back away now. Greene is BusinessWeek's Seattle bureau chief

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