Webtv: Hello, Couch Potatoes

Can Steve Perlman sell WebTV to the masses?

Kevin Harrington wanted to get on the Internet, but he didn't much like computers--or their price tag. So after seeing ads and news stories about a $350 device from WebTV Networks Inc. for surfing the Internet via the TV, the maintenance foreman at a Akron (N.Y.) recreational-vehicle lot bought one last December. Now, he cruises the Web for news and sends E-mail to friends at least two hours a night. "If you're not into computers," says the 29-year-old, "it's unbelievably easy."

Or, even if you are into computers: Microsoft Corp. Chairman William H. Gates III has bought several WebTV devices for his friends. Apple Computer Inc. co-founder Stephen Wozniak has snapped up a dozen. And since the boxes went on sale in October, consumers have bought more than 50,000--a decent start, considering that 35,000 audio CD players were sold in their first year. Says Wozniak, whose relatives use WebTV--not an Apple Macintosh--because it's a breeze to learn: "Find me a computer that is so human-understanding."

Indeed, the notion of making a ride on the Internet as effortless as pushing a remote-control button has made WebTV one of Silicon Valley's hottest prospects. Since its June, 1995, founding, WebTV has raised $65 million from an all-star lineup of investors--including Citicorp, Marvin Davis, Times Mirror, George Soros Capital, Seagate Technology, Microsoft, and Gates himself. That outdistances even Netscape Communications, which raised $36 million before it went public in 1995. Not surprisingly, co-founder Steve Perlman is spouting a giddy vision. "This has the potential," he says, "to replace television as the dominant form of entertainment."

Whoa--don't cancel your cable just yet. Five months into selling these WebTV boxes, the initial glow is fading. Sure, the devices, manufactured by Sony Electronics Inc. and Philips Consumer Electronics, have grabbed an early lead on an exploding pack of rivals all trying to bring the Net to the 85% of Americans not online (table). But since the holidays, sales at Good Guys, a West Coast electronics chain, have slipped 75% from December, compared with the normal 50% seasonal sales drop. Says Sears, Roebuck & Co. Vice-President Chuck Cebuhar: "They were not the mass-market item that some people expected."

LONG HAUL? Especially Perlman. After selling to the digerati and such Internet converts as Harrington, Perlman is now finding it hard to reach the masses--the couch potatoes. Most still barely know what the Internet is. And compared with TV programming, current Web material is slow, static, and largely silent, thanks to the limited data capacity of most phone lines. "People watching TV expect to be entertained," says Forrester Research Inc. analyst Josh Bernoff. "They expect motion, they expect sound."

That means it could take years, if ever, before Net TV devices achieve hit status (chart). Market researcher International Data Corp. predicts annual sales won't top 1 million until 1999, and the 12.4 million it forecasts in 2001 will still trail VCR sales. "We don't think it's a world-beater," says Ed Christy, a consultant at SRI International.

But Perlman does. A technical whiz who hails from Apple, he argues that WebTV can overcome all of its obstacles. Thanks to his and others' advances in multimedia and communications, WebTV devices have surprised the skeptics, who doubted the Web could look good on a TV screen. And while rivals keep tinkering to get their devices on the market, Perlman's box went from prototype to store shelves in just 14 months.

Now, Perlman plans to up the ante by making WebTV into a full-fledged online network--one that makes most of its money on advertising to the Internet-unwashed. To do that, he must dramatically improve Web fare--an uphill battle considering he has signed only a few partners so far, including PBS and TV Guide, to provide Web news and entertainment.

Perlman hopes to jazz up WebTV content partly through a new technology it is developing called VideoFlash, due out this summer. It vastly speeds up video--even faster than PCs--by compressing data much more than current methods. VideoFlash will make TV-like video possible and shorten the waiting time for downloading Web pages. It also helps those creating TV programming to easily move the content to the Web.

At the same time, WebTV and its partners, Sony and Philips, will step up advertising and marketing this year--the three spent some $60 million in 1996. WebTV also plans to train retail salespeople on how to better explain WebTV. And Perlman is pushing to get the price of the WebTV boxes below $300 this year. All this, he says, could jump-start sales.

It had better. So far, Sega Saturn's $200 NetLink is the only significant rival on the market, but Oracle's deep-pocketed Network Computer partners, including Mitsubishi and Akai Electric, will bring out low-cost Net TV devices this fall. Meanwhile, WebTV is burning cash fast--analysts estimate well over $2 million a month, while the $19.95 monthly subscription fees it is charging WebTV customers and royalties from its hardware licensees are bringing in a little over half that. Concedes WebTV Chairman Randy Komisar: "It's a high-wire act."

But if anyone is accustomed to the edge, it's Perlman, whose prickly, headstrong ways have sent him from one Silicon Valley highflier to the next. Take Apple. He joined its Advanced Technology Group in 1985, working on multimedia technologies, including a chip set to turn the Mac into a TV receiver. But in 1990, he left in a huff after he thought Apple sat on that work.

The same thing happened at General Magic Inc., a startup developing software for handheld communicators. Perlman walked out in 1994, after four years, when higher-ups mothballed his Magic TV interactive software. Then at Catapult Entertainment Inc., a game developer he co-founded in 1994, he was fired a year later after clashing with other managers.

The 36-year-old Perlman blames all this friction on what he calls the "Salieri syndrome," in a reference to Mozart's jealous rival composer. "Some people don't keep up with me, and they don't like that," he says. Now that he's the boss, though, colleagues say his demanding style could pay off.

That's being put to the test. Along with Apple colleagues Bruce Leak, who invented Apple's QuickTime, and Phil Goldman, Perlman founded WebTV in 1995 in a former BMW auto dealership. He came up with the idea while surfing the Net one night when he stumbled across Campbell Soup Co.'s Web site. He realized the people it was aimed at weren't on the Web yet and the way to reach them was through TV. That's when he set out to make the Web look good on a TV screen--a feat he accomplished after three days of painstaking work.

EASY DOES IT. By all accounts, WebTV is a snap to use. The box is plugged into the TV like a VCR, hooked up to a phone line, and turned on with the press of a clearly marked button on the remote. The first time, you enter a name, password, and credit-card number, and the unit automatically dials a local phone number. After a short wait to connect to the network--accompanied by animation and music instead of modem screams--you're immediately hooked up to the WebTV home page. From there, you can travel via a click on the remote or an infrared keyboard to E-mail, a search box, or your favorite Web sites.

For Perlman, this is the culmination of a longtime dream to get computing power to the masses. While attending

Columbia University as a liberal arts major, he tapped the campus mainframe with a homemade microcomputer to write papers. And he had the bug even earlier: In high school, Perlman stopped attending classes to start a company that helped Northeast Utilities share a minicomputer. Perlman, who grew up in West Hartford, Conn., graduated anyway, thanks to hours spent cramming. "He was working every minute of the day," recalls Perlman's mother, Adele.

That hasn't changed at WebTV. "He's always saying, `Why can't we have this feature now?"' says Chief Operating Officer Leak. Perlman's relentless pace is felt throughout the company, where three product generations are being developed in parallel. Perlman tinkers with them all as he gets results from a full-time WebTV psychologist, who brings in a dozen consumers a week to test reactions to new features. That, plus data from WebTV's network logs on what customers view and what mistakes they make, provide immediate feedback.

So far, it's working. Returns are less than 4% at Good Guys, for instance, and subscription cancellations are under 5%--both low compared with other new products. And, some commercial Web sites report significant traffic from WebTV owners. For instance, WebTV now represents the fourth-largest block of visitors to E! Online, the Web arm of the E! cable channel.

Still, that's a small corner of cyberspace. Perlman has a long way to go before he becomes the Bill Paley of the Internet.

Before it's here, it's on the Bloomberg Terminal.