Let The Set Top Wars Begin

Now that cablers won't pick one system, everyone's a player

Has Bill Gates been trumped? In May, he made a no-strings-attached $1 billion investment in Comcast Corp. to endorse the nation's partially upgraded cable networks as the best distribution vehicle for the digital age. Not promised but likely expected was Comcast's help in getting Microsoft Corp.'s operating system adopted by cable moguls as the standard for the next generation of digital set-top boxes. That's the device, much like a powerful computer, that will deliver all sorts of interactive services and features via TV.

Microsoft's move was such a shot in the arm for the cash-strapped and beleaguered cable industry that the stock of all the major companies skyrocketed. That, perversely, reduced the financial strain on the industry and allowed it to effectively spurn Microsoft's advances. What's more, suddenly emboldened cablers played Gates's plans off those of other technology companies, such as Intel, Oracle, and Netscape, which are also racing to develop software and services for the new set-top boxes. So Microsoft intensified its efforts, courting at least three other big cable companies--Tele-Communications, U S West Media Group, and Cox Communications--in an effort to buy more influence. "Microsoft would very much like to be in this business, and right now, they're not," says David M. Woodrow, senior vice-president of Cox, the fifth-largest cable company.

But cable moguls sidestepped that effort once again. On Nov. 5, they announced that they won't pick a single operating system for the set-top box. Rather, they will establish open standards so that many technology companies can jump in and design competing but interoperable software and hardware. In addition to interactivity, the box will be able to double as a cable modem hooked to a PC and will one day provide video teleconferencing. Detailed specifications will be issued by January. Calling the shots is a small group of seven top cable execs--including Comcast's Brian L. Roberts, TCI's John C. Malone, Cox's James O. Robbins, and U S West consultant William T. Schleyer--all of whom sit on the executive committee of Cable Labs, the industry's research-and-development consortium.

Cable Labs' decision trades speed to market for unassailable control of cable's infrastructure in the years to come. "A single operating system [would have] made application development somewhat easier," concedes Schleyer, who is leading the group. "But the general feeling was there was the potential to have the owner of that operating system dominate the TV domain." By choosing multiple systems, the cable industry, the technology industry, and consumers will have to sift through two or three versions of applications for the new cable network. "That's unfortunate," says Schleyer, "but it's a fact of life. We had to trade off the potential long-term cost of losing control of [our own] industry if we let one operating system dominate."

Under Microsoft's original proposal, presented by Gates to cable execs in New York on July 7, Microsoft would have controlled the brains of the system, from a server at the cable-system offices to the box in a consumer's home, as well as claimed a cut of transactions conducted over the network. It would have been a key gatekeeper into the 95% of U.S. homes that can currently be served by cable. After that meeting, says an industry source, other tech companies were privately asked by numerous top cable execs to enter the fray, lest Microsoft take over. And in August, Malone declared publicly that "when the dust settles, we have to own the thing."

Some top tech execs, especially Netscape's James Barksdale and Oracle's Larry Ellison, took it upon themselves to remind the cable moguls how dangerous it is for an industry to be dominated by a single player. "Microsoft just overstepped itself," says one senior executive familiar with the talks. "It probably could have gotten what it wanted if it had been more cautious in how it presented its proposal. Microsoft has been kind of paternalistic. Cable guys have big egos, are self-made men, and don't like to be talked down to." So when Cable Labs invited tech companies to submit proposals, Microsoft had little choice but to get in line, along with 25 others.

The cable execs are relishing their new clout with the techies. Notes Time Warner Inc. Chairman Gerald M. Levin: "Gates has changed a lot in the last six months. [He had been] over-reaching. He recognized reality and is trying to be a player with an open operating system."

TEAM EFFORT. Levin, who had to develop in-house all the software for his failed Full Service Network a few years ago, exults in the new climate. Now, tech companies are devoting resources to help cable companies upgrade their networks and offer new services. Says Levin: "[Cable's future is being] financed on the back of what's written for the PC and the Internet."

Cable Labs' choice to go with multiple operating systems means the fight for the cable box will be a protracted guerrilla war, as techies court individual cable companies and perhaps even individual cable systems. While a single winner won't be decreed by Cable Labs, despite all the cajoling and hectoring by Microsoft and other tech companies, a de facto winner will be determined "by the aggregate buying behavior of the industry--made by those writing the checks," says Schleyer. Of course, the risk is that consumers, who will buy the set-top boxes at retail stores, will be confused by the competing brands.

Even so, other tech companies have worked hard to avoid being shut out. So they're happily playing by the cable guys' rules. Avram C. Miller, Intel's vice-president for corporate business development, says it is devoting a lot of energy to the new boxes. "We want to make sure the cable industry can take advantage of the massive investment of the PC industry," says Miller.

With billions of dollars of cash on hand, Microsoft has plenty of ammunition to entice cable execs to choose its products in coming months. Craig Mundie, head of Microsoft's consumer-platform unit, denies wide speculation that Microsoft is talking to all of the cable companies about investments but acknowledges negotiations with a few.

The cable moguls' preference for control over speed seems to be an irritant. "We've been ready for six months," says Mundie. As the battle for the set-top box plays out, Microsoft and its tech rivals will have to adjust their calendars to cable's more plodding pace.

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