Bill Gates's New Focus: Streaming Video

Microsoft's NetShow video software is coming on strong

For the past year and a half, there hasn't been much to cheer about in Building 9 on Microsoft Corp.'s campus in Redmond, Wash. That's where engineers labor on the company's NetShow streaming-media technology--which has been roundly criticized for producing nearly unwatchable postcard-size videos on PC screens. "To date, NetShow has been a no-show," says analyst Gregory Tapper of Giga Information Group.

That's about to change. On May 4, Microsoft plans to release its first public test version of NetShow 3--in advance of a formal June launch. People who have seen the new technology, used to send video and audio clips over the Web, say NetShow is finally ready for prime time. It has improved compression, which makes video clips satisfying even on a 28.8 kbps modem. And its so-called intelligent streaming technology adjusts on-the-fly to changing network conditions, such as traffic bottlenecks. "It improves the quality of the video dramatically," says Mark Cuban, CEO of AudioNet Inc., a leading provider of live video and audio content via the Web and a NetShow user.

Video technology may seem arcane, but Microsoft sees it as the key to crossing the chasm between the PC world, where it rules with its Windows software, and the much larger TV realm, where it barely has a toehold. Microsoft is distributing NetShow with its Windows operating system free of charge. Wide acceptance of the new version by Web publishers and consumers could drive demand for its Windows NT servers, WebTV service for browsing the Internet via television, and its new software for interactive cable. "In the long run, the Internet and corporate intranets will join radio, TV, cable, and satellite as a major broadcast network for entertainment and business communication," says NetShow product manager Gary Schare.

Today less than 1% of Web sites make heavy use of video. But Giga's Tapper estimates that those sites will number in the thousands within two years and will be tens of thousands a couple of years later. That's largely because of improvements by Microsoft and video technology leader RealNetworks Inc.--combined with the switchover to faster 56 kbps modems. These changes make the Web more appealing to businesses and consumers and could spawn a slew of new products, services, and content worth several billion dollars over the next half decade, according to market researcher Paul Kagan & Associates.

LIVE COVERAGE. Web site operators and software developers already are revving up. Media giants such as CNN, Fox, and MSNBC are making aggressive use of video on their Web sites. Last summer, CNN transmitted live video over the Web of Princess Diana's funeral. ZDNet News, a leading technology news site, plans to offer far more video over the coming months. Executive Producer Patrick Houston points to Apr. 20 when Microsoft Chairman William H. Gates III was embarrassed after Windows 98 crashed during his demonstration at the Comdex computer industry conference. "You can't express that moment any better than in video," says Houston. And in the business realm, dozens of software companies are building programs for video-based training, video archiving, and video corporate communications.

Microsoft's technology is finally up to the challenge. It includes Microsoft Media Player, software for receiving video, audio, and other multimedia content over PCs. The server-side component makes it possible to deliver quarter-screen video over dial-up modems--on up to high-quality, full-screen video over cable-TV networks. And a high-end product, Theater Server, is designed for hotels and airlines that want to deliver broadcast-quality video with such services as city guides and interactive shopping.

Microsoft didn't get here by hard work alone. The software giant has either bought or made equity investments in most of the top video-streaming players in a bid to catch up. It spent $60 million on an equity-investment and licensing deal with RealNetworks and paid $75 million to buy VXtreme Inc. Earlier, it invested $5 million to get a peek at technology developed by video pioneer VDOnet Corp. That has given Microsoft access to technology that it combined with its own software, which first debuted in December, 1995.

It also has given trustbusters cause for concern. As part of a wide-ranging antitrust probe, the Justice Dept. is investigating Microsoft's video-streaming moves. Justice was alarmed that Microsoft might buy its way into dominance of Web video, according to executives of rival companies who have been interviewed by government investigators.

Of particular worry: that Microsoft's dominance and appetite for video-streaming companies would poison the field for startups. "We told them venture capitalists don't like to invest where Microsoft has its foot in the door," says James Long, chairman of Starlight Networks, a developer of business-video applications based in Mountain View, Calif. Still, Long and other execs say they didn't accuse Microsoft of playing unfairly. And Rob Glaser, CEO of RealNetworks, the video-software leader that holds an 85% share of all Web pages that use streaming media vs. Microsoft's 5% share, says he's not counting on government help. "Even if Microsoft prices below cost," says Glaser, "we still think we can win."

Pricing is Microsoft's key advantage in its attempt to catch up with RealNetworks. Microsoft bundles the NetShow player and server for free with Windows and NT server software. If the tactic sounds familiar, it is. That's exactly the approach Microsoft used to batter Netscape Communications Corp., the early leader in Web browsers. The result: Microsoft grabbed a 40% market share in two years and forced Netscape to start giving away its browser, too. The analogies between browser and video software "are haunting. This happens time and time again," says David Limp, vice-president for marketing at Network Computer Inc., which competes with Microsoft's WebTV unit.

But there are some key differences. Most significantly, unlike Netscape and its browser, RealNetworks poses no direct threat to Microsoft's Windows desktop hegemony--so there's less motivation to crush it outright. Instead of targeting RealNetworks as pointedly as it did Netscape, Microsoft can instead overtake it in time.

SETTING STANDARDS. Indeed, Microsoft is trying to promote the entire video industry. Last summer, the company proposed the so-called Advanced Streaming Format--a de facto standard ultimately supported by more than 40 other companies, including RealNetworks. A standard was needed to assure compatibility between the major streaming-media technologies. But it also means that Microsoft is trying to set up its own technology as central, giving it an advantage in courting developers.

In new markets such as video, friends matter. So Microsoft is following its successful Windows blueprint by drumming up support from developers of software programs and tools. Some 100 companies learned how to build applications on top of NetShow 3 at a February workshop. For Excalibur Technologies Corp., which is developing a video-search product, the ubiquity of Windows was the deciding factor in its decision to forge a major relationship with Microsoft, even though it is collaborating with RealNetworks. "We went where there's a significant market opportunity," says Daniel Agan, vice-president for worldwide marketing. Excalibur's new product, Screening Room, which is used to search and archive videos, works on top of NetShow.

Right now, RealNetworks is the preferred video-technology provider for most of the major consumer Web sites. But Microsoft is beginning to gain mindshare. Over the next couple of years, Paul Kagan & Associates expects it to capture 25% of the video server market. "This can be like Pepsi and Coke, with neither one totally dominating," says analyst Jae Kim.

Already, popular media sites such as Bloomberg LP and CNN Interactive have decided to support both Microsoft's and RealNetworks' technologies, even though NetShow is not widely used by consumers yet. They say the quality is roughly comparable. And "there's great appeal in something that's free," says Jonathan Fram, general manager for Bloomberg's Internet Group. At CNN Interactive, which next month is launching a video site, the decision to use both technologies was a strategic one. General Manager Mark Bernstein says he wants to help make sure that there is always an alternative to Microsoft. "We don't want Microsoft to dominate the Internet," he says.

Still, he won't bet against the software giant. And over the long haul, even CNN might find it cumbersome to support two video formats. If that's the case, the technology that's available nearly everywhere, and for free, will have the advantage--and Gates may be the one saying, "Lights, camera, action."

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