For Microsoft, It's "Inactive Tv"

Missed deadlines have cost it a chunk of the set-top biz

Apparently, you can't buy friends the way you used to. Consider Microsoft Corp. In the past three years, the Redmond (Wash.)-based software giant has dipped into its multibillion dollar cash hoard and invested over $10 billion in cable companies around the world. The conventional wisdom: Microsoft was buying market share for its fledgling interactive TV software.

That's logical. But because Microsoft has failed to deliver a reliable system on schedule, things haven't worked out that way. Instead, cable companies are considering--and even signing up with--rivals. The most recent threat of defection came from Netherlands-based United Pan-Europe Communications, Europe's largest cable operator, with 8.4 million subscribers. UPC is now considering going with Liberate Technologies.

"LONG LIST." Months earlier, Telewest Communications, Britain's No. 2 cable operator, also chose to go with Liberate. And that happened even as Microsoft was in the midst of closing a $2.6 billion deal to buy a 24% stake in Telewest from MediaOne. "It's full speed ahead, but not necessarily with Microsoft," warns Josh Bernoff, an analyst with Forrester Research Inc. in Cambridge, Mass. Probably the most disturbing development from Microsoft's point of view: Even AT&T--its largest cable investment--may be looking at a rival system as well, sources claim. AT&T declined to comment.

The problem is clearly one that Microsoft brought on itself. It stems largely from Microsoft's insistence on powering the boxes with its Window CE operating system--the little sister to the Windows PC software. The benefits of using Windows CE are significant, since it can snap easily into other Windows-run systems and because a large software-development community writes applications for the operating system. But while Liberate's system was developed from the ground up for set-top boxes, Windows CE, used in everything from handheld computers to digital gas pumps, is more complex. "There's just a big, long list of things to do," says Microsoft Senior Vice-President Jon DeVaan.

Meanwhile, cable companies have to get on with the business of jumping into interactive TV--an enterprise that Jupiter Communications expects to generate as much as $10 billion in revenues by 2005. UPC, which was on the receiving end of more than $350 million of Microsoft's money, faces such a deadline: It plans to roll out 30,000 interactive set-top boxes in the Netherlands next month. But because Microsoft's software is not ready, UPC CEO Mark Schneider now says it's "highly likely" that the plumbing that runs the boxes will come from Liberate. And while Microsoft is promised the business on the 100,000 boxes UPC plans to ship next year, it will lose that, too, if it can't get its software working properly.

Rivals are licking their lips. "They have given me some of the best customers in the world on a silver platter," says David A. Limp, Liberate's senior vice-president of corporate development. Other potential beneficiaries include WorldGate Communications Inc. and PowerTV Inc.

DEEP POCKETS. None of this lost business holds a candle to Microsoft's biggest cable partner, AT&T. In May, 1999, Microsoft pumped $5 billion into AT&T and secured a contract to install its TV software in as many as 10 million AT&T set-top boxes. At the time, the companies said they would roll out the service in two showcase cities by the second quarter of 2000. Now, two months past that date, the software remains in Microsoft labs. While DeVaan says the AT&T deal isn't in jeopardy, sources say AT&T is trolling for alternatives--just in case.

The interactive TV game is still very young, and Microsoft is far from out of it, particularly given its heft. "They have tremendous financial resources that they can throw at the issue," says Francois Carayol, CEO of Canal+ Technologies, which makes its own TV software. But as Microsoft is learning, money is not always enough.

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