The House That Microsoft Is Building

A plan to sell routers is key to its vision of the digital home

Microsoft Corp. (MSFT ), whose software has come to dominate the workplace, now wants to take over your living room as well. Last October, the Redmond (Wash.)-based software giant launched Windows XP, the new operating system that makes it a snap to organize music files and gather digital photos. Microsoft then jumped into the video gaming market, with its Xbox game console. And on July 11, it plans yet another bold foray, this time into home networking.

With global sales last year of $1.4 billion, home networking hardly holds the sex appeal--or the profitability--of the lucrative game console business. But Microsoft now believes that networking devices, known as routers, may be the key to controlling the digitally wired home. By selling routers that link PCs to game consoles, TVs, and other household devices, Microsoft is hoping to serve as the gatekeeper connecting consumers to the multibillion-dollar world of digital entertainment: games, movies, music, and other services. At the same time, Microsoft hopes to defend its place as the technology centerpiece for consumers against intrusions by other home-networking services. "There's a bigger strategic connection," acknowledges Adam LeVasseur, a group product manager at Microsoft.

In Microsoft's vision of the future, all these home devices and appliances will be connected through the router not just to one another, but also to the Internet. Thus, rock fans could download the latest tunes from a Net service and then access the song on their stereo. And families could share a high-speed Net connection so teens could swap instant messages with their pals at the same time Mom pays bills online.

For its part, Microsoft won't discuss details of its networking plans, except to say it will offer kits for both wired and wireless connections. And while it hasn't announced pricing, analysts briefed by Microsoft expect the giant to match competitors like Linksys Group Inc. and Netgear Inc.--charging roughly $250 for a wireless broadband router--and perhaps then bundle it with deals on its high-speed MSN Internet service. "Competitors should be worried," warns Mike Wolf, an analyst with industry researcher In-Stat/MDR.

Microsoft's networking rivals may lack the clout to fight back. Linksys and Netgear, the current leaders in home-networking devices, combined for less than $600 million in sales last year, a mere 2% of Microsoft's revenues in the same period.

Ironically, both companies worked closely with Microsoft to ensure its new Windows XP worked well with home-networking gear. Now, they face the prospect of competing with the same company that provides the technical data to make their products operate seamlessly with Windows. "Potentially, there's a conflict of interest," warns Linksys Vice-President Janie Tsao, who nonetheless hopes to stay a step ahead of Microsoft in innovation.

History suggests that they should be wary. Last year, a federal appeals court upheld a lower court ruling that Microsoft illegally added features to Windows to put its chief browser rival, Netscape Communications Corp., at a disadvantage. Microsoft's networking rivals are keenly aware of its record. "You hope they will behave as they have been saying they will," says Netgear Chief Executive Patrick C.S. Lo.

Still, home networking is far from a sure bet for Microsoft. The software giant has dabbled before in hardware, with mixed results: Its keyboards and mice are best-sellers, but its efforts to sell PC speakers and PC-connected cordless phones in the late 1990s fizzled after only a year. And while Microsoft's Xbox game console has sold well domestically, the weak response overseas has led the company to slash its Xbox sales projections by as much as 40% for the year ended June 30.

How big will the home-networking business be for Microsoft? Some optimists believe the market could more than double over the next few years, to $3 billion or more. However fast the market grows, you can bet Microsoft will be in there angling for the lion's share.

By Jay Greene in Seattle

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