Gates Tries For A Hollywood Ending

It looked like a boffo debut for William H. Gates III and his attempt to go Hollywood. Two years ago, flanked onstage by Oscar-winning Titanic director James Cameron and rapper LL Cool J, the Microsoft chairman unveiled his company's latest version of its audio and video software. But Microsoft Corp.'s (MSFT ) upbeat show hit a dark second act. Holding court later in a suite at the Four Seasons Hotel, Gates delivered what one Hollywood mogul called "a second-grade tutorial" on the economics of selling movies online. It was "a little uppity," says the mogul, "even for the richest man on the planet."

Someone must have sent in a script doctor. Since the debacle, Microsoft has phased out the geeks in favor of Hollywood insiders, such as former Warner Bros. Inc. (TWX ) DVD chief Warren Lieberfarb. In July, Microsoft hired Blair Westlake, former chairman of Universal Television & Networks Group, to run a newly created unit to lobby Hollywood. Their goal? Persuade the studios to wrap their movies in Microsoft's software, which the company is offering for free. That way, Microsoft can turn around and sell the software that plays these digital versions of movies to computer makers, consumer-electronics companies, and online video services.

Microsoft is smoothing over its legal disputes as well. During the past year, the company settled lawsuits with Time Warner Inc. (TWX )'s Netscape unit and tiny InterTrust Technologies Corp., a copy-protection technology maker that's partly owned by Sony Corp. (SNE )

The new approach is helping Microsoft make headway. It won nonexclusive software licensing deals with Time Warner and Walt Disney Co. (DIS ) Time Warner is considering making its content available to PCs and portable devices that use Microsoft's Media Center software. Disney is looking at using Microsoft's software to deliver movies and TV shows over the Net. Microsoft has also won approval to include its encoding software in the next-generation HD DVDs, including the new Blu-ray format backed by Sony.

Still, the studios remain wary of Microsoft, given its bruising monopolistic practices of the past. Hollywood execs, originally concerned that they would have to pay for every movie or show digitized using Microsoft's software, were relieved at the company's willingness to provide it for free under a 10-year agreement. But the historical distrust lingers. "Sounds great, but studios are waiting for what happens in the 11th year, when Microsoft says it has Windows 15 and it's gonna cost you a bundle," says Richard Doherty, research director at the Envisioneering Group, a consultancy that has advised studios in the past. At the same time, these strategies have raised the hackles of competitors. In December, rival RealNetworks Inc. (RNWK ) filed suit, charging Microsoft's practice of giving away software to content providers was part of a pattern of anticompetitive behavior.

Hollywood is being careful to avoid becoming dependent on Microsoft. The five studios that own the Movielink movie download service use software from both Microsoft and RealNetworks. And despite its recent deal with Microsoft, Disney shows no inclination to drop the copy-protection technology that it licenses from Switzerland's Nagravision to protect movies on Disney's MovieBeam video-on-demand service for TVs.

Tinseltown execs may still love a tale of redemption. But it may take more than a new script for Microsoft to remake itself from villain to hero.

By Ronald Grover in Los Angeles

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