Online Extra: Aiming For "A Very, Very Good-Sized Business"(extended)

It's very important for us to have gotten in early, says Microsoft Chairman Bill Gates about interactive TV

Microsoft (MSFT ) first invested in TV technology more than a decade ago but found little success over the years. Now it seems the market that Microsoft and others first envisioned is close to become a reality. Soon, channel surfers will get vast new choices in programming and the ability to customize their selections. And Microsoft's decadelong pursuit gives it much experience to draw on.

Chairman Bill Gates recently sat down with BusinessWeek Seattle Bureau Chief Jay Greene to talk about the company's long-running interest in TV software and prospects for the business going forward. Edited excerpts of their conversation follow. Note: This is an extended, online-only version of the interview that appears in the Feb. 7, 2004, issue of BusinessWeek.

Q: What are the lessons you've learned about TV technology over the last decade that will make Microsoft more successful with its current product lineup?


TV started as analog, went to digital broadcast, but now is making the evolution to what we call IPTV [Internet protocol TV, which uses Web technology to deliver programming]. And when you go to that generation, you can do something dramatic. We believe that software can improve the TV experience.

Q: It seems as though Microsoft TV turned a corner shortly after Moshe [Lichtman, Microsoft's top TV exec] took over two years ago. What are the most important changes he made?


Moshe definitely evolved [Microsoft's TV] group. He took the partner relationships to a new level. The Motorola (MOT ) partnership is a good example. We've been working with Motorola, but we've never really said to them, "Hey, are we part of your strategy or not? And if we're not, well, that's a real problem. If we're crosswise, it's probably not going to work that well for either of us. We'll both essentially be overinvesting."

Q: One of the important changes is that Microsoft's set-top box software no longer needs to run on Windows. Was there much internal debate about creating set-top box software that didn't require Windows?


No, no, no. Those guys do a super good job of leveraging Microsoft technology.

The biggest revelation for me on this stuff recently was the reaction at [the Consumer Electronics Show] to that baseball demo [where viewers were able to watch one baseball game while monitoring three others on tiny windows on their TVs]. People loved that thing. It just reminded me people care about the TV viewing experience. If you can really make it better, then it's a very profound impact.

Whether it's game shows or sports or news or should have a show that fits what you're interested in. When you watch sports, if you have 20 minutes, [you should] see the best parts. But then [you should] be able to control and say, "No, I would like to see a little bit more of that play."

Even the idea of being able to talk with your friends, video chat or audio chat or text chat, while you're watching shows at different locations. That stuff gets incredible responses, and it's only when you get that IPTV framework that you get the chance for that kind of innovation.

Q: You said that you've seen that baseball demo, and ones like it, for a long time. Why will it become a reality now?


We are believers in the power of software. Anywhere we see a chance for great software, we're going to invest in it -- and we're going to just stick with it. It's very important for us to have gotten in early to do a TV platform.

When [telecom giant] SBC (SBC ) first came in to talk with us about IPTV, there were just a few people at SBC who believed in IPTV. They were kind of a renegade group. Then, they met our guys, and our guys said, "Yeah, of course you're right. Actually, you should do your network architecture this way, you should do this." And the SBC guys said, "Oh gosh, we've found some kindred folks. Can you help promote this idea back at SBC?"

Q: Is that something you personally got involved in?


Actually, I always thought they'd call on me to do that. Our group working with those people at SBC obviously made the case well enough that this is the strategy they have in the company.

Q: And it didn't require you to put in a call to SBC CEO Ed Whitacre or anyone else to push this forward?


No, though I definitely volunteered to do that.

Q: How big of a business can Microsoft TV become?


Well, if we win a substantial number of the cable and telecom deals around the world, then you could see a pretty good-sized business. Not a Windows-sized business, but a very, very good-sized business. And that is reinforcing all the other work that we're doing -- our media [compression technology], our digital rights management. It's a great thing for getting other efforts around the company to critical mass. We see this [Microsoft TV] as being quite a profitable business.

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