Picture imperfect

For all its promise, Microsoft's $425 million purchase of WebTV has been anything but revolutionary.

Mike Yamamoto Staff Writer, CNET News.com
Mike Yamamoto is an executive editor for CNET News.com.
Mike Yamamoto
28 min read

How Microsoft lost its vision with WebTV

By Mike Yamamoto and Stephanie Miles
Staff Writers, CNET News.com
October 12, 2000, 4:00 a.m. PT

MOUNTAIN VIEW, Calif.--It was supposed to have been the crucible where the elusive goal of interactive television would finally become a reality, introducing the Information Age to the American living room.

But for all its promise, Microsoft's $425 million purchase of WebTV was anything but revolutionary. So unclear was the software company's direction that some speculate it bought WebTV simply to keep it out of the hands of the competition, a tactic alleged in technology markets ranging from Java to streaming.

Even outside the company, Microsoft's culture is cited as a key reason for the conspicuous lack of progress throughout the interactive TV industry. Former executives say the historical tension between the computer and TV industries was exacerbated by the company's perceived arrogance and cutthroat

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reputation in the three years since the WebTV purchase--an unexpected move that came as a seismic wake-up call to TV networks.

Whatever the reason, Microsoft has lost a clear lead in interactive television, widely thought to be the Holy Grail of high technology's next generation. Companies from the communications, media, entertainment and consumer electronics industries are cooperating with and competing against computing stalwarts in positioning themselves for the day that two-way television becomes a mass-market staple.

A series of recent missteps have jeopardized contracts with players as large as AT&T, leaving Microsoft vulnerable to competitors as diverse as America Online's AOLTV, a challenger to WebTV, and Liberate Technologies, which makes software for interactive TV boxes.

Along the way, early WebTV crusaders have seen their idealistic mission reduced to a business clich?, losing its fire and identity to the rigid ways of a large corporation--and providing a cautionary tale for all new companies.

A case of remote control gone awry
The transition following Microsoft's purchase of WebTV was slowed by problems ranging from corporate politics to needless delays in technology, according to former executives and others familiar with both companies.

For Apple refugees, a sense of d?j? vu
The infusion of Microsoft culture was particularly difficult for some of WebTV's early crusaders: Many came from Apple Computer, where they had fought bitter wars against the software empire, only to lose their idealism to Microsoft's agenda.

Microsoft TV: Not ready for prime time
The culture clash between Silicon Valley and Hollywood has been cited as a major obstacle to the marriage of the personal computer and the TV set. The issue is particularly familiar to Microsoft, whose track record in mass media is dubious at best.

Go to: A case of remote control gone awry

Microsoft's once-commanding position in the interactive TV market has suffered several setbacks in the past few months:

June 19:
AOLTV is officially unveiled, the first head-to-head competitor WebTV has ever faced. Although reaction to the AOL set-top box is mixed, analysts say the online service and portal company is a potent threat to WebTV because of its brand recognition among consumers. AOL, which is using software from Microsoft rival Liberate Technologies, recruits many of WebTV's partners to its team, including Philips, DirecTV and Circuit City.

Aug. 14:
Microsoft reshuffles key management positions in the television group, essentially removing WebTV co-founder Phil Goldman from his role as head of the Microsoft TV group. Because of repeated delays completing and shipping Microsoft TV, sources say the technology group is now directly overseen by Microsoft executive Jon DeVaan.

Sept. 5:
Microsoft announces it is integrating components of Microsoft TV into Whistler, its next-generation operating system for the PC. The move is seen by analysts as a step back from digital set-top boxes as the primary method of providing interactive programming.

Sept. 11:
United Pan-Europe Communications, one of Europe's largest cable providers, agrees to use Liberate's software in its digital cable boxes. UPC says it looked to other software companies, including OpenTV, Excite@Home and PowerTV, after it became clear that Microsoft was moving too slowly. Microsoft has an 8 percent stake in UPC.

Sept. 21:
After taking $5 billion from Microsoft and agreeing to use Microsoft TV in its cable set-top boxes, AT&T shifts gears and announces that it will begin trials with Liberate software. Sources say AT&T, thought to be one of Microsoft's closest allies in the interactive TV market, was frustrated by repeated delays and missed deadlines.



A case of remote control gone awry

For some executives at WebTV, it was the beginning of the end.

After Microsoft acquired the company a few years ago, the software empire assigned an executive from corporate headquarters to represent WebTV at a National Association of Broadcasters convention. The young Microsoft emissary met with WebTV executives to outline his agenda for the conference, an event where powerbrokers descend each year from television fiefdoms as diverse as Rockefeller Center in Manhattan and Universal Studios in Hollywood.

The main topic of his presentation: a "white paper on dual-platform architecture."

Puppet masters: Who controls the Net "This is a trade show of television programming executives. The only platform they'll know is on a subway," recalled Stacy Jolna, then head of content for WebTV and now a vice president at rival TiVo. "Microsoft brought about 1,000 copies of the white paper and handed it out to executives in Armani suits--who took one look at it and quickly threw it away."

The experience epitomizes the problems Microsoft has encountered in the three years since buying WebTV, a deal originally cast as a historic bridge into the future of media and technology. Some see WebTV as a classic case of a passionate upstart whose altruistic goals met with cold economic reality and eventually surrendered its spirit to the Prussian personality of a large corporation. Along the way, the three idealistic WebTV cofounders who met at Apple Computer two decades ago have seen their friendships strained and their professional credibility challenged.

In interviews with CNET News.com, former executives and others familiar with Microsoft's TV operations say the WebTV transition has been a sometimes-farcical exercise fraught with unclear direction, shameless politics and technological blunders that have already cost both companies untold sums in lost opportunity--if not their assured leadership of the entire interactive TV industry. Former employees say that conflicting goals and rising tensions eventually clouded the company's vision, stunted hardware innovation and ultimately led to one of the highest customer turnover rates on the Internet.

"Honestly, the WebTV folks really didn't want to be part of Microsoft," said a former senior executive from company headquarters in Redmond, Wash. "They had their own identity, their own vision, and they wanted to maintain it as separately as possible. The cultures were very different and hard to blend."

Beyond these operational issues, many believe a much larger problem has blocked progress: a fundamental clash of culture and agenda between the computer and television industries. TV executives fear losing control of their business to a technology they don't fully understand, the theory goes, and companies such as Microsoft feed those worries with piranha-like reputations and aggressive business practices. The result is an eternal series of false starts involving competing technologies, dubious partnerships and little tangible benefit to the consumer.

In recent months, Microsoft has been blamed for some high-profile delays, including deals to develop software for cable boxes distributed by AT&T and European cable giant United Pan-Europe Communications. Perhaps most damaging, some sources say, is that Ultimate TV--Microsoft's successor to WebTV as the TV box of the future--may miss its promised deadline for availability this holiday season.

WebTV engineers were particularly offended by Microsoft's technology development, chastising the company's notorious tendency to overload software with extraneous features and throw products embarrassingly off schedule. They say this practice clearly contributed to the recent loss of Microsoft TV deals with AT&T and other cable companies.

"It's a thin client--a cheap box with limited memory," a former employee said of WebTV and other TV set-top boxes. "Microsoft always wants to add features, writing bloated code. They just didn't get it."

See special report: When worlds collide Microsoft used WebTV as a "petri dish," one source said, and effectively cast it aside once it learned how it worked. "People in Redmond were angling over who was going to have WebTV report to them," a former WebTV executive said. "It was disgusting but amusing."

Today, the assimilation of WebTV appears complete, with little left of the original company's culture or staff. Although president Steve Perlman remained in charge for a year after the acquisition, sources say Microsoft headquarters had an increasingly strong influence on the company's direction, most notably through resources and marketing.

The WebTV brand itself has a limited future, its mission confined to the slow business of dial-up Internet access through the TV set. Development of true two-way interactive television is overseen by a Microsoft group known as Microsoft TV, a line of authority underscored by senior management changes in recent months.

The issue of leadership surfaces repeatedly in conversations with former WebTV employees. If the company's direction was sometimes confused in its early stages, many say it became downright indecipherable once Microsoft took over.

"Microsoft didn't know how to manage the situation," a former Redmond executive said. "As a result, it provided inconsistent management of the WebTV team with inconsistent strategies and inconsistent results."

Those at WebTV assessed the situation more bluntly. "It got so political, so crossed up. Nobody knew who was calling shots, who was safe, who was on the same team--or was it the enemy within?" one former employee said of WebTV after the merger. "Certain engineers got so fed up. One said, 'OK, here's the deal: I live three minutes away from here. I've got two cars. I'll leave one car in the lot and a set of keys in my desk drawer. When you guys figure out what you want to do, come to my house and get me.'"

Some former executives blame Bruce Leak, WebTV co-founder and successor to Perlman, for not standing up to Microsoft and setting a clear direction. Although Leak is an affable man who wins praise for his grasp of technology, sources say he never commanded the respect held by Perlman and was largely seen as a figurehead that Microsoft installed to maintain the appearance of continuity after the merger.

In a lengthy interview with News.com, Leak scoffed at that notion. He accepts full responsibility for everything that happens at WebTV, good or bad, and that includes the issue of leadership.

"Microsoft never stationed anyone down here to run the business," Leak said at his office on Microsoft's new Silicon Valley campus in Mountain View, Calif., where WebTV moved late last year. "I've heard some of those concerns, and I think that the difference is I would blame it on me and my management team. I can't blame it on Microsoft; Microsoft doesn't tell me what to do."

Still, others say that Leak--at times known as an office eccentric who occasionally would stroll the hallways with a pet parrot perched on his shoulder--has given in to the inevitable. As it has done with so many other acquisitions, sources say, Microsoft forced WebTV into a corporate mold rather than give it room to thrive as an independent subsidiary with its own philosophy and talent.

Former employees say Microsoft's insistence on corporate hegemony stifled the creative, albeit chaotic, Apple-like environment that allowed for much of WebTV's early success. Everyone willing to speak about their experiences says they were drawn and became addicted to the intoxicating sense of purpose that pervaded their deceptively mundane warren of cubicles at the original site in Palo Alto, Calif.

In addition to the dynamic personality of its co-founders, many early WebTV employees say they were drawn to what they saw as a pioneering mission to create interactive TV content and a ground-breaking service that promised to combine the most popular medium ever with its fastest-growing counterpart, the Internet.

"There was so much excitement because everyone saw that this was going to become a mass medium, and they didn't understand exactly what characteristics it would take," said Phil Goldman, WebTV's third co-founder.

However, that same ambition--and the rewards that it could eventually reap--also engendered infighting throughout management and mistrust among WebTV employees toward parent company Microsoft. They point to a significantly lower level of energy and commitment since their offices were incorporated into Microsoft's campus in Mountain View, only a few miles north but a lifetime away from WebTV's first location in what used to be the garage of a car dealership.

"There was a joke at WebTV that people who visited Redmond came back with a scar behind their left ear, where the chip had been installed," one worker said.

To Microsoft, that apparently isn't a bad thing. Executives there say the decision to leave the interactive TV group in Silicon Valley exacerbated the transition problems.

"Microsoft does best with development done at headquarters in Redmond and has a much harder time figuring out how to do development elsewhere really well," a former senior executive said. "It's been a challenge for many years at Microsoft and why you see most acquisitions the company makes move to Redmond to get well-integrated."

Perlman initially appeared immune to much of Redmond's influence and was held in high regard both within WebTV and at Microsoft. Those who worked with Perlman say he and Microsoft chairman Bill Gates had a particularly close relationship. "It was almost as if a halo would appear above Perlman's head when he spoke at Microsoft meetings," one source said.

Many stayed on at WebTV, hoping that Perlman could do the impossible: run the company as a truly independent subsidiary. Over time, however, sources say even he could not stave off the encroachment of the mother ship. In one particularly frustrating struggle, former executives say he repeatedly tried to fire public relations agency Waggener Edstrom but was rebuffed by Microsoft's corporate communications division.

See related story: The new world order Microsoft's growing influence did not sit well outside of WebTV either. Where they once saw a young band of rebels who might jump-start a long dormant industry, competitors and partners alike viewed WebTV with a jaundiced eye once Microsoft's takeover was complete.

"Everyone's scared to death of Microsoft," said one former WebTV executive who worked on deals with other companies. "I remember one telephone company in particular was not interested in dealing with Microsoft at all."

Ironically, this perceived threat was felt most strongly in the industry WebTV was created to court: television.

"There is traditional friction between television and the new media side of the business. It runs both ways," said Kris Jacob, former director of business development for WebTV and now CEO of Alterlayer, a Web consulting firm. "In the TV industry, they say, 'I've been in this business 50 years, and you're not in position to tell us how to do things.' In Silicon Valley, there is such a tremendous focus on technology and engineering that it sometimes doesn't allow the perspective that we have a lot to learn."

In many circles, it is often thought that TV executives dismiss their computer counterparts as techno-nerds. But Microsoft is no ordinary technology company. If ever there was a software company with egos to rival those in the entertainment industry, it would be the Redmond juggernaut.

Before the merger, "we faced problems of getting bullied by huge cable operators, but at least we had a chance," one WebTV source said, adding that things changed seemingly overnight after the buyout. "People knew how Microsoft behaved, and they didn't want to have anything to do with that. People know when they're getting screwed."

Go to: For Apple refugees, a sense of d?j? vu

1995: WebTV is co-founded by Steve Perlman, Bruce Leak and Phil Goldman, veterans of Apple and General Magic. Initially, WebTV offices are located in the garage of an auto dealership in Palo Alto, Calif.

October 1996: WebTV ships its first product, the WebTV Classic. The $329 device is the first product to offer Web surfing and email through a TV set.

April 1997: Microsoft announces it is acquiring WebTV for $425 million.

August 1997: The Microsoft acquisition is approved by the Justice Department.

December 1997: WebTV experiences widespread network slowdowns and outages, attributed to servers straining under the load of too many new subscribers.

January 1998: Microsoft chairman Bill Gates promises WebTV boxes with high-speed DSL connections "in the coming year." To date, WebTV has never announced plans to ship a product with high-speed DSL or cable modem connections.

July 1998: WebTV is hit by two network outages in one week.

September 1998: WebTV drops plans to support popular Web technologies like RealNetworks' streaming media player and Java, despite vocal customer demand. WebTV is widely criticized for letting Microsoft's public battles with Sun Microsystems and RealNetworks influence technology decisions. WebTV later announces it will work with RealNetworks to offer support for new versions of its media player.

May 1999: Co-founder Steve Perlman steps down as president of WebTV.

November 1999: WebTV pushes back support for Real Audio, as the service suffers email delays and outages.

June 2000: AOLTV launches, the first head-to-head competitor WebTV has faced in the retail market. Although analyst reaction is mixed, AOL has attracted many of WebTV's partners to its effort, including DirecTV and Circuit City.

August 2000: Microsoft reshuffles the executive lineup in its television group, with Microsoft executive Jon DeVaan taking direct control of Microsoft TV, the collection of server and client software sold to cable and satellite providers for use in their digital set-top boxes. The move leaves WebTV co-founder Phil Goldman, who previously had been heading up the Microsoft TV group, in charge of interactive TV business development. The changes are in response to repeated delays in getting the Microsoft TV software ready for partners AT&T and United Pan-Europe Communications, sources say.

September 2000: AT&T and UPC separately announce deals with Liberate Technologies to begin trials of Liberate's interactive TV software.

September 2000: Microsoft president Steve Ballmer calls WebTV "interesting, but not overwhelming," in an interview with CNET News.com.



For Apple refugees, a sense of d?j? vu

It is no small irony that WebTV was founded by a group of disciples from Apple Computer, the original archrival of Microsoft.

Apple has long been known to encourage innovative thinking, and that's precisely what led Mac-heads Perlman, Leak and Goldman to create WebTV in hopes of leading the computer industry into its next brave new world: television.

"I think those roots of changing the world, of using software to have fun but make things better, is really what brought us here," Leak said. "Television is the mass-market device in the world, and if you look at where people expect to get multimedia and have that experience, you will find television there."

But just as the Macintosh was overshadowed by Windows computers, the Apple-inspired dreams of WebTV have been eclipsed by Microsoft's vision of interactive television. The irony continues today, as WebTV is criticized for providing poor service, losing its focus to corporate politics, and sharing many of the general sins its parent company has been accused of for years.

Critics see Microsoft's handling of WebTV--and its role in the progress of interactive television as a whole--as a metaphor for the way large corporations subsume smaller, often more agile and creative organizations. And like the Orwellian theme of Apple's famed "1984" advertising campaign, once-altruistic employees say Microsoft's corporate ways smothered the energy that sustained the early life of WebTV.

"Obviously, it was an Apple-based culture vs. Microsoft," said one former WebTV executive who had worked at Apple. "It was tough to deal with their regimentation."

Nevertheless, sources say WebTV's original leaders cannot escape responsibility for significant problems that beset the company well before it began receiving directives from Microsoft headquarters in Redmond. The "Apple mentality" that the co-founders brought with them also had its downside for some executives, who equated the Apple heritage with disarray and lack of a unified direction. More than one former executive said Goldman's group was dubbed "Camp Run-Amok" for its disorganization.

Goldman, who fully acknowledges that he has been strongly influenced by Apple's culture, says he recognizes its weaknesses. But, like Leak, his recollections of his experiences there are tinged with nostalgia.

"In a way it's very bad because Apple really was chaotic, and there was no management at all. And the good side was for young people like Bruce and myself. You could find a place and really own it; no one would tell you what to do," Goldman said. "I mean nothing at Apple--nothing--came from the top. There were a lot of great people who really had the passion and the energy and loved what they were doing and just made great things."

Today, the philosophy that pervades WebTV and the rest of the Microsoft South campus is distinctly Redmondian. "At Microsoft, people measure each other on how much revenue their business generates and how much profit it generates. And it's the culture: technology with a business," Leak said. "So I think we've learned a lot from that."

That sober perspective is a far cry from the start-up days at WebTV. As it became a leader in the so-called convergence market that was to combine the personal computer with the TV set, the company attracted droves of driven, talented people--many of them hoping to create a technology outside the realm of Microsoft-dominated computing.

The company was tracked closely by a broad range of parties, from software engineers to techno-philosophers who saw the unassuming device as a cornerstone of the Information Age. Although many other attempts at two-way television had been made, WebTV represented a new generation of companies seeking to meld the computer and the TV set as the Internet became a mainstream medium.

"This was a huge thing, an awesome undertaking," said another early employee who came from Apple and worked at WebTV before and after Microsoft took over. "Like an ice skater who makes it all look so easy and then falls on your keister once in awhile."

Like others, this employee was skeptical of Microsoft but tried to keep an open mind, committed to the interactive TV mission. Everyone at the company knew that it was only a matter of time before WebTV needed more resources to achieve its highly ambitious goals, so why not align with the world's most powerful software company?

At first, Microsoft said all the right things, praising the staff that had built WebTV and promising to continue supporting the use of Macs. But then things started to change.

CNETs complete Dreamcast guide "We all had Macs and were Mac users. Most of our engineers were from Apple," the former WebTV employee said. "It's a small thing, but you soon found that you couldn't get into the internal Microsoft site and had to use (Internet Explorer). In six or seven months, we had our Macs replaced with PCs."

Microsoft also made its presence known in ways that went well beyond computer hardware and into the area of content. In one often-recounted incident, sources say the company fired 30 people who had been hired to produce programming for WebTV subscribers, including a magazine called "Explore" that offered original content and guides to news, sports, games and other areas of the Web.

Then, sources say, management decided that it had made a mistake and tried to hire all of them back. Needless to say, the offer wasn't welcomed by all. And even those who did agree to return said the experience did not exactly inspire confidence in the company.

"I was assured I'd get a phone call by the end of the day with an offer. Three weeks later, I heard nothing," one former producer said. "I finally got hired later for a freelance job, and they told me I might as well sit at my old desk.

"I checked my voice mail, which hadn't been turned off. The point person who was supposed to get back to me about the first job had called me at my cube, where I was no longer working at the time. He sat about 12 feet away and had to have heard the phone ringing when he called."

Leak said he did not recall the producer dismissal but said content was never a primary focus for WebTV. Moreover, he and Goldman defend Microsoft's influence over the company, saying that it provided a kind of maturity that helped WebTV grow beyond its adolescent stages.

"For the first few years, we were like the independent film producers, and we wanted to get awards because the eclectic group really liked us. But it wasn't the mass market, really," Goldman said. "And you can imagine, Microsoft's expectations are very high. What we originally would have thought of as a huge success, Microsoft would not look on it as a success."

Goldman knows this well. Just days after he spoke with News.com, sources say Microsoft essentially removed Goldman from his position of leading the WebTV "platform" group, which was developing Microsoft TV software to be used in AT&T and other cable boxes.

"Goldman promised the cable platform team that they'd receive family vacations to Hawaii if they finished their work this summer. The promise was made one year ago," one source said, adding that some departing employees have cited the promise in their exit interviews. "Goldman couldn't deliver, the platform is really late, and Microsoft is now apologizing to valued employees who canceled their family vacations to work ridiculous hours on an understaffed team."

Microsoft denies the management change was precipitated by any delays in Microsoft TV. Instead, Goldman decided to head up a small group investigating interactive TV offerings within Microsoft's ".Net" initiative as the projects with AT&T were wrapping up, according to Ed Graczyk, director of marketing communications for Microsoft's TV group.

"The state of the software had no effect on the management change," Graczyk said, denying that Goldman was demoted because of the repeated delays. "It was essentially a lateral move."

Maybe so, but others say the delays had not escaped the attention of Microsoft's chairman himself. "Bill G. was pissed, especially since he has publicly said this is the year of interactive TV," said another source familiar with Microsoft's various cable deals.

Microsoft is often portrayed as late to the interactive TV game, having tried to catch up quickly by purchasing WebTV. But Gates has always kept an eye on television, knowing that it was only a matter of time before he needed to enter that fray with full force.

"The interactive revolution seemed to be stalled," Gates wrote in his 1995 book, "The Road Ahead," alluding to failed efforts earlier in the decade by Time Warner, Bell Atlantic and Japan's Nippon Telegraph and Telephone. "Then, almost overnight, the Internet answered the questions that hung over the industry. It became clear that the interactive network would be built first around the personal computer and later around the TV, which would itself become more like a PC."

"The (WebTV) acquisition was driven by Bill (Gates) and Craig Mundie, who have been the principals behind interactive TV," a former Microsoft executive said. "They had a vision for what WebTV could be and were very excited about it."

Less clear, however, were the details of how Microsoft intended to execute that strategy. "Microsoft never had a clear vision for WebTV, other than to keep it out of the hands of competitors," another former executive said.

That obsession with competition was indeed a motivating force for the merger, as it is in all things at Microsoft. If it had one goal for buying WebTV, it was to install Windows software in the boxes--part of an overarching goal to extend the operating system beyond personal computers, a market it had already saturated. That would also keep rival Sun Microsystems' Java technology out of the devices.

Microsoft had planned to use a "stripped-down" version of its PC operating system known as Windows CE to work with the limited computing power of WebTV's set-top boxes. But those who worked on the project said the software wasn't stripped enough.

"Getting Windows CE to work was a huge priority," said one former WebTV executive who worked on the project. "Publicly, executives were saying that Java was too large to fit on WebTV. But Windows CE is much fatter than Java. We were setting ourselves up for so much failure."

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A what's what of interactive TV services


Microsoft TV: Not ready for prime time

To many in the industry, Microsoft has only itself to blame for not dominating the interactive television arena three years after purchasing WebTV.

On paper, it had all the makings of a natural market leader: the top company in a new field, vast resources, marketing prowess and enormous deal-making power. But former executives say Microsoft suffers from a blind spot that it may never be able to overcome: It just doesn't get television.

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"I'll tell you a funny story. When Microsoft first took over WebTV, I was invited to Redmond to meet with a group of engineers to develop a skunkwork project," TiVo's Jolna related. "I was led into a room that had what looked like a giant television, but it was really a PC screen. The lights went down, and it was 'Interactive Baywatch.' It had interesting features and functionality, but I said, 'I gotta tell you guys, it's Baywatch, not Bay Interactive.' People want to lean back and just enjoy the show, not do anything. They just looked at me quizzically."

This is why some believe competitors may still have a chance at taking business away from Microsoft, even though they are years behind in development. For all the megacorporation's prowess in software, Microsoft has never proven that it can replicate that kind of dominance with Middle America--in essence, the TV-viewing masses.

It is for this reason that companies like AOL, which have built their success by catering to the general public, may pose a threat in the interactive TV market, especially with the potential to provide original programming and high-speed cable lines to deliver that content through its merger with Time Warner. Companies such as Sony, which have successfully targeted consumers for decades, also are in a position to challenge Microsoft with their own strongholds in traditional TV products and increasingly sophisticated game consoles.

Leak dismissed recent TV efforts by AOL, calling its AOLTV too little too late, a product designed to compete with WebTV while Microsoft TV has moved on to more sophisticated technologies and marketplaces. But others caution against any premature judgment.

"AOL is always going to be an extremely powerful player," Alterlayer's Jacob said. "It faces some of the same challenges as Microsoft (in focusing) on a lot of technology and a lot of infrastructure work. But it is primarily a consumer-focused company, so they do have some very viable subscriber bases to test this stuff out."

In some ways, Microsoft's handling of interactive TV mirrors the early days of the Internet's mainstream popularity in the mid-1990s. Many believe that, had Microsoft recognized the sea change in online computing earlier, it could have continued to dominate the PC business as it migrated from the desktop to the Web, preventing the growth and encroachment of portals and other major players.

The criticism that it doesn't understand mass media and content is a familiar one for Microsoft. For years, the company has attempted various forays into online content, through the Microsoft Network, Slate magazine, the Sidewalk city guides and several other ventures. By most accounts, its track record has been underwhelming, and top executives have not been shy to pull the plug when their patience was tried.

Television, however, is a different matter. From Bill Gates on down, Microsoft has long had its sights on the living room, anticipating the day when consumers would embrace and demand something more than a passive medium for their family entertainment.

The potential is enormous, even if interactive television experiences only a fraction of the growth seen by preceding generations: TV penetration quadrupled from 1949 to 1952, the first three years that official statistics were recorded, and grew steadily until it reached at least 95 percent in the late 1980s.

With the Internet as a catalyst, Gates saw an opportunity for another upward spiral in which content and technology fed off each other's growth. "As more television sets were sold, more programming was created, which enticed more people to buy television sets," he wrote in his book.

WebTV seemed the perfect greenhouse to nurture the seeds of the interactive TV revolution, and Microsoft had the software to cultivate it. But Microsoft was less interested in providing the second component in Gates' equation: programming.

"WebTV was an engineering company run by engineers," one former employee said. "Content was not king."

Few argue with Microsoft's decision to avoid deep investment in content, which has always been an expensive proposition for any mass medium. The problem was that no one else stepped up to provide the programming--relegating WebTV to a commodity status alongside a proliferating array of other simple devices used for Internet access, sometimes for less money.

"One of the founders once said to me, 'I don't understand why we need 25 editorial people. It only took two engineers to create email,'" Jolna said. "Talk about a disconnect. It's not that these aren't incredibly brilliant people, but they come from a very different perspective."

Working further against Microsoft is the company's take-no-prisoners reputation, which has kept potential partners at arm's length in important industries ranging from entertainment to telecommunications.

Last year, Microsoft made a bold statement with a $5 billion investment in AT&T that was widely viewed as an attempt to secure a relationship for distribution of Windows software in cable TV boxes and other products that require high-speed digital connections. But AT&T has always kept its options open, making deals with Microsoft but also with many of its competitors, possibly including AOL.

Even Microsoft supporters concede that, if it had done a better job with its TV initiatives, products like AOLTV would never have made it off the drawing board. A more serious threat may come from companies like Liberate Technologies and Sun, which are aimed at the next generation of interactive television, not WebTV.

"We were two or three years ahead of Liberate, which now seems to be the company of choice in that category," one former executive said. "But we lost that lead."

Microsoft says its software efforts are still on track but concedes some of its expectations for interactive television may have been overly ambitious. "It's par for the course," Graczyk said of Liberate's recent announcements.

AT&T and UPC, which have decided to use Liberate software on their cable boxes instead of Microsoft technology in recent contracts, always intended to work with multiple software and hardware companies, Graczyk said--alliances that further complicate the development process.

Online TV may spark Net battle Microsoft TV is unlikely to be widely available by the end of this year, as originally promised, Graczyk acknowledged. "We're not finished yet, but I don't know that it's correct to characterize it as delayed," he said.

Regardless of what becomes of Microsoft TV, the once-prized WebTV brand will likely remain a corporate stepchild. Microsoft chief executive Steve Ballmer himself confirmed as much at a recent conference when asked about WebTV's subscriber numbers, which have appeared stalled at 1 million for some time.

"I actually think that the narrowband, current WebTV service is interesting but not overwhelming," Ballmer said. "What we do today is let you get Internet on TV, as opposed to enhancing the TV experience."

That comes as a disappointment to those who thought a new era in interactive communications was just around the corner. Love or loathe Microsoft, its purchase of the interactive TV company was seen as a major step toward realization of this elusive dream.

"Anytime an acquisition takes place, there's a transition period, and I think that continues to this day," Jacob said. "Microsoft is primarily a software and operating system company. And WebTV was a combination of a large engineering organization focusing on creating a consumer product and a bunch of people creating a new programming medium--the convergence of television and the Internet.

"The reality is that people who have the resources and knowledge to create interactive television and those who do PC software are living in separate worlds."

Separate, too, are the futures of WebTV's co-founders, who have grown in different directions since their days of ponytails and tie-dyed T-shirts at Apple. Some sources say disputes have arisen between WebTV and Perlman over recruitment of employees to his new venture, Reardon Steel.

"Steve Perlman and Bruce Leak are no longer friends," a former associate of both men said flatly.

Even those who were happy to leave WebTV are saddened by what could have been. Many speak of their days there almost wistfully, the way people do of their high schools or colleges once time and perspective have dulled the more painful memories.

"There are definitely morale problems now, for sure. The good people have left. There's been an exodus since last year. They say there's a party every week for someone (who's) leaving," one former employee said.

"There's been a loss of urgency. It just doesn't have that start-up mentality anymore." 

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While still in its infancy, the interactive TV market already has a number of major players vying for control. Companies in the game include:

AOL Time Warner
With its merger with cable giant Time Warner, AOL quickly started to take shape as the 500-pound gorilla of interactive TV. The first effort in that arena, AOLTV, was launched in limited markets this summer, offering email, instant messaging and Web acces via a TV set. Federal regulators recently expressed concerns that the merged companies could unfairly dominate the nascent interactive TV market.

Liberate Technologies, OpenTV
Microsoft's main competitors for the software that will run interactive TV devices and services have been racking up partnerships and alliances at a furious pace. Liberate's recent wins include deals with AT&T and European cable giant United Pan-Europe Communications. Liberate's backers include AOL, Lucent Technologies, Sony and Sun Microsystems. While striking deals with numerous European satellite and digital TV providers and making a high-profile acquisition of Internet pioneer Spyglass, rival OpentTV has yet to crack the American cable market.

TiVo, ReplayTV
Both companies sell digital video recorders and accompanying services that allow people to easily record TV programs. Though the market for such devices has grown slowly, they are expected to become widespread in a few years. TiVo went public last year, but Replay has repeatedly delayed its IPO. TiVo backers include America Online and Blockbuster Video, while Replay investors include Excite@Home and Sega.

Sony, Sega and Nintendo
Each of the leading manufacturers of video game consoles has unveiled or is working on a broadband strategy. Sega last month launched its own branded Internet service, SegaNet, along with the Sega.com gaming site. Sega also plans to offer Internet telephony over its Dreamcast consoles. Sony's upcoming PlayStation 2 console will include connections that could be used to deliver Internet service, but the company says it's still formulating its Internet strategy for the PlayStation. Nintendo's next-generation Dolphin console, set to launch next year, will include as-yet unspecified Internet functions.

Gemstar-TV Guide
Gemstar's recent acquisition of TV Guide sets it up to become the leading purveyor of interactive TV programming guides, considered a major segment of the interactive TV market.

AT&T-Liberty Media
AT&T, the country's leading cable TV provider, is counting on its acquisition of investment conglomerate Liberty Media to make it a prominent player in interactive TV. The company's investments range from chunks of Sprint PCS and Rupert Murdoch's News Corp. to a 50 percent share of the Game Show Network. Microsoft has made significant investments in AT&T, counting on its cable systems for broadband access.