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Behind Steve Perlman's big score

The Web TV founder raises $67 million for a new stealth venture--and this in a tough venture market. Is a killer set-top box on the way?

His wife's voice is in the Macintosh computer he helped design, and his dog's name is on the chip he made for Microsoft.

His new company is working on a stealth home entertainment set-top box, but it also provides Internet content production, live Webcasting, 3D printing and real-time motion capture. Three of his employees are currently in Jamaica, researching a historical screenplay he's writing.

Clearly, Steve Perlman has a problem with boundaries.

And that, say people familiar with the WebTV inventor's current plans, lies at the heart of his recent success in wooing many of the entertainment and technology industry's most powerful players--led by America Online--to give his latest venture, Rearden Steel, a financial endorsement of unprecedented proportions.

Now armed with $67 million in Series A funding, Perlman is said to be designing a set-top box as omnivorous as its inventor is in his interests, one that funnels all kinds of satellite, cable, traditional broadcast, Internet, and other digital content through the same piece of hardware and into the television.

A disrespect for the boundary between the computer and the television set spurred Perlman to his meteoric rise to fame and fortune when the then-34-year-old tinkerer jiggered together the first WebTV prototype. Twenty months later, after mortgaging his house to meet payroll, and several other corporate near-death experiences, he sold WebTV to Microsoft for $503 million.

WebTV ultimately proved a disappointment to both its inventor and its acquirer, with its customer base stalling at about a million. Perlman's WebTV unit has gone on to create Microsoft's interactive television initiative, UltimateTV. Long before UltimateTV launched, however, Perlman had left Microsoft to take some time off and put his mind to the problems that intrigue him most, those preventing the widespread consumption of converged digital media and televised entertainment in the home.

Q: Critics say you're entering a tough market, that DVR (the digital video recorder) can't survive on its own and that a new player is going to have a very difficult time of it.
A: I think if you look at one of the things that's tough for TiVo and ReplayTV, it's that people look at PVR (personal video recorders) or DVR--they're the same thing--as more of a feature than a product. That's not to say it's a trivial thing, but it's hard to build a whole business around that capability.

We can't look at any of these things that are on the market today and call them a runaway success. I saw this same situation when I was with General Magic and we were looking at handheld devices, what we now call a palm-top computer. We are on the cusp of a complete revolution in home entertainment. This is much bigger than WebTV. Now you can look back with 20-20 hindsight and say what you need is something that's simple, light, and has a long battery life. Before that, there were a lot of different ways to approach the problem. Before, analysts would say "this hasn't taken off because there's not a market for it." Others took the position that some day, someone's going to figure out how to do it and the market's going to take off.

I feel that way about home entertainment. We are on the cusp of a complete revolution in home entertainment. It's the same as it was 100 years ago when you could go to the Nickelodeon, but people hadn't figured out the studio model and how to build a profitable industry around it.

What needs to be done to break the logjam?
I think all the pieces are there, but to get around the fundamental problems that are getting in the way of home entertainment technology, there are some tough problems to be solved. I wasn't sure a year and a half ago that they were solvable, so I wasn't comfortable going to the venture capital community and asking for money. So I funded it myself.

I took some time off, and characterized (Rearden Steel) as an incubator. It was an incubator in the sense that I was exploring a bunch of different things. The pot of gold at the end of it was that if we could make these things work, we would change home entertainment forever and get around these issues that the industry's been trying to get around. When we did get through some of these fundamental problems, it was time to start the company.

We're now in a full transition. We have some of the strongest names in the industry backing the company. It's one of the largest Series A (funding) in history when market is at one of its worst states in history.

AOL Time Warner has a heavy investment in TiVo. Now it's leading your Series A. Will there be a conflict?
What we are doing is quite different than what TiVo's doing. AOL can be behind both companies. A few of those people at TiVo are working at Rearden Steel now. There's no issue there. (AOL unit CEO) Barry Schuler has oversight with all these different partners they're working with, and they wouldn't do it if they didn't think we could work together.

How did Rearden Steel get started?
I left WebTV in 1999 after designing (UltimateTV's) Solo2 chip, which is named after my German Shepard Solo. I had some time, and I did something I don't do much and took some time off. I went to Tahoe, and I said "Where are we with consumer electronics and entertainment?" There are lots of interesting products that have been developed--TiVo, UltimateTV, the dish player, all sorts of things--but when you get right down to it none of these things were runaway successes.

There's no way to build something that works unless you find a way, come up with a breakthrough, some fundamental invention. I started working on that with Rearden Steel and began incubating a bunch of ideas. I funded everything myself and got some things to work. Rearden Steel Technologies launched in January 2000. We brought people together, and it wasn't until later on this year that we presented what we had to partners and we had the phenomenal response that led to this funding round.

You've bought all of Geocast's intellectual property, which has led some to speculate that your new product will implement some kind of data reception technology like what they were working on.
There are modules across the whole thing that we can use. We're not using the Geocast system as a whole, operating it the way they intended for their own products. Data reception wasn't the center of what we were interested in. Even just a module that does low-level drivers could save us a month of work. There are lots of useful things they've done, but a lot of it was more in a research vein and needs to be productized.

My sources tell me you bought the Geocast IP for $1.8 million.
I can't comment on the exact numbers. They had $90 million in financing. So when you're paying a very small amount of money, you don't have to worry about the details. It wasn't essential. To be frank about it, we wouldn't use the system as they had originally conceived it. It was not something viable as a product, which is why the company ran into some difficulty. And it was particular to the hardware that they did.

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Behind Steve Perlman's big score
(Continued)

Is your product going to compete with Microsoft's UltimateTV?
I can't comment on that because it gets into what we're doing. We are in the home entertainment space, and you'll find there's overlap, but our

The many moving parts of Steve Perlman  
• Designed a graphics system at age 16, his first computer at 18. "I was more interested in the arts than in engineering. I've always been doing things on the side."

• Worked for Atari and ColecoVision during summers while at Columbia University as an undergrad

• On teaming up with Apple Computer: "I saw an ad in the New York Times, a two-page spread for the Mac, and I said, 'This is amazing. I have to help those guys.' I kept calling them and said I wanted to develop the color Mac.

• While working at Apple, Perlman's wife was recruited to make "monkey" sounds for the Mac. "My girlfriend at the time, now my wife, got dragged into the sound lab, and they asked her to make every weird sound she knew how to make. Her "eep-eep" became the monkey sound on the Mac. It was recorded in 1986."

 
approach is quite different from any products we know of. Our partners get briefed on everyone out there, and what we're doing is really different than anything else they've seen.

What are the key features that a set-top box should include?
That is a long discussion. There are all sorts of circumstantial issues, such as the particular characteristics of the economic model and the target customer, and clearly it matters what infrastructure you have. One thing you can say is that whatever the set-top box is, it should be very inexpensive. The DCT-5000 (General Instrument's set-top box that offers two-way communications capabilities over a coaxial cable) tries to be too many things, is very expensive, and that's the reason we haven't seen widespread deployment from MSOs (multi-system operators).

Mark Snowden, an analyst with the Gartner Group, said in reference to your funding, "I don't see how a new company starting up right now is going to be able to displace anybody else. I think even TiVo is going to have trouble going forward as an independent company. And all the set-top box manufacturers are incorporating persona video features into their next-generation boxes. Cable companies are looking at introducing new services. And standalone boxes haven't taken off in the market." What's your response to that?
I would agree with (Snowden) generally, that someone without the right partnerships in place cannot make it in this market. But if you do have those partnerships, and you have endorsements by the major stakeholders in the entertainment market, and those stakeholders say "we want what you're doing and we're going to help you do it," then that's a different story.

Tell me about the invention of WebTV.
I went to Fry's and got a whole bunch of parts and about $3,000 worth of stuff and brought it home and started working on it. Prior to that, I developed much of the multimedia technology behind the Mac. We developed all the graphics and sound and color in the Mac 2. My team developed QuickTime technology and developed all the video output technology that Apple uses.

When I saw Netscape 1.0, when I was at Catapult (Entertainment, a multiplayer gaming company), I said, 'I'll bet I could get a Web page to look good on a TV set.' I worked three days straight, through two nights. Then I showed it to my partner Bruce Leak, who said, 'What'd you do to the TV set?' I hadn't done anything to it--I just figured out how to get the signal going into it. Bruce said, "We'd better start a company."

When it comes to
your 
entertainment system, it's about life, it's about feeling good from the 
experience--not about 26 remote controls and cables and configurations
and 
crashing because the thing is gobbling up the disk drive We started calling people to set up partnerships and went about trying to raise money. I was very happy to get $1.5 million in financing--it seemed like the king's ransom! By the time we got our Series B, I had had to mortgage my house to pay salaries.

What were some of the highlights of the WebTV experience?
Did you ever see any specials on the moon landing? There was a lot of concern that the surface of the moon was all very soft and that the vessel was going to go right through the ground. Well, there had never been a successful interactive television system. No one had successfully shown that you can interact with a TV. We were relying on being able to use the remote control, and that was a scary proposition. There was no greater height than seeing how it changed people's lives. People weren't online with PCs for a number of reasons: because they couldn't figure it out, because they couldn't afford it, because they were handicapped. And we were hearing stories of people who found long-lost family members--that sort of thing was really powerful.

What were some of the lows?
Any start-up has its tough times. In March 1996 I got a certified letter from Sony saying they weren't going to work with us. It happened days before our Series B, and I had mortgaged my house to make payroll. Fortunately, the VCs said they were going to invest anyway, despite Sony's withdrawal. Those were some pretty dark days. In the end, Sony came back. We had our other challenges. Our first big Christmas, we had so many people signing up for WebTV that on Christmas day it overwhelmed our system and took it down. We all gave up our holidays. We had never been able to test such huge demand. But we got through it and learned how to scale. The product only won a limited audience. But it did pave the way for the paradigm of interactive television, and it paved the way to show you could build a very complex, remotely updated and reliable home entertainment system. Our reviews said that if you were used to working on computers, WebTV would seem very strange for this reason: it didn't crash. It would boot in five seconds. There were a lot of things we pioneered and that I'm quite proud of. And having 1 million subscribers means having WebTV in one out of every 100 American households.

Any start-up has its tough times. In March 1996 I got a certified letter from Sony saying they weren't going to work with us. It happened days  before our Series B, and I had mortgaged my house to make payroll.What got you interested in this business?
What I'm interested in is products. I like seeing average people having access to technology without hassle, and I like the link to entertainment. I like to write and am working now as a hobby with some folks who are doing motion picture development.

One of the very telling statistics is that if you've read TiVo's announcements of its end-of-year results--they have a very nice product--but nonetheless they said that just half the product that was purchased over Christmas had not been hooked up yet. People got this thing, saw what it took to put it up, and said, 'It's not worth it!' We had the same thing with the WebTV Plus. Why is it so hard to take a neat tech and make use of it? Why do people have to know about video-in and video-out? Why not turn something like Napster into something that people can readily turn on in the home? Napster is actually very hard to use. We have all these disparate efforts and haven't really figured out a way to make things easy to use and make then intuitive. The world really needs to have these problems solved.

Microsoft has no incentive to make PCs boot fast--but when it comes to your entertainment system, it's about life, it's about feeling good from the experience, not about 26 remote controls and cables and configurations and crashing because the thing is gobbling up the disk drive. Come on guys, we didn't used to design product like that.

What's Rearden Steel Studios?
Rearden Steel Studios is a small operation in San Francisco, on Bryant Street in South Park, where we have a team of four people who do motion capture, Webcasting and video work. We just did a big motion capture for HBO. Motion capture is where a performer puts on a suit so cameras or a magnetic structure can keep track of his movements. We have three movie products under development. Hollywood moves very slowly. It's a completely different pace than Silicon Valley. One of the things I've learned through that process of creating WebTV is that it wasn't just about the technology. You have to understand what goes into creating content. Through the Rearden Steel Studio, I'm getting more insight into what goes into this. As we deliver new delivery systems, we have to understand new paradigms, just as they had to in early television emerging from the radio. It's the same thing that's needed for the brave new world of digital entertainment.