Microsoft splits TV efforts, mulls MSN integration

Microsoft's confusion about its Internet strategy has hampered WebTV's evolution, observers say. This turbulence has led Microsoft to take some significant steps to get the business back on track. Microsoft confirmed that it has labeled half of its television business Microsoft TV and is considering an integration with the company's other Internet efforts, namely its MSN portal and Internet service.

Before its acquisition by Microsoft in 1997, WebTV was positioned as a cheap and easy way for consumers and Internet neophytes to get online via the TV. After the acquisition, the group's strategy has become increasingly murky, clouded by the fact that much of its technology overlaps and in some cases competes with other Microsoft products, such as the MSN Internet service.

For example, MSN recently joined the "free PC" brigade, offering discounts on PCs to customers who sign MSN contracts, a strategy that could potentially cannibalize WebTV's customer base.

Microsoft announced last week it is jointly developing Internet-enhanced televisions with French consumer electronics company Thomson-TVs. These may eventually compete head-to-head with Sony and Philips' WebTV terminals, according to analyst Richard Doherty of The Envisioneering Group.

This somewhat schizophrenic strategy has resulted in less-than-stellar subscription numbers for WebTV, with membership at about 800,000 and growing slowly. WebTV co-founder Steve Perlman stepped down as president of the group earlier this summer.

Today, WebTV is comprised of two separate businesses. The back end is Microsoft TV, which develops client-server software that is sold to service providers and cable companies that are interested in offering enhanced television services to its subscribers. Out front is WebTV, which sells the consumer TV set-top box and Internet access service.

"What Microsoft provides for television is splitting into two pieces," said Rob Schoeben, senior director of marketing at WebTV, who joined the television group last week. "The underlying technology, the platform, the software, and expertise is called Microsoft TV," he said. "The enhanced-TV service falls under the branding WebTV."

Microsoft is apparently experimenting with the possibility of integrating MSN and WebTV. WebTV and parts of MSN are slated to be housed within the company's upcoming Silicon Valley campus and both will report to Richard Belluzzo, the former SGI president who will head up the company's interactive group, which includes WebTV.

In addition, sources say the company may be looking to consolidate its content-development efforts by combining the two teams. Microsoft's own Microsoft TV Web site seems to back this up, featuring a graphic displaying MSN services such as Hotmail and Passport as the "client" applications for Microsoft TV Server, rather than WebTV services.

"Have there been discussions about using MSN? Yeah, there's been discussions," said Schoeben. He added that he believes the graphic on the Web site is "wrong."

But other sources familiar with WebTV's plans say that integration with MSN makes sense from an organizational standpoint, especially once WebTV completes its transition to the stripped-down Windows CE operating system. Such a move would also remove the possible marketing conflicts in selling two competing Internet services.

The separation of the TV efforts reflects the company's desire to disassociate the somewhat lackluster WebTV service from the potentially more-lucrative platform software that can be sold to other service providers, said Sean Kaldor, an International Data Corporation analyst. He noted that WebTV's subscriber base still falls short of the 1 million users executives predicted for last year. "They're not living up to their own expectations."

Kaldor said integration makes sense.

"WebTV and MSN are both content portals," he said. "Wouldn't there be a lot of efficiency in consolidating their efforts? Content is content and can be displayed on a number of devices. MSN can be shown on Windows CE."

Any integration between MSN and WebTV may further confuse the company's television branding efforts, sources say. Microsoft TV has actually existed as a separate brand since last June, but it now refers to all of the group's client-server products, said Schoeben.

Belluzzo's appointment is further proof that the group is in flux and that attitudes have changed at WebTV, sources said.

"There has been a changing of the guard, in the scheme of things," agreed Schoeben. "It's the evolution of people who want to be part of a start-up, and people who want the widespread market impact of Windows.

"This isn't a cowboy mentality of doing things because it's possible. Now we can affect millions of consumers, and that appeals to a different kind of person and requires a different level of business discipline," he said, adding that he is now working on clarifying the group's sometimes confusing branding strategy.

News.com's Michael Kanellos contributed to this report.