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Microsoft takes uneasy steps in the brave new world

Microsoft's efforts in markets that extend beyond the box have met with marginal success, despite the company's huge position in the PC market under the direction of Bill Gates.

Microsoft grew to be a giant in the PC market under the direction of Bill Gates, but the company's efforts in markets that extend beyond the box have met with marginal success.

And, for the software giant, it could get worse before it gets better.

"We believe the PC will continue to be the most powerful creativity piece available to people," Steve Ballmer, Microsoft's new CEO, said in a press conference yesterday. "But we also need to ensure that non-PC devices can leverage this next-generation set of services."

TV set-top boxes, Internet phones and handhelds are all part of the company's vision, Ballmer said.

Unfortunately for Microsoft, that's easier said than done. The scaled-down Windows CE operating system has floundered, while WebTV has met with limited success. Meanwhile, the blockbuster AOL-Time Warner deal, if approved, gives archrival AOL a huge advantage in the promised age of interactive TV.

In these and other markets, Microsoft has tried to muscle in with large investments, but again, with limited success.

To be sure, Microsoft has entered into markets before, stumbled, then recovered to eventually lead. Witness Microsoft's history with the Internet, which went from a slow start to an eventual victory of sorts over rival Netscape.

The lesson, however, is that wealth and power don't guarantee results in the rapidly changing industry. While the company was successful in rounding up hardware makers on CE, for instance, the company has had trouble keeping them in the fold. Just last year, manufacturers of handhelds such as Everex and Philips have discontinued their CE-based products. Windows CE can also be used to power set-top boxes, which led to Microsoft's $5 billion investment in AT&T last year.

Microsoft also has undergone internal strategy shifts, the most recent being the company's decision to relaunch the CE products under the "Windows Powered" name. It has also revised the Windows CE operating system several times, but sales are a distant second to those of Palm Computing, according to various market analysts.

WebTV presents a slightly different story. Through WebTV, the company has succeeded in almost single-handedly creating a market for interactive TV where none existed before. But, in the grand scheme of things, very few are watching. WebTV now has more than 1 million subscribers, but the product strategy has had to change to more closely reflect consumers desires for control over the TV experience, not just Web browsing.

Technologically, WebTV also remains a work in progress. Microsoft purchased the company in 1996 but has yet to fully migrate WebTV's software onto the Windows CE operating system, for instance. And in the cable set-top market, the company's Windows CE-based products have yet to appear even in trials in AT&T's cable system and probably won't appear until after the middle of the year.

"If you look at any of the traditional computer software and hardware companies, and look where they are in the non-computer CE market, they all have had their problems. The Apple Newton, Sun's Diba technology, the Oracle NC," reads a note from a source close to WebTV. "The only one with an unqualified success is 3Com with Palm, but they acquired that from US Robotics, so you can't even say they grew that from within."

Meanwhile, the proposed merger of America Online and Time Warner and AOL's investment in PC maker Gateway have only served to highlight how Microsoft is able to exert less control over the development of new devices.

Analysts say that the combined AOL and Time Warner strength in content and distribution will give AOL growing power to take a hand in the design of non-PC devices for accessing AOL's services. The Gateway deal involves the two entities combining forces to design email readers, Internet set-tops and who knows what else. What better way to ensure these devices succeed by making sure there is lots of content for them, and by having 22 million customers to offer them to?

Meanwhile, Microsoft has again posted mixed results in the new media arena. Like AOL, Microsoft sees a time where it could supply content to everything from cell phones to TV set-tops to PCs that also use Microsoft software. Its venture with NBC on cable and the Internet--MSNBC--is still moving along, but its Internet service, MSN, has not fared well on the whole.