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Microsoft's latest plan for TV

The software giant is set to announce a renewed assault in its war of the tube, building on its greatest strength: Windows.

Television has been something of a great white whale for Microsoft. The company has tried to sell WebTV and build software for TVs and cable boxes. It has even invested billions in cable systems.

So far, these efforts have been expensive and have not yet put Microsoft into the position it covets: the maker of the software behind every glowing screen.

Tuesday, Bill Gates, Microsoft's chairman, ventures into Hollywood to announce a renewed assault on a different front in his war of the tube, one that builds on Microsoft's greatest strength: Windows.

Gates will unveil a new version of the Windows XP Media Center, software that, combined with specially configured personal computers from dozens of manufacturers, turns the PC into a photo album, jukebox, DVD player and, most important, a TV set with a built-in recorder.

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The first two editions of the software have been slow to gain acceptance in the market, representing about 3 percent of home computers sold. But, Microsoft hopes to turn that around with the latest version, which will add a few features and improve the technical quality of the television picture and the video recorder; both at times have been spotty.

More important, say industry executives, demand will be spurred by a series of new hardware devices using the Windows software that will be introduced tomorrow. Several manufacturers, including Linksys, a unit of Cisco Systems, and Hewlett-Packard, are expected to introduce versions of a product Microsoft announced last January called the Media Center Extender, a device that allows a television signal to be sent from a Media Center computer to a television in another room, by way of a wireless network.

And perhaps most significant, some of the new Media Center computers will have prices below $1,000, about half that of the first models.

Still, it is an open question whether people want to watch television on their computers. "Convergence solves a problem consumers don't have," said Sean Baenen, a managing director of Odyssey, a consumer research company. He said that simpler, single-purpose machines are easier to use.

So far, the record of Media Center PCs is mixed. Since they were introduced in 2002, computers using the first two versions of this software have been slow sellers. IDC, which had forecast sales of 1.5 million of Media Center PCs this year, now sees sales at 550,000 units for all of 2004.

Roger Kay, a vice president of IDC, says sales of Media Center PCs have lagged because they are buggy, too hard to use, and often too noisy to put in a living room. And even among the small group of users, they haven't developed the fanatical following of TiVo, the stand-alone video recorder.

"I haven't been in some placid home where the people who use Media Center PCs think it is great and a part of their life," Kay said.

Brad Brooks, the marketing manager for Windows, said that Kay had undercounted the software's sales and had overstated its flaws.

"We're pretty happy where we are after only 22 months in the market," he said. "We have grown past 3 percent of the market." He said that over the next few years, Media Center machines would represent 10 percent to 20 percent of the market.

Brooks said this growth would be driven by the new software to be introduced tomorrow--along with a series of related new products by hardware makers. He declined to say what specific changes would be in the new version, but press accounts and industry executives say they include a modest set of new features and improvements to the user interface.

"We are going into Version 3 of the Media Center edition, and everyone says that Version 3 is Microsoft's sweet spot."

Stephen Baker, the director of industry analysis at the NPD Group, a research company, is skeptical even of the existing sales of Media Center PCs. "A lot of their sales have been accidental," he said. "Someone wants to buy the best PC out there, and this is the one with all the bells and whistles."

That isn't such a bad thing, Brooks said. "Our partners say that the media center is their highest-margin PC."

Microsoft, too, gets higher margins. Industry analysts say that PC makers pay a premium of $20 to $40 over the roughly $50 a computer that Microsoft gets for the basic edition of Windows.

Regardless of how they get Media Center computers, Brooks said people like them when they get them home. Microsoft's surveys, he said, found that more than 90 percent of the owners of the Media Center computers are satisfied with them, far more than the percentage of basic PC owners. Eight out of nine, he said, would recommend the product to a friend.

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But research by both Microsoft and computer makers found that most of the initial users of the machines were using them on their computer monitors, presumably on their desks. Only a small minority use the highly promoted ability of the computers to link to TV sets and sound systems for use in family rooms. (The machines come with remote controls and software with very large type so that they can be used by people sitting on the couch across the room from a big TV set.)

One reason, perhaps, is that video-recording functions and picture quality have not been as good as on a device like TiVo. A survey by Forrester Research found that people who recorded video on their computers were less satisfied than users of specialized recorders. Microsoft says new hardware and software will help fix these problems.

Microsoft and other researchers have been surprised that many initial Media Center users use the product more for managing digital photographs than for watching television.

The media extender device may give Microsoft its desired beachhead in the living room. But those devices are emerging technology and have an initial price tag of about $250. A recorder from TiVo, by contrast, can be bought for less than $100 after rebates, although it has a fee of $12.95 a month, which the Windows system does not.

Sony has sold a similar system for several years to link its Vaio PC to a computer in another room, but sales were modest. More than half the Vaio desktops have TV tuners, but most do not use the Windows Media Center software. Todd Titera, the product manager for Vaio, said Sony's customers liked to watch television and especially to edit their home movies on their computers. But rather than using its product to send the pictures to the TVs in their family rooms, they used a simpler method. They burned DVDs of movies and then walked them to their DVD player.

HP is also trying another approach to sneak into the living room: building a computer that is the size and appearance of a large DVD player that can be stacked alongside other home theater devices. Like a fancy receiver, it has all sorts of jacks for sound and video coming in and out on the back. The front has a drive for DVDs and CDs, a jack to hook up a video camera, and a slot for an extra hard drive. The device is a full Windows computer, but it is meant to be used with a television, rather than a monitor.

It also has a price tag close to $2,000. John Romano, HP's senior vice president for consumer products, says this version is "not already for the mainstream market yet." But as with all technology, he said, prices will fall. And HP has high hopes for new versions of its regular Media Center PCs that will sell for less than $1,000.

But even as prices fall, many researchers wonder whether people want a single machine to handle their television, music and photos.

"Consumers don't want or need the ultimate device," said Baenen from Odyssey. "They don't want to pay for the ultimate device; they don't trust the ultimate device; and they don't want to deal with the complexity of the ultimate device."

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