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MS tuned in to convergence

Microsoft lays the groundwork to dominate the convergence of PCs and TVs.

Long the king of PC software, Microsoft (MSFT) is making moves to extend its reign to include TVs.

Its latest tactic is a bid to acquire privately held WebTV Networks in a cash and stock deal that analysts value at about $425 million. The company made two other announcements that it hopes will make Redmond the capital of PC-TV convergence.

Microsoft today outlined its efforts to make TV receivers out of next year's Windows operating systems, Memphis and NT 5.0. The third strike is the company's lobbying effort, along with Intel and Compaq, to narrow the current digital television technical standard.

Microsoft's three-pronged strategy is an attempt to outmaneuver the consumer electronics manufacturers and traditional broadcasters who have grumbled at the FCC's mandate that they provide consumer digital TV services by Christmas 1998, analysts say. The WebTV acquisition will also give Microsoft instant entry into non-PC homes for its ever-increasing content ventures such as MSNBC, the Microsoft Network, Sidewalk, and Slate.

"We want to take the personal computer and its progeny...quickly into the home," Microsoft senior vice president Craig Mundie said yesterday. He announced the acquisition plans at the National Association of Broadcasters Multimedia World Conference in Las Vegas.

Yesterday's announcement is really only another step in Microsoft's existing strategy to create "better PCs and better TVs" to help viewers channel surf, Web surf, and send email, Mundie said.

The company announced plans in January to deliver software development kits to software makers, hardware manufacturers, and content providers that would foster development of interactive programming. The programming--which will combine elements of traditional television shows, personal computing, and the Net--will be able to be viewed on big-screen PC monitors and Web-enabled television sets.

The move is part of Microsoft's Simply Interactive PC initiative, which it launched last spring in the hopes of expanding its software empire to every PC, handheld device, and TV in the nation. The company said the new technology will let consumers use a remote control device to surf TV channels, the Net, and new hybrid content, all from the living room couch.

Microsoft hopes to use its Simply Interactive TV initiative, first announced about a year ago, and its new WebTV acquisition to set the standard for hybrid PC-TVs of the future. Microsoft and the rest of the software industry are moving quickly to control the new digital TV-PC platform before consumer electronics makers and traditional broadcast media players do.

To that end, Microsoft and allies Compaq Computer and Intel are adding yet another dimension to the Simply Interactive initiative with a new Digital TV standard announced today at NAB.

The standard would narrow the scope of the current standard, finalized last week by the Federal Communcations Commission, which lets traditional broadcasters switch from analog to digital without mandating a specific way that the image is drawn on the screen or the screen proportions.

Microsoft and its partners want to create a first-step standard, called HD-Zero, that would allow the broadcast of regular TV programming as well as combined video and data broadcasts--a sports event in one frame and a Web site with player statistics in another, for example. HD-Zero will call for broadcasters to send Internet data in a part of the signal called the vertical broadcast interval or VBI, which is now used to send closed-caption information, ratings codes, and other network-to-station information.

HD-Zero would allow PCs and PC-TV hybrids to support progressive scanning only, which means the monitors will draw each line of the picture consecutively. At first the resolution will be fairly low, but Microsoft officials said that HD-Zero will allow for upgrades by the year 2000 and beyond. The company has submitted the HD-Zero proposal to the Internet Engineering Task Force for consideration as a standard.

FCC officials were not available for comment.

Dwight Davis, editorial director for Windows Watcher newsletter, said the deal will also allow Microsoft to recoup the investment it has made in interactive television, an industry initiative which has been eclipsed by the Internet's rise in popularity.

"Microsoft will have a way to leverage all of the work and investment that they have made in that area," Davis said. "You can expect to see a blending of what Web-TV has been doing to date and some of the ideas that emerged from the interactive television development of the last few years.

While analysts say Microsoft is paying a premium for a new and relatively untested company, they say Microsoft's decision legitmizes the market for an industry that bridges traditional consumer electronics and PCs.

"Until now, the market has not been that huge. Over the next year or so, this move will have an impact," said Ulnas Naik, an analyst at First Albany.

Others agreed. "This is a very solid move," said David Card, analyst for International Data Corporation. "The combination of the two companies will make for a very powerful new media player."

Card sees the acquisition as a sign of Microsoft's intent to play a leading role in this emerging sector. On top of that, Microsoft could use WebTV to deliver content from the Microsoft Network and cement the company's brand-name recognition in the broad consumer market.

"This could broaden the audience for Microsoft content," said Card.

"They want to essentially own the market for any Internet-based appliance," Naik said. He said he expects Microsoft to announce a fax acquisition in the future.

Microsoft plans to integrate some of the features of its Windows CE operating system and Internet Explorer browser into the WebTV platform by sometime next year, the company said today.

Yet, it remains unclear which features will be incorporated and how they will affect the amount of memory needed to run the set-top box. The amount of memory required will in turn affect the highly sensitive price. WebTV currently sells for about $300 apiece, but the company is looking to lower the price point to attract more consumers, said Card.

The boxes currently run on the MIPS R4000 class of microprocessor. Microsoft said today that there are no specific plans to have the boxes run on Intel chips.

Microsoft expects to take a charge of between 50 percent and 60 percent of the purchase price, or between $212.5 million and $255 million. The deal is expected to close in either Microsoft's fourth quarter of 1997 or its first quarter of 1998.

Microsoft shares closed up nearly 2 percent today.

Microsoft said the $425 million was composed mainly of Microsoft shares given to the management of WebTV and its employees but declined to specify how much of the acquisition price was cash.

WebTV Networks, which counts among its investors Microsoft cofounder and CNET investor Paul Allen, first introduced its set-top box last fall. The boxes sit atop the user's TV like a cable box and connect to the Internet over a regular telephone line. The system also features a credit card reader that allows users to shop on the Internet.

The company has licensed its design for set-top boxes to manufacturers Philips Consumer Electronics and Sony.

Redmond, Washington-based Microsoft made an equity infusion into WebTV in September of last year. Since then the two firms have been negotiating to cross-license each other's technology.

WebTV, based in Palo Alto, California, will operate as a unit of Microsoft and will continue to be managed by president and chief executive officer Steve Perlman.

Reuters contributed to this report.