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New hope for General Magic

Microsoft's investment and technology deal with General Magic may be just what long-suffering investors in General Magic have been waiting for.

It had become almost a laughingstock in some high-tech circles, a long fall from its heady days as a promising young company that might be sitting on the next big thing.

But today, General Magic (GMGC) got a business partner that many small outfits only dream about--Microsoft--and suddenly the struggling company is once again a hot property.

The company's stock price more than doubled this morning after news of Microsoft's investment and technology deal, and more than a quarter of the company's shares changed hands.

Both partners remain cagey about just what Microsoft is buying into. All that was announced was a $6 million transaction that will provide for the licensing of unspecified General Magic technologies and a minority investment for an undisclosed amount. (See related story)

For long-suffering investors, however, the vote of confidence seems to be enough, even though Microsoft already had invested in a company called WildFire, which offers a service similar to General Magic's Serengeti messaging technology.

"Any time Microsoft puts its capital behind a technology or idea or business plan, it's significant, but it doesn't make it a reality," said Jeffrey Schlesinger, wireless analyst at UBS Securities.

Schlesinger said Serengeti, which also can be used through the Internet, plays into broader social trends as people become mobile in their jobs and require constant access to data. Serengeti is a voice-activated service, due to launch this summer, that allows mobile professionals to call a single number to retrieve phone messages, have email messages read, check an appointment calendar, or look up a person's phone or mailing address in a database.

"Serengeti is a key component of General Magic's overall business mission, which is building applications that integrate voice and data," company spokesman Buck Krawczyk said. "We feel the service itself is going to be really critical with the way people keep in touch with information that is important to them."

Serengeti, which the company calls a "virtual assistant," represents General Magic's latest strategy to revive the former high-flying company. The service is expected to be rolled out this summer, and to be sold through phone carriers, ISPs, and device manufacturers that would bundle it with their hardware. General Magic has not announced distribution partners.

General Magic once was among the most ambitious of the mobile computing companies, touting its Magic Cap operating system for wireless handheld devices. Its promise of making information available anywhere, even when not connected, caught the industry's imagination.

Magic Cap remains alive--barely--because early investors have pressured the company to continue the operating system, even while management deem it tangential to the company's strategy.

In February 1997, new CEO Steve Markman changed General Magic's focus from being a licenser of technology to offering its own services. Initially, the company said it would target small businesses, but it since has dropped that line from its marketing spiel.

General Magic still carries some baggage from its history, however. "When you say 'General Magic' in some circles in the computer industry, they laugh," wireless industry consultant Andy Seybold acknowledged.

Prior to this deal, General Magic already had integrated Serengeti with various Microsoft applications, including its Outlook email and collaboration software, Schedule + calendaring application, and Internet Explorer. Serengeti also will work with WebTV and devices used to run the Windows CE operating system.

Karen Hargrove, a senior general manager in Microsoft's research lab, said the technology licenses aren't for products being rolled out in the near term.

"Our research group basically takes years to go into products," she said. "We believe that a natural-voice user interface is pretty important, and will be pervasive, and we are also trying to focus on Internet."

Hargrove declined to say which General Magic technologies Microsoft has licensed.

Alan Reiter, president of consultancy Wireless Internet & Mobile Computing, sees Microsoft's General Magic deal as the software giant's first step toward integrating the Internet with wireless communications.

Reiter said he believes that Microsoft is particularly taken with the "universal mailbox" concept. "When Bill Gates talks about 'information at your fingertips,' he's dead serious about the long-term strategic importance to Microsoft," he said in a statement. "Businesses that can help Microsoft achieve that goal, such as General Magic, are under scrutiny."

He noted that Microsoft also is investigating the possibility of enabling its local area network (LAN) software to transmit information via wireless networks, using the Microsoft Network to facilitate wireless communications, and placing Windows CE into wireless products.

In addition, General Magic this month expects to ship its own handheld device, called DataRover, which will sell for around $1,000 and will be targeted to vertical markets in health care, utilities, and delivery companies like UPS or Federal Express. DataRover could get a boost from Apple Computer's recent decision to abandon Newton, which was targeted to similar markets.

But Seybold says General Magic's hardware business is a leftover from the company's Magic Cap days, not the ticket to its future.

"I like the service a lot, but it's not up and running, and the proof is [to] get it up and running," said Seybold, editor of Andrew Seybold's Outlook newsletter and an occasional consultant for General Magic.

"If they can deliver with what they say they can deliver, I think they have found the right place at the right time," he added, noting that the company has rivals who perform some parts of what Serengeti does, but not all. They include Premier Technologies, Access Line, TelePost, and perhaps Qualcomm, which is talking of providing similar services for customers using its mobile phones.

General Magic had been scheduled to release its earnings this week but has delayed that announcement until Tuesday--perhaps hoping the Microsoft news would break first.

For the quarter ending September 10, 1997, the company lost $4.8 million, or 18 cents per share, on revenue of $2.6 million. It had about $40 million in cash.