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AT&T interactive TV plans haven't yet turned on

Nearly a year after Microsoft invested $5 billion in AT&T to gain access to its cable network, the duo has little more than fuzzy reception to show for it.

Nearly a year after Microsoft invested $5 billion in AT&T to gain access to its cable network, the duo has little more than fuzzy reception to show for it.

When Microsoft took a massive stake in Ma Bell last May, the deal created a strong new cable TV-focused alliance that was expected to have a broad effect on the PC experience, the Internet, and the media and entertainment industries.

But nearly a year later, the alliance has produced few tangible results, and the companies continue to offer only limited insight into their plans, causing some analysts to question whether the companies operate on the same timetable. Software giant Microsoft, known to swiftly tackle markets, may assume a different pace than the traditionally slow-footed AT&T.

"Even a year in the lethargic pace of AT&T is not much time," said Gary Arlen, president of interactive media research firm Arlen Communications. "Obviously a year in the dynamite pace of Microsoft is much longer."

The alliance was intended to give Microsoft a powerful partner and provide the company with a ready-made customer for Windows CE, its slimmed-down operating system. As part of the deal, AT&T, which had already committed to using Windows CE to power 5 million cable TV set-top boxes, expanded the plan to include up to 10 million set-top boxes.

Although Microsoft's software (dubbed Microsoft TV) is nearly ready, its set-top initiative with AT&T remains in the internal testing phase--being used by company employees--with apparently little hope for significant commercial service availability this year.

"I don't think AT&T had any problem taking Microsoft's money," said Gerry Kaufhold, an interactive television analyst for Cahners In-Stat Group. "But if you were going to rank all the cable operators in terms of interactive TV rollouts, I think AT&T would be last."

AT&T's interactive TV plans with Microsoft must also compete with Ma Bell's larger ambitions to own a chunk of the emerging all-in-one communications market, in which customers will use one provider for their local, long-distance, cellular and Internet access needs.

Microsoft executives and AT&T representatives say they are working closely to develop software, services and support for a consumer interactive TV offering and to ensure that those efforts are both ongoing and on schedule.

"We will be ready with the commercial-quality release of Microsoft TV by the middle of the year," said Phil Goldman, vice president of the TV platform group at Microsoft. "We were done with the functionality of the platform earlier this year. All we're doing is raising the bar on quality and performance."

AT&T will launch interactive TV service in two or three "showcase cities" in 2001 with "a limited deployment" that some would characterize as a trial in at least one market by the end of this year, according to Tracy Hollingsworth, a spokeswoman for AT&T's cable division. See related story: The new world order

Microsoft plans to urge TV broadcasters to begin developing interactive TV programming at the National Association of Broadcasters annual conference in Las Vegas next week. The company has scheduled an all-day briefing for broadcasters, content providers and consumer electronics device manufacturers for Sunday, according to analysts.

Microsoft executives may also reveal further interactive TV details at the cable industry's yearly conference next month. AT&T has been reluctant to disclose details of its set-top initiative, and its plans for the industry show remain unclear.

Phones vs. televisions
Analysts said Ma Bell's attention is more squarely focused on offering local phone services over upgraded cable TV wires than on offering interactive television.

AT&T purchased Tele-Communications Inc. and MediaOne Group for a combined total of more than $100 billion with the intent of offering local phone service, a key cog in its strategy to go after the markets dominated by the entrenched Baby Bells, such as Bell Atlantic and SBC Communications.

AT&T plans to finish the year with 400,000 local cable-based phone customers, up from 8,000 at the end of last year. The company also expects to have at least 2.5 million digital cable TV customers, up from 1.8 million last year, and 700,000 high-speed Internet access subscribers by the end of the year, up from 200,000 at the end of 1999.

"We know there's strong and consistent demand in the market. But we want to present the best product we can," AT&T's Hollingsworth said. "So we're not going to rush it.

"Clearly the telephony product has the most aggressive growth," she said.

For Microsoft, interactive TV and intelligent set-top devices that use its software can only extend its influence over the high-tech and entertainment industries. Therefore, there is much at stake for the company as it furthers its aims in the communications industry.

"The TV is a platform that can rival the PC or even surpass it over the next few years," Microsoft's Goldman said.

Added Arlen: "I think (the investment has) bought Microsoft a presence in AT&T in ways we're just not seeing yet. It's not just about interactive TV."

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Microsoft not alone
Microsoft is not alone in its attempts to work with slower-moving communications companies.

For example, high-speed Net access provider Excite@Home for years has largely been at the mercy of its cable operators, which must upgrade their networks before offering cable modem service. America Online, the world's largest dial-up Internet service provider (ISP), has struggled to launch its plans for high-speed digital subscriber line (DSL) services with local phone companies.

But AOL is expected to offer commercial interactive TV services with satellite TV service DirecTV later this year, raising the stakes for Microsoft and AT&T.

"If by the (National Cable Television Association) cable show in May AT&T hasn't committed to a large number of customers by a reasonable date, the consumer electronic companies are going to put their attention onto other projects," said Richard Doherty, director of research for The Envisioneering Group, a Seaford, New York-based technology testing and market research firm.

"There are just too many other horses that people can jump on," Doherty said. "The competition is not standing still. The biggest enemy for Microsoft is time."