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Crucial TV test for Microsoft

Comcast trials will provide a big clue about the software giant's prospects for cable success.

After years of finding only static, Microsoft is hoping that its TV software effort is starting to get a decent reception.

The software maker has spent years working on the software and invested billions of dollars in cable companies, but has seen only modest returns.

Now, thanks to a deal with Comcast, the largest cable TV provider in the United States, Microsoft hopes its fortunes are changing. On Monday, the two companies are expected to announce details about how their efforts are proceeding at a press conference on Microsoft's campus in Redmond, Wash.

"This is hugely important to the future of Microsoft TV," Forrester Research analyst Josh Bernoff said, commenting on Microsoft's cable push in general. "If Microsoft TV becomes successful at Comcast, it will rapidly spread through the rest of the cable industry in the U.S. If it isn't successful, then they have spent 10 years for nothing."

Representatives of Microsoft and Comcast declined to comment before Monday's announcement.

Microsoft has long eyed the TV market as a way to move beyond its PC roots, but its efforts have so far met only limited success.

Its vision has morphed over the years, from an ambitious attempt to bring PC-like functions onto the television to a more prosaic effort to improve video delivery. These days, it is focused on low-profile improvements in basic cable functions--for example, facilitating digital video recording on cable set-top boxes and showing program schedules.

The company spent several hundred million dollars to acquire WebTV in 1997 and later invested $1 billion in Comcast and $5 billion in AT&T, when Ma Bell was purchasing cable company Media One.

The software has gradually gained some momentum, with Microsoft signing a few deals in Mexico. In the United States, though, its adoption has largely been limited to some small-scale trials.

Earlier this year, Comcast announced a deal to use Microsoft's software on up to 5 million set-top boxes. New details from that partnership are expected Monday. Industry publication CableFax reported that Microsoft will announce that Comcast is testing its software in the Seattle area.

Too much, too early
The software giant readily admits that its early efforts in the TV market came too early and were too ambitious.

"We got involved in TV-related software way too early, and we spent $500 (million) or $600 million before its time," Chairman Bill Gates said during a speech in Berkeley, Calif., last month.

For many years, much of the effort by Microsoft and others was on so-called interactive television--merging TV with e-mail, Web surfing and e-commerce. Cable companies saw it as a way to fend off satellite services, and technology companies were tempted by the possibility of a cut of the sales.

Microsoft also pursued the satellite market with a pricey service for DirecTV customers called UltimateTV, which combined WebTV and digital video recording with satellite service. The hardware, though, cost hundreds of dollars, and monthly service fees topped $100, in some cases.

Not long after it launched UltimateTV, Microsoft stopped pitching the service and began trying to refocus its efforts on the mainstream cable market rather than push a feature-rich product that would require expensive new hardware.

Although Microsoft was hurt by the slow pace at which both cable and satellite companies adopted new technology, the company has also benefited to some degree as once-strong competition has faded. Some start-ups folded altogether, while other players, such as Liberate Technologies, have fallen on hard times.

"The cable operators moved so slowly that most companies ended up pulling way back. And in particular, Liberate now is in a very difficult financial state because of having to wait around," Bernoff said.

The battle between satellite and cable is still strong, but the push toward interactive TV has waned, said Aditya Kishore, an analyst at The Yankee Group. These days, the battle tends to center on high-definition broadcasts, video-on-demand and digital video recording.

"There is more interest in HDTV, VOD and DVR than what was traditionally known as interactive TV," said Kishore.

Microsoft has revamped its software to focus on these types of features. Its main product is known as Microsoft TV Foundation Edition, and it works with the standard-issue digital set-top boxes used by Comcast and others. The software's main features are enabling video-on-demand, interactive program guides and digital video recording.

Bernoff said Microsoft's software has moved from "completely inappropriate" to "really intriguing," in part because of the changes Microsoft has made and in part because the set-top boxes are now more capable.

Cable operators need better software, from Microsoft or others, to take advantage of the powerful processors in the current generation of set-top boxes, most of which are used only to run an interactive program guide and offer limited pay-per-view movies.

Beyond trials
Thus far, though, Microsoft has yet to move beyond trials in the United States. Time Warner Cable tested Microsoft's interactive program guide software in Beaumont, Texas, but abandoned that test with plans to focus on using a future version of Microsoft TV Foundation Edition software. The company has said it has committed to further work with Microsoft, but a representative would not comment on any specific plans.

Microsoft has achieved somewhat more success in Mexico, with cable operators Cablevision and Megacable, which have used various versions of Microsoft's TV software there.

But all eyes are on Comcast, Bernoff said.

The need for the cable companies to move quicker is clear, said , who founded WebTV. "They are struggling now to simply stem the unraveling of their customer base," he said. "They're a monopoly that has never faced a situation where their market was steadily shrinking."

The competition is poised to only increase, he said, as telephone and other companies look to offer video service over high-speed Internet connections, a technology known as IPTV. Microsoft is also trying to nab that market with a separate version of its TV software.

Bell Canada agreed to test the software. In the United States, SBC Communications has also said it will do trials with the software, as have Switzerland's Swisscom, India's Reliance Infocomm and Italy's Telecom Italia.

Whether it is cable, satellite or telecommunications companies that ultimately lead the way, Gates said in the Berkeley speech that the concept is finally moving toward reality.

"Now actually, this idea of delivering video streams over the IP network--so that you can individualize every video stream, have complete control over it--its time has finally come," Gates said.

CNET News.com's Richard Shim and Jim Hu contributed to this report.