The UltimateTV service, which offers digital video recording and Web surfing via DirecTV's satellite television network, was launched about a year ago and is part of Microsoft's larger television strategy. The service will continue to be available after the restructuring, Microsoft said.
The reorganization means that UltimateTV will no longer be a part of the Microsoft TV division and will become a part of a new television services group within Microsoft's MSN division, according to the company.
"We're reorganizing UltimateTV to better align it with our entertainment and television efforts," Microsoft spokeswoman Erin Brewer said. Brewer confirmed that the company informed employees on Tuesday through an internal e-mail that it was restructuring the unit.
The change will also mean that one-third of the 500 positions in the UltimateTV business will be eliminated. Employees in those positions will have three months to find other jobs within Microsoft, Brewer said. If they don't find a new position within that period, they will receive a severance package.
The remaining two-thirds of the employees will be reassigned to jobs within the MSN, Xbox or Microsoft TV divisions.
Microsoft's television efforts, which include MSN TV (formerly called), Microsoft TV and UltimateTV, have been slow to pick up subscribers.
MSN TV, which offers e-mail access via a television set-top box, has about 1 million subscribers, according to the company. Microsoft TV licenses interactive TV software to cable companies.
Microsoft would not confirm the number of subscribers to UltimateTV, but sources have said that the service has been getting about 1,200 new customers per month.
Yankee Group analyst Aditya Kishore said pickup rates for UltimateTV, like all digital video recording services, have not been as high as many in the industry had anticipated they would be. Kishore noted, however, that the reassignment of UltimateTV workers to Xbox could mean that Microsoft wants to add digital video recording (DVR) to the game console.
"It will be interesting to see what will happen with UltimateTV and Xbox. We could see the fruition of the Trojan horse idea to get into consumers' homes," Kishore said. "Thus far, it has been difficult to sell DVR as a standalone product, but combining it with the popular Xbox could change that."
Microsoft has been hailing the launch of the Xbox as a success. During its second fiscal quarterlast week, the company reported it sold 1.5 million units of the console in the quarter, at the high end of internal estimates, and said it was on track to sell 4.5 million to 6 million units by the end of the 2002 fiscal year on June 30.
Technology Business Research analyst Bob Sutherland noted that Microsoft is taking a loss on the Xbox just to get it into homes now, and that it plans to turn on new features later through add-on products.
"Xbox could be so much more than what you initially bought it for as a gaming console," he said. "The mentality of it is that, well, for an additional 30 bucks, it's a DVD player. For an additional $200, it could be a TiVo" digital video recorder.
"I think that is one of the most interesting strategy plays at the close of 2001 that really works," Sutherland said.
Microsoft and its hardware partners, such as Hewlett-Packard, Compaq Computer and Samsung, are working to add DVR capabilities to home entertainment devices. Start-up Moxi Digital is doing the same.
The market for DVRs has not taken off as many expected it would, when companies such as TiVo and ReplayTV--before it was acquired by Soniceblue--pioneered the capability. The obstacles have been twofold, Kishore said.
"The most significant obstacle has been the fundamental inability of companies to communicate to consumers the value of a DVR product--and secondly, price," Kishore said.
Jon DeVaan, the senior vice president in charge of Microsoft TV, will take a leave after the reorganization of UltimateTV, Brewer said. Moshe Lichtman, who has been on leave, will take his place. And WebTV co-founder Bruce Leak will lead the television services group.
News.com's Joe Wilcox contributed to this report.