Microsoft Shifts Media Mix

Oct 4, 2004  •  Post A Comment

Microsoft Corp. this week will announce MSN TV 2, the successor technology to Web TV. It will arrive on the shelves of consumer electronics stores such as Best Buy and CompUSA in time for holiday sales, and will be available through Amazon.com. However, instead of playing just to those who are unable to master the personal computer, it is aimed squarely at people who want to integrate their TV and online experience.

A sleek box the size of your cable TV

converter, the upgraded version of what was Web TV combines Internet content, digital video, music and e-mail, and makes it all available on the big-screen TV in your living room. With a reasonable retail price point of $199 (before add-ons), it will still work for the casual user but will be especially useful to those who want to move everything from downloaded movies to TV shows to music out of the office (where the PC is typically kept) into the living room.

It is just one of a number of products, applications and services growing out of Microsoft’s new focus on television and video entertainment in many forms. In wide-ranging interviews TelevisionWeek conducted last week with various Microsoft media “teams” at the company’s Redmond, Wash., headquarters, it became clear that the software giant has cooled in its desire to own and control media directly, as it did with its somewhat uncomfortable MSNBC partnership, its Slate political webzine and its 25 percent investment in Comcast Cable.

All of Microsoft’s media efforts now can be put in a single context-Microsoft wants to be the operating system for the TV and entertainment business, supplying everything from the media menu to the software that makes the menu system work, without having to supply the content itself.

Michael Kinsley, former editor of Microsoft’s Slate webzine, now editorial and opinion editor at the Los Angeles Times, said the media culture never really caught on at Microsoft. “There were never any moments when I felt that I was around unfriendly people,” he noted, but when it came to comprehending the finer points of the media and news business, there was never a great comfort level.

That level of discomfort apparently is particularly acute when it comes to MSNBC, Microsoft’s partnership with General Electric’s NBC Universal in cable TV, which first went telecast in July 1995. By three years ago, the problems were already surfacing when Microsoft CEO Steve Ballmer told Reuters, “If we were starting [MSNBC] now, as good an operation as it is, I don’t think we would have started it.”

The main reason for that change in attitude is a change in direction at Microsoft. However, it apparently also has to do with unease about some MSNBC programming. For instance, during controversial talk show host Michael Savage’s short run on the cable channel, Microsoft felt compelled at one point to put out a press release distancing itself from some of his more outrageous comments. Mr. Savage was later fired.

Executives from Microsoft and NBC have reiterated that the partnership will endure, but behind the scenes, according to a source close to the situation, the $420 million joint venture still suffers from some strain between its owners. “There is a complete polarization of the senior ranks,” the executive said, “between the NBC and Microsoft people.”

According to the source, an intense negotiation has been under way for some time in which the partnership would be either completely unraveled or completely restructured. It is not an easy task, as the 99-year deal struck five years ago has no out clauses. Both sides would have to be satisfied with any new compromise, which could take the form of Microsoft assuming some extra digital rights to NBC properties and taking significant cash for its stake in the cable channel. “NBC is still trying to figure out what 50 percent of the channel is worth,” the source said.

A source at MSNBC said that six months ago senior executives at MSNBC suggested to Jeffrey Immelt, the chairman of GE, that the channel needed to be rebranded as an NBC property. But Mr. Immelt reportedly replied that the company had already spent too much on establishing the MSNBC name.

An MSNBC board meeting is scheduled for this month in New York, but it is unclear whether anything will transpire with the partnership by that time. A top source at NBC said some press accounts about the MSNBC partnership have “wildly overstated the prospects” for imminent change. He confirmed that there are ongoing discussions between the two companies about possible future scenarios. “We talk to Microsoft all the time about MSNBC and MSNBC.com,” he said.

Will anything change? There does seem to be some momentum in that direction, as Microsoft has already committed to selling Slate. (New York magazine says The Washington Post Co. is close to buying it.) And past forays into Microsoft media, such as the city guide network Sidewalk.com, are virtually forgotten in Redmond today. Several executives hadn’t even heard of it.

The latest effort to figure out where Microsoft fits into the entertainment space plays to the company’s traditional strengths. It involves a variety of different strategies, whether it is providing the interactive program guide, MSN TV2, MSN Video (video stored on Microsoft’s web portal), competing TV delivery systems coming from SBC and other telcos, or the company’s new Portable Media Center (PMC) hand-held TV device.

“I use an analogy,” said Frank Barbieri, group product manager for the new Portable Media Center. “Microsoft is to the entertainment industry as GE has been to the tourism industry,” referring to GE’s manufacture of jet engines for airplanes that whisk travelers around the globe. In other words, Microsoft envisions a future when much of the world of entertainment runs on its software, whether it involves production, distribution or the consumer viewing experience. The products emerging now are the result in most cases of several years of industrial development, extensive field testing and calculated marketing efforts in conjunction with partners.

When it becomes focused, Microsoft can deploy considerable resources. Worldwide, it has about 57,000 employees occupying almost 9 million square feet of office space. Just over 28,000 work in Washington state. A big percentage of those employees are involved in research. The company reported that it spent $7.78 billion on R&D in fiscal 2004.

The company is, as always, a money machine, with its revenue for the quarter ending June 30 at $9.29 billion, a 15 percent increase over the same quarter last year. For the fiscal year ending June 30, 2004, Microsoft reported net revenue of $36.84 billion and net income of $8.17 billion.

What follows is a look at several initiatives by which Microsoft wants to revolutionize media. These moves come on the 10th anniversary of the Microsoft Home, a futuristic home center on the Redmond campus that is designed to help the company figure out the American consumer. The Home is the embodiment of Microsoft’s vision of “seamless computing” and media integration, in which everything in the house-movies, TV shows, music, the kitchen-is run from a central Microsoft-powered brain, with a simple, easy-to-use menu system. You go to your living room, pick up a single Microsoft-powered remote and control all your home-centered and entertainment applications from there. Everything is menu-driven. The question that remains unanswered is just who will control the menu.

MSN TV 2 Internet

and Media Player

Formerly known as Web TV, the MSN TV 2 product being introduced this week is designed in part, according to Andy Sheldon, senior director of product management for MSN TV, to answer the question, “How can we take Internet content to the living room?”

The first incarnation of Web TV, pioneered by an entrepreneur named Steve Perlman, was designed for people who didn’t own or want to own a computer, supplying Internet access, e-mail and a keyboard that connected to the user’s TV. The new completely overhauled MSN TV 2, with a control unit built by Thomson using the RCA brand, retails for $199 and requires
a $9.95-a-month subscription. It enables broadband consumers to easily move pictures, music files and video back and forth from their PC to their home entertainment centers.

It is partly designed to appeal to consumers who are downloading music and video to their desktops and want to integrate with their TV. Microsoft is also working with a number of content providers, including CinemaNow, a movie and TV download service partly owned by Lions Gate Entertainment, which has more than 4,000 feature-length films, shorts, concerts and television shows from more than 150 licensors, including 20th Century Fox, Disney, MGM, Miramax, Warner Bros., Lions Gate, Lot 47 Films, Vanguard Cinema and Visionbox Media.

A casual onlooker might think Microsoft is planning to take cable’s VOD offerings head on through services such as CinemaNow, but Microsoft’s Erin Cullen, group product manager for the Windows Digital Media Division, stressed repeatedly that Microsoft does not own a position in the L.A.-based CinemaNow and is not taking a piece of CinemaNow download revenues, also available through MSN and other Microsoft venues.

“We’re trying to help the entertainment industry develop seamless experiences for the consumer,” Ms. Cullen said. Since its introduction in the ’90s, as PC usage has increased (Microsoft projects 1 billion in use by 2010), the need for Web TV’s original mission has diminished, and subscriptions have declined from what was about a million to a fraction of that now. (Mr. Sheldon won’t give current numbers.) In the existing sub base, 70 percent had never used the Internet prior to their MSN TV subscription; that pool of potential subscribers keeps diminishing. Microsoft is hoping its next-generation unit will get the numbers back to at least what they were.


Microsoft was widely criticized in the late 1990s for being late to the Internet, and Chairman and CEO Bill Gates has acknowledged as much. Microsoft still does not dominate Internet content and usage the way it would like. According to comScore Media Metrix rankings for August 2004, which ranks the top 50 U.S. Web properties by unique visitors, Microsoft’s MSN, with 110 million unique visitors from the United States that month, ranks third, behind Yahoo! and Time Warner’s AOL networks. Microsoft is trying to remedy that by constantly streamlining MSN.com and by offering an array of video services for broadband customers.

Christine Andrews, lead product manager for MSN, said the Web service now has video deals with Major League Baseball, NBC, Fox Sports, Discovery Channel, The Learning Channel and Scripps Howard (HGTV and Food Channel). Like the video material accessible through MSN TV, the product is highly “clip” oriented, with thousands of video clips available. The video is available in clip form because major video suppliers, including partner NBC, need to protect their main distributors, particularly cable. But Ms. Andrews said MSN does have an advantage with its full service of Major League Baseball games, allowing her husband, a Toronto Blue Jays fan, to keep up with all of his team’s games.

With online ad revenue estimated in Microsoft filings at about $1 billion, and with a large customer base of premium subscribers who pay for special content, “MSN is profitable as of fiscal 2004,” Ms. Andrews said. The unit, in fact, moved from a $567 million loss in fiscal year 2003 to a $121 million operating profit in fiscal year 2004. When MSN started in the 1990s, Microsoft thought it needed to compete with the entertainment industry, and MSN was briefly a proprietary software dial-up service offering “channels” of original video entertainment. That disastrous effort shows just how far Microsoft has come in the evolution of its thinking.

Microsoft plans to continue to offer its free Hotmail e-mail system but will beef up marketing of an upgraded version that requires a fee, which has much greater storage capacity.

Microsoft TV Group

In September Federal Communications Commission Chairman Michael Powell predicted that phone companies, particularly SBC Communications, would mount a serious challenge to cable via IP-TV (TV delivered over the Internet). “Almost every major phone company I’m aware of has an initiative under way to begin to try to plug the hole with partnerships with satellite-delivered video, but what they’re really working on is broadband-delivered IP [Internet protocol] television. That’s a major component that’s moving fast,” Mr. Powell said.

Facilitating that growth is the Microsoft TV Group, which, among other initiatives, is working on two tracks. It supplies operating system platforms for IP-TV to the telcos. On the other side, it is perfecting an interactive program guide for cable that is giving its main competitor in that market, Gemstar TV Guide, a run for its money.

Last May Comcast said it planned to roll out Microsoft’s TV Foundation Edition 1.7 software to up to 5 million of its 7 million digital households, despite a much-touted IPG partnership with Gemstar announced in April. Foundation Edition includes a competitive IPG from Microsoft. Comcast’s Chris Ellis said last week that the Microsoft product is “complementary” to Gemstar’s GuideWorks IPG because Foundation is both an IPG and a Middleware solution, and Foundation can be deployed using Gemstar’s IPG, if so desired.

As TVWeek met with Ed Graczyk, director of marketing and communications for the Microsoft TV Group, dozens of executives from cable companies and phone companies were on hand in Redmond for what Microsoft billed as the Microsoft Connections Summit, a two-day affair designed to introduce top executives to the array of current product offerings. Wes Warnock, a spokesman for SBC, said his company has contracted with Microsoft for a lab test of its IP-TV platform. “Having Microsoft on your side is a good thing,” he quipped.

However, IP-TV is in development mode for SBC, and no target date for actual deployment has been announced. “There is still a lot of work to be done,” Mr. Warnock said, adding that SBC is now offering a bundled package of services that includes EchoStar’s satellite service. He compared cable’s three-way offering (cable TV service, telephony and cable modem) with what he called SBC’s quadruple threat (EchoStar TV service, telephony, DSL high-speed Internet access and Cingular Wireless service), all bundled together. “The telcos are at a competitive advantage,” Microsoft’s Mr. Graczyk said. “SBC no longer considers itself just a phone company.”

Still, some are skeptical that the telcos will ever mount a serious challenge to cable, given the dismal history of telco TV efforts in the 1990s, including the big Tele-TV initiative then run by Sony’s Sir Howard Stringer.

Portable Media Center

Twice in the past decade or so Microsoft has been stung by hugely popular innovations introduced by rivals. First, in the early 1990s, Netscape Communications, not Microsoft, introduced the Web browser. And then Apple and Bill Gates rival Steve Jobs introduced the portable download media player iPod, which got Mr. Jobs on the cover of Newsweek.

“The breakthrough success of the iPod took the world by surprise,” conceded Mr. Barbieri of Microsoft. Not to be completely outdone, Microsoft is launching its Portable Media Center, which plays video as well as audio files. It is bigger than an iPod at 5.6 by 3.2 by 1.0 inches, weighing 11.7 ounces with a 3.8-inch color video screen.

The $499 PMC runs on Microsoft software but is being manufactured by Creative Labs, Samsung and other companies and does not necessarily carry the Microsoft name. The product can store up to 80 hours of video programming. Mr. Jobs has stated that consumers want portable music, not necessarily portable TV files, and Mr. Gates retorted to Business Week in September, “Ask kids in the back of a car on a two-hour trip, `Hey, would you like to have your videos there?’ My kids would. I guess Steve’s kids just listen to Bach and Mozart. But mine, they want to watch `Finding Nemo.”‘

He added, “Getting the content providers to open up their broad libraries and making those t
hings really easy to get at, we’ve put a lot into that.”

Movies are currently quite easy to access through download services such as CinemaNow, available through various Microsoft online platforms. Mr. Barbieri said at present Microsoft has fairly modest projections for its PMC. If it can sell some reasonable fraction of the 4 million iPods that Apple has sold, it will be happy.

“Globally, the category is just taking off,” he said, adding that as of 2004, 13 percent of global PC users report having viewed at least one video file on their machines. The PMC mantra is control, choice and availability, which could be applied to what Microsoft is working at across the board. n

Alex Ben Block contributed to this report.