`Judge Judy' And The Virtuous Loop

MICROSOFT SPLITS its WebTV strategy into interactive TV and the technology that runs it - and there are challenges ahead on both fronts.

MOUNTAIN VIEW, Calif. - WebTV is based 700 miles from Microsoft headquarters, but it couldn't be any closer to the center of the software giant's goal of bringing Internet-connected devices everywhere.

Last month, Microsoft spent $5 billion for a 3 percent stake in AT&T, the biggest investment it has ever made. The company spent the money largely to guarantee that AT&T's TCI cable unit will use Microsoft interactive technology in up to 10 million cable set-top boxes.

That technology is WebTV.

That says a lot, considering skeptics lined up to skewer Microsoft when it bought WebTV for $425 million two years ago. At the time, WebTV was seen as nothing more than a service that offered customers the opportunity to surf the Web from their couch.

Today, WebTV is the leading provider of interactive television services. And though the interactive-TV piece of its business is still rudimentary, it has offered enough to lure 850,000 customers nationwide and is gaining support from a growing number of television programmers.

For all the promise, WebTV is at something of a crossroads. It clearly is the leader in an industry on the cusp of exploding. It's also backed by the deep pockets of Microsoft, a company that can cut deals while enduring a stream of losses at a unit such as WebTV that's working to secure a foothold in an industry.

But the promise of interactive television is drawing competitors, from upstarts with little backing to longtime Microsoft adversaries, including America Online and Sun Microsystems. Moreover, as WebTV moves center stage for Microsoft, it will face those challenges without its longtime standard bearer, co-founder Steve Perlman.

Both inside WebTV and out, Perlman is considered a visionary, someone who has pioneered interactive television and brought it to the masses. Last month, Perlman decided to take a break, to travel and then look for new ventures.

The responsibility of leading WebTV now falls to Perlman's longtime partner, Bruce Leak. Perlman became the champion of interactive television, using his WebTV soapbox to evangelize on the future of TV. That won't be Leak's shtick.

Though hardly a wallflower, Leak isn't prone to the big-think sort of talk that Perlman could easily engage in. Leak's more of an operations guy. He's more comfortable talking up the promise of WebTV's business.

"We're building a customer base of potential," Leak said. "We are the largest interactive-TV trial in the world."

More TV than Web

The TV part of the product is still more gee-whiz than the Web component. Using its top-of-the-line WebTV Plus service, viewers can check TV listings that are downloaded to their set-top boxes daily. Those listings allow them to watch a program while checking out what's on other channels.

They can also program WebTV to remind them - with a note that scrolls on their televisions - when a program is about to start. Users also can record a show by simply popping in a tape and clicking on a program listing.

The Web part is basically the same thing computer users see when they launch a Web browser. With a portable keyboard, users can surf the Web from their couch, buying books, checking out sports scores or e-mailing friends.

WebTV, though, was never designed to turn television sets into computers and simply give viewers the chance to get online during commercials. The idea is to make television interactive, giving programmers the opportunity to develop shows that let viewers participate if they want to. Bruce Leak "For consumers, we need to distinguish between going to someone's Web site and an interactive-TV experience," Leak said.

To do that, WebTV needs to convince the folks who make programs that building interactivity into shows is worth the investment.

Leak is optimistic.

"They want it to happen," Leak said. "They need it to happen to have a deeper relationship with their customers, especially the broadcast networks who are losing viewers to cable."

NBC already has experimented with interactivity, building links during the Emmy awards show and a "Saturday Night Live" episode. "Wheel of Fortune" has developed interactive programming that lets home viewers play along. Those with the highest scores can qualify for a tryout to be on the show.

Elsewhere, the Weather Channel and MSNBC run interactive content throughout the day.

The links in these shows appear directly on the screen, so viewers don't have to switch between their browser and their TV. The signals that handle the links run on the TV bandwidth reserved for closed captioning.

Another show experimenting with interactivity is "Judge Judy," the TV courtroom presided over by the irascible Judge Judy Sheindlin. With WebTV, "Judge Judy" fans can click on links to learn more about the plaintiff or defendant, get information on points of law and even buy the judge's book, "Don't Pee on My Leg and Tell Me It's Raining."

But the most popular links let viewers guess how Judge Judy will rule and allow them to chat about the case with other viewers.

For programmers, interactivity gives them a chance to connect with their audience.

"I can never get more time," said Larry Namer, chairman of Steeplechase Media, which develops "Judge Judy's" interactive programming. "The network will never give me another minute. But I can change the density."

The virtuous loop

Microsoft announced a key shift in its WebTV strategy last week at the National Cable Television Association conference in Chicago. It is splitting WebTV - one piece of the company will provide the service to its 850,000 customers, and the other will develop an interactive-TV software platform that cable companies can put inside set-top boxes.

Some of the cable companies might offer WebTV to their customers, but the new platform, called TVPak, for television platform adaptation kit, would allow them to create their own interactive-television offering as well.

Cable companies might be slow to adopt the WebTV service because it will only extend Microsoft's business, not their own, said Hank Vigil, vice president of consumer strategy and partnerships.

So Microsoft decided to give cable companies the option of choosing WebTV or building their own service with TVPak.

To some, though, the strategy is flawed. Josh Bernoff, an analyst with Forrester Research in Cambridge, Mass., believes the real money in interactive television will come from the services business, not from the operating-system platform.

If the technology is not tied to the service, there will be little incentive for cable companies to offer WebTV. They'll likely offer their own to keep all of the monthly subscription revenue to themselves.

That makes Microsoft more dependent on revenue from the TVPak. Microsoft hopes that cable companies will use that platform, which runs on Microsoft's Windows CE operating system, as the core of their set-top boxes.

It's a similar strategy Microsoft has used to dominate the personal-computer operating system business - put Windows at the center of the PC universe and get software developers to build programs off it. As more customers opt for Windows PCs, more developers build programs for it. And that cycle continues to spiral.

It's what economists call the virtuous loop.

"We are skilled at trying to generate a platform win," Vigil said. "It's kind of in the genetics."

But Bernoff believes the virtuous loop stops with interactive television. While there is money to be made in set-top boxes, Bernoff believes cable companies will be agnostic when it comes to choosing which operating system runs it, in large part because they don't want to become beholden to Microsoft or any other company.

"The cable industry went a long way to make sure that the cable box is a commodity," Bernoff said.

Microsoft disagrees. The company expects TVPak to be the foundation of interactive television.

"The platform in the old days was Windows and the services were applications," such as word processing software or games, said Bill Keating, WebTV's senior vice president in charge of the platform business. "The platform is now becoming digital television and the services are video-on-demand, online banking and a lot of things we can't even think of yet."

Microsoft wants to be at the center of that world. "Microsoft has a very strong digital-television initiative," Keating said. "We're extending the notion of what the company has always been and that's a platform provider."

While there's no question WebTV is the current king of the mountain, there are plenty of would-be kings. Most notable, perhaps, is America Online (AOL), which last month announced plans to launch AOL TV next year. AOL's audience, at least initially, will be somewhat limited because its only deal is with DirecTV, a satellite service.

Another company, WorldGate of Bensalem, Pa., has just begun offering a competing service directly through cable companies. It offers television service and Internet connections over the same cable line.

OpenTV, a Sun-backed competitor, has made inroads in Europe and is developing a U.S. business. It offers interactive television, over digital-television signals, without an Internet connection.

"Least worst time"

The biggest challenge for WebTV, though, may be overcoming Perlman's departure. Because of his vision, Perlman has had a large amount of autonomy within Microsoft to run WebTV. There are few names in interactive television that carry the weight of Perlman's.

Even though fellow WebTV co-founders Leak and Phil Goldman remain with the company, Bernoff doesn't believe they have the same stature.

"At WebTV, who do they have that's a known quantity in the cable business?" Bernoff asks. "Nobody."

That's important, because relationships help secure deals.

"This is as much a relationship game as it is one of technology," Bernoff said.

While Microsoft's Vigil acknowledges Perlman's importance in WebTV's history, he also believes the company has "a lot of key, bright, visionary people." He points to Craig Mundie, long Microsoft's visionary on hand-held appliances and interactive television, as someone with Perlman-like stature.

"We have a deep bench," Vigil said.

Leak added that Perlman remains as a WebTV adviser. "I'm going to his belated wedding reception in two weeks, and I'm sure I'll get some vision there," Leak said.

To him, Perlman has helped bring the company to the point where it is a creditable force with a lot of potential. Now is the time for the company to execute Perlman's vision.

"I describe it as the least worst time to leave," Leak said.

Jay Greene's phone message number is 206-464-3287. His e-mail address is: jgreene@seattletimes.com