Microsoft buys itself a place in the Internet's future

The purchase of a tiny start-up company for $425m is a crucial step for Bill Gates, writes David Usborne

Searching for ways to maintain its lead in home computing, Microsoft has paid $425m (pounds 261m) for WebTV, a tiny start-up company that sells devices that enable viewers to connect to the Internet through their television set.

The deal, though relatively modest in dollar terms, is being viewed as critical in several regards. Above all, it signals an effort by Microsoft's Bill Gates to position himself for the expected merging together over the next few years of the home computer, the television set and the Internet.

At the same time, it also puts Microsoft in the thick of the struggle just getting under way here to agree on new standards for digital, as opposed to analog, television technology. The battle has to be settled by 2006, the date set by the US government for the introduction of digital broadcasts.

It also further demonstrates the conversion of Mr Gates to the Internet. For a long period Microsoft stood aloof from the Internet rush until it felt suddenly threatened by companies growing out of it, like Netscape.

Indeed, the WebTV deal is Microsoft's largest Internet-related acquisition ever. Microsoft's Internet Explorer browser, developed in the face of Netscape's competition, and Windows CE operating system for pocket computers will be incorporated in WebTV products.

"This acquisition is the cornerstone of our long-term effort to combine the best of the Internet and the best of digital television technology," said Craig Mundie, Microsoft's senior vice president. "We want to take the personal computer and its progeny quickly into the home".

WebTV has developed the technology for set-top boxes that connect televisions to the Internet via a telephone line. About the size of an ordinary cable box and priced at about $300, the boxes allow viewers to use e-mail and surf the Internet on their televisions using a remote control.

In business only since 1995, the privately held WebTV counted Microsoft and one of its founders, Paul Allen, among its investors. Its boxes have been available since December and are made under licence by Sony and Philips.

For WebTV, the embrace of Microsoft will provide the heft to begin marketing its Internet technology in earnest worldwide. Microsoft officials believe that the cost of the box technology can quickly be brought down to $50 and that soon TV manufacturers will begin installing it inside their sets.

The stakes involved in both the digital television revolution and in the marriage of TV and the Internet are astonishingly high. The potential market for replacing all of America's TV sets with new digital versions alone will be worth as much as $150bn.

The issue of which standards should be used is crucial. For now, US broadcasters are pursuing a standard that will only provide for much clearer, home-theatre style pictures and sound, but nothing more. Microsoft is now joining a growing coalition in the computer industry demanding that the standards must also make the new generation of TVs Internet-intelligent.

It is not hard, meanwhile, to fathom the lure of television to companies like Microsoft. Currently, home computers have penetrated a little more than one third of America's homes - and merely 10 per cent of homes in Europe and Japan. Television, however, has found its way into 98 per cent of US homes (better even than the telephone).

Some analysts worry, never the less, that Microsoft is still uncertain of where to go next and indeed is following a schizophrenic strategy.

On the one hand, it is fighting to maintain consumer commitment to the full-blown personal computer - most of which, after all, are run on Windows operating system - while scorning the efforts of Oracle and Sun Microsystems to win us over to the much simpler and cheaper NC or network computer.

In many regards, however, an Internet-capable television set and the Oracle NC, which has no hard drive and derives all of its power and memory from the Internet, are pretty much the same product. The question: is Microsoft lost or is it cannily playing both sides of the game?