NEWS ANALYSIS : PLAYING THE INTERACTIVE GAME : A High-Tech Hollywood Alliance : Microsoft Venture With DreamWorks: Taming the Shrewd

TIMES STAFF WRITER

Hollywood meets Silicon Valley conjures up an image of slick, Armani-suited movieland types running roughshod over pencil-necked nerds.

But Microsoft Chairman Bill Gates is anything but your average nerd: Many of his erstwhile business partners, in fact, say he's as ruthless as any movie mogul, a true power player who never loses sight of his own interests.

Thus the marriage of software giant Microsoft and DreamWorks SKG, the entertainment company started by Steven Spielberg, David Geffen and Jeffrey Katzenberg, looks like a case of the snake meeting the mongoose--but no one knows who will play which part.

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At the outset, at least, the Dream Team would appear to have the upper hand. The joint venture company, DreamWorks Interactive, will be headquartered in the Los Angeles area, near the home offices of DreamWorks. There will be a studio at Microsoft's campus in Redmond, Wash., but two-thirds of the staff will be housed in Los Angeles.

"It's Steven, Jeffrey and David who're bringing the creative talent," explains Louise Velazquez, who was president of Quincy Jones Productions before joining Oracle Systems last year. "At this point, Microsoft is the distribution mechanism. The leverage is the creative vision and that's not something that Microsoft has."

Despite tens of millions of dollars in investments, indeed, Microsoft has struggled to create multimedia games and interactive educational programs and other next-generation, consumer-oriented software products.

It's best-selling CD-ROMs, including Magic School Bus and Cinemania, relied heavily on the creativity of outside partners. The Encarta encyclopedia, though successful, is hardly an innovation. Microsoft's best-selling game, by far, remains the ancient Flight Simulator. If Microsoft is to be a major player in the nascent interactive entertainment field, analysts say, alliances such as the one with DreamWorks are just what it needs.

And DreamWorks could certainly use Microsoft's technical expertise and distribution muscle. In fact, the alliance appears in many respects to be a perfect match, just the type of partnership that analysts say is necessary to succeed in a brand new industry.

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But in the technology world, these sorts of unions have been troublesome: brought together by mutual need, partners are often torn apart by interests that change as rapidly as the technology evolves.

And the Silicon Valley and technology regions beyond are littered with onetime Microsoft business partners who feel they were jilted once the PC software powerhouse had had its way with them.

"You have to go into a relationship with Microsoft with your eyes open," says Ford Johnson, manager of software evangelism for Apple Computer. "Microsoft plans to benefit from the relationship and you have to understand how you will benefit."

The most famous of Microsoft's angry ex-partners is certainly IBM, which enlisted Microsoft to write its next generation of operating system software for the personal computer--OS/2. When OS/2 was coolly received by customers, Microsoft began promoting Windows instead, which it had developed independently of IBM. At the same time, Lotus Development and other software developers contend they were led to believe that Microsoft was still behind OS/2, and they thus should keep developing applications such as spreadsheets for OS/2.

Today, Windows sales dwarf those of OS/2, and Microsoft's own applications for Windows--ready much earlier than those of its competitors--dominate the market. Microsoft and IBM are bitter rivals, and Gates has often spoken contemptuously of his one-time ally--despite the fact that if Microsoft had not won the contract to supply IBM with the DOS software for the original IBM PC, it would be a shadow of the company it is today.

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Similarly, Apple Computer needed Microsoft to write software packages for its Macintosh personal computer. In return, Microsoft gained access to Apple's crown jewels: the software code for its picture-pretty graphics. Apple claimed that it never intended for Microsoft to have the code indefinitely. The two went to court, a battle that lasted seven years and one that Apple eventually lost. Microsoft's Windows, based on the Apple design, is far more successful than the Macintosh.

Then there are small independent companies that write software for the Windows operating system. Stac alleged that Microsoft hijacked its technology and attempted to offer it--without compensation--in new versions of Windows. Microsoft later agreed to invest $40 million in Stac and pay another $43 million in licensing fees as part of a settlement.

Microsoft's reputation for hardball is such that even big, powerful companies have sometimes hesitated to do business.

Sources say that a proposed joint venture involving Microsoft, cable giant Tele-communications Inc., and Time Warner to create software for interactive TV never came to fruition largely because of the TV partners' wariness about Microsoft's intentions.

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For this Wednesday, at least, the Dream Teamers said they had no such concerns.

"We've spent a tremendous amount of time in the last six months with Bill and his team," says Jeffrey Katzenberg. "A collaboration is something that starts from a place of mutual respect. To say that we respect one, another is a vast understatement."

Stay tuned.

* POWERFUL ALLIANCE

DreamWorks teams up with Microsoft. A1

* CROWDED FIELD

Many enter interactive game field. D12

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The Emerging Battle

The masterminds behind the DreamWorks-Microsoft venture won't be the first to bring interactive entertainment to your television set or personal computer. A look at the video game makers, movie studios and software companies that have dabbled--to various degrees and with varying success--in this burgeoning market:

The PC Companies

Companies that specialize in interactive video games for personal computers are doing the best in the emerging interactive game market. Among them:

* Electronic Arts: This San Mateo, Calif., company is the leading producer of personal computer games.

* Virgin Interactive: Virgin's "The 7th Guest," a mystery set in a haunted mansion, is one of the most popular interactive games of all time. The Irvine company also worked with Disney to create "The Lion King" CD-ROM game and has other titles based on movies.

* Broderbund: With titles including "Where In the World is Carmen Sandiego" and "Just Grandma and Me," this Novato, Calif., company dominates the educational software market.

The Studios

Hollywood studios have anxiously turned their movie products into games, often with the help of software companies. Not all have been successful.

* Disney Interactive: This Disney division was launched in December, 1994, displacing an earlier software unit that had limited success.

* Time Warner Interactive: One of several Time Warner interactive units, the company has produced an interactive game based on "Demolition Man" and the popular "Hell Cab."

* Paramount Interactive: This Viacom New Media subsidiary distributed a title based on the "Mighty Morphin Power Rangers" television series that has sold more than 100,000 copies.

* Fox Interactive: Sales of this company's first title, "Pagemaster," fared about as poorly as the movie of the same name.

* Universal Interactive: This year-old firm's first product, a "Jurassic Park" CD-ROM for Sega systems, has been a slow seller.

* Sony Imagesoft: Makes games based on movies like "Dracula" and "Last Action Hero" for Sega--but has yet to score a blockbuster hit.

The Video Companies Traditional video game makers have paired with studios and software firms to make interactive games, but their transition into the world of PC games has been rocky.

* Nintendo: This company's reputation rests on traditional cartridge-based home video games.

* Sega: The other big power in cartridge games--but pushing hard to expand into CD-ROM--Sega lists its most successful products as those based on its original character Sonic the Hedgehog.

* Acclaim Entertainment: This Glen Cove, N.Y.-based company's most famous title is "Mortal Kombat."

TOP PC GAME TITLES FOR 1994

Doom II (GT Interactive)

Myst (Broderbund)

Sim City 2000 (Maxis)

5 Ft 10 Pack Vol. 1 (Sirius)

Microsoft Flight Simulator (Microsoft)

Tie Fighter (LucasArts)

Star Wars Rebel Assault (LucasArts)

7th Guest (Virgin)

Sim City (Maxis)

Outpost (Sierra On-Line)

GAMES vs. MOVIES

Revenue for CD-ROM and video games lags behind box office revenues, but not by much. In billions of dollars:

1994*

Games: $4.03

Movie box office: $5.40

* Figure for games is a projection.

--KAREN KAPLAN

Sources: Dataquest, PC Data, Times reports. Researched by JENNIFER OLDHAM / Los Angeles Times

For the Record Los Angeles Times Friday March 24, 1995 Home Edition Business Part D Page 2 Financial Desk 1 inches; 32 words Type of Material: Correction Virgin Interactive--The company developed a "Lion King" video game for Sega game machines, but had no involvement in the personal computer CD-ROM version. The company's role was misstated in a chart that appeared Wednesday.
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