Microsoft, DreamWorks Studio Team Up : Business: Venture to create Hollywood-inspired interactive software.

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The world's most powerful software corporation joined with some of the biggest entertainment industry powerhouses Wednesday as Microsoft Corp. said it will become a minority investor in DreamWorks SKG and participate in a venture to create a new generation of Hollywood-inspired interactive software.

Microsoft and DreamWorks, the studio started last year by moguls Steven Spielberg, Jeffrey Katzenberg and David Geffen, each will contribute half of the $30-million start-up funding for the venture.

Called DreamWorks Interactive, the new company will be based largely in Los Angeles with a smaller group near Microsoft headquarters in Redmond. It will focus initially on producing adventure games and interactive stories to be played on personal computers and game machines.

The venture is the splashiest entry yet in a fast-growing industry about which there is considerable uncertainty. Few have profited from the millions of dollars spent thus far on chasing the nebulous interactive market, though many are convinced that the market eventually will be huge.

By merging Microsoft's technical expertise with the sensibilities of the entertainment industry's top talents, the venture hopes to exploit new forms of popular culture, from shiny CD-ROM discs to yet unknown inventions in cyberspace. Microsoft's formidable distribution power gives the new company what could be an unparalleled advantage.

The DreamWorks' star team flew to Seattle to join Microsoft founder Bill Gates in a news conference. Gates is the richest man in America, and the four combined are estimated to be worth more than $11 billion.

Seated on high director chairs--not standard furniture at the software firm's headquarters--the group symbolized the ultimate in the "Sillywood" phenomenon that has driven numerous similar deals recently as Hollywood and Silicon Valley have come together to create digital-age entertainment.

"I'm spoiled," said Spielberg, who sported a brown leather jacket and a black baseball cap with the yellow smile logo of one of Microsoft's consumer software products. "I worked with the best studios and the best actors, and it would be silly to get into the interactive business without Microsoft. They're the best company in the world. It does seem like a marriage that was destined to happen."

A self-described "video junkie" dating back to the days when the ancient video game Pong was popular in the 1970s, Spielberg insisted that he and his partners commit the necessary time to interactive projects despite their busy schedules.

"I have not lost my interest in this technology," he said. "My interest grows every year."

Analysts and interactive industry veterans for the most part applauded the deal, which they said lends legitimacy to the nascent multimedia industry and would help to expand the market for CD-ROMs and other interactive software.

"These guys are obviously very talented and what they're doing can only help this industry," said Tom Kalinske, chief executive of Sega of America.

Some questioned Gates' projections that the new venture would have revenues of several hundred million dollars within two to three years. "Like the movies, this is a hit-driven business," said Bruce Ryon, multimedia analyst with Dataquest. "And it's not necessarily easy to get a hit."

Many of the new interactive ventures have suffered from a clash of wildly different personalities and cultures spanning Hollywood and the computer world. Some industry observers questioned whether the software giant and the new studio can bridge the gap.

All four principals are known for being obsessed with detail and taking a very hands-on approach to their businesses. Microsoft also has a reputation for dominating the companies it works with.

But Spielberg went out of his way to praise Gates, who has been under fire from rivals alleging that Microsoft has been heavy-handed in competing with them. The company's operating system software runs about 80% of the personal computers sold today, and the software giant has been the target of antitrust charges.

"One thing we've already learned from the last couple of months is that they are not predators, they are collaborators," Spielberg said in an interview with The Times.

But in a fledgling industry populated by dozens of small start-ups--many of which aspire to become the Microsoft of multimedia--the deal was greeted with some skepticism.

"I don't think the 'Dream Team' or Microsoft has the mantle on interactivity. I don't think they're any better than we are, either creatively or with technology," said Graeme Devine, co-founder of Trilobyte, the tiny Medford, Ore.-based firm that developed "The 7th Guest," one of the few CD-ROM titles to sell more than a million copies. "Should we suddenly run on down to Hollywood and say 'Please, Mr. Spielberg, open your door?' I don't think so."

Although the company will begin with a budget of just $30 million, Gates said that finding good people and good project ideas would be the primary constraint rather than financing. Katzenberg said the money would go almost exclusively toward hiring people. He estimated that the company would soon employ about 75 people.

The new company is expected to come up with as many as two dozen titles a year, with its first original interactive products available for Christmas of 1996, and its first potential projects based on its movies and television shows available the next year.

The announcement comes three days after Microsoft co-founder Paul Allen confirmed that he will invest $500 million in the studio.

Still unclear is what role Allen--a major Microsoft shareholder--will have with DreamWorks Interactive. Gates said he welcomes the involvement of his former schoolmate and fellow Microsoft founder. Allen left the company in 1983 after being diagnosed with Hodgkin's disease, which has been in remission.

"Paul obviously made his decision about the investment, and Microsoft made its own decision about doing the interactive thing. I think that's going to work out super well. Paul and I spend a lot of time together," Gates said.

Allen was not at the news conference and could not be reached for comment, but a spokeswoman for the investor said he views the announcement as "a very positive step" and said he will have no direct operational involvement in DreamWorks Interactive.

Sources said Microsoft will own about 1% of DreamWorks, with the amount invested about $9 million. Although small given Microsoft's size, the investment is important symbolically for DreamWorks. Microsoft's involvement marks another vote of confidence in the DreamWorks plan, and links the company with what arguably is the country's most successful entrepreneurial company in the past 20 years.

Founded in October, DreamWorks teams filmmaker Spielberg, whose movies include "Jurassic Park," "E.T.--The Extra Terrestrial" and "Schindler's List," with music mogul Geffen and Katzenberg, who formerly headed the Walt Disney Studios until he left last fall in a falling out with Disney chief executive Michael D. Eisner.

DreamWorks' first movie is scheduled for 1996, with its first animated movie due in 1998. The company is counting on animation being a major contributor to the company's earnings.

DreamWorks' money-raising efforts are nearing completion. The company has been seeking $900 million from investors by selling a one-third stake in the company. Of that, more than $750 million is firmly committed.

Talks are continuing with other potential investors, such as the California Public Employees Retirement System, and the company is expected to easily reach its goal.

That money, combined with $1 billion in loans from Chemical Bank and $100 million contributed by Spielberg, Geffen and Katzenberg, will give the company a $2-billion launch. The company also has a 10-year pay television deal with Home Box Office worth up to $1 billion, an agreement with Capital Cities-ABC Inc. to develop programming, and is expected to attract more funds through foreign television, video and other agreements.

"I think we've now set the stage for our principal businesses," Katzenberg said. "Now we're going to get building and running them."

Given the marquee power of Spielberg's name, some executives in Hollywood believe that an original, exclusive interactive story from the producer/director could be a potential bestseller for DreamWorks.

Another possibility is licensing arrangements to turn some of Spielberg's past hit movies into interactive products.

Spielberg said he has not thought yet about whether he will create an original interactive product. He said it is possible that DreamWorks could make interactive licensing deals involving films that he has made in the past, but stressed that he is more interested in plowing new ground.

"I'm looking ahead at original ideas, not looking back at some of the things I've already created," Spielberg said.

Gates said the new company will get immediate help from a group of Microsoft programmers and would have the necessary combination of talents to make interactive technology work. "You need the best talents in terms of making the computer sing and dance and you need great entertainment talent," Gates said. "It really will be a meeting of two worlds."

Gates, who cut short a trip in Europe to join the group, said he telephoned Katzenberg to discuss possible collaborations as soon as he found out that the executive was leaving Disney. Katzenberg said Gates was the first person on his phone list too, and he flew to Seattle to begin discussions with Gates even before teaming up with his DreamWorks colleagues.

The foursome said they met frequently in numerous locations, often staying up late at night to discuss the new technological world.

All agreed that the key to the new company's success would be in taking completely new creative approaches toward interactive games and movies.

"We're not interested in standing on the shoulders of giants who've already created a hip game or other product," Spielberg said. "We're interested in forging ahead and finding things that haven't been done before. Whatever it is will be very, very stimulating."

DreamWorks Interactive will be based in Los Angeles at DreamWorks' headquarters, underscoring the region's potential as a major center of the new multimedia industry.

Helm reported from Redmond, Harmon and Bates from Los Angeles.

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