Microsoft to Buy Internet Firm WebTV

Searching for a way to speed the Internet’s transformation into a true mass medium, Microsoft Corp. on Sunday announced it would acquire pioneering Internet start-up WebTV Networks for about $425 million.

WebTV, one of the Internet world’s most closely watched new ventures, has developed technology that enables consumers to access the Internet’s World Wide Web via a $350 box that attaches to a TV set.

“We want to take the personal computer and its progeny . . . quickly into the home,” said Microsoft Senior Vice President Craig Mundie.

The deal, announced at the opening of the annual National Assn. of Broadcasters convention in Las Vegas, could accelerate the much-discussed convergence of computer and television technologies.

Federal regulators last week gave final approval to a plan by which TV broadcasters will switch to digital transmission, and in the long run television sets will probably gain many of the interactive capabilities now associated with personal computers, while PCs will gain TV capabilities.

“Microsoft is already the king of the PC,” said Richard Zwetchkenbaum of International Data Corp., a research firm based in Framingham, Mass. “Now it wants to be the king of the PC as it merges into television.”

But Microsoft and other computer firms have a long way to go before the Internet enjoys anything resembling the popularity of television, and the WebTV acquisition raises a number of complex questions about Microsoft’s strategy in the consumer market.

Founded in June 1995 by former Apple Computer engineer Steve Perlman, WebTV is credited with successfully developing a system that allows World Wide Web pages to be viewed on standard home television sets--and navigated easily by even the most technophobic consumers.

Customers buy the WebTV device from Sony or Philips, which build them under license, and when they hook it up they’re automatically signed up to the WebTV Internet service, which costs $19.95 a month. Almost anything that can be seen via a Web-surfing PC is accessible, and it’s controlled either by a special TV remote or an optional wireless keyboard.

Backed with $65 million from a blue-chip roster of venture capitalists and corporate investors--including Times Mirror Co., parent of The Times--WebTV launched its products and services in October.

Microsoft made an initial investment in the company in September, and since then the two firms have been negotiating to cross-license each other’s technology.

But despite a big marketing campaign, WebTV sales have not been as strong as many had expected. Analysts estimate that about 50,000 boxes have been sold.

Microsoft, for its part, has for years been trying to develop products that would reach the 60% of households that still don’t own a PC. Working with cable giant Tele-communications Inc., Microsoft initially focused on developing set-top boxes that would allow interactive television to be offered over cable systems.

But cable and telephone companies abandoned plans for huge investments in infrastructure that would have made it possible.

“We developed the technology for cable networks,” said Hank Vigil, senior director of business development for Microsoft. “[WebTV] did it first for the Internet.”

Now, Microsoft plans to alter WebTV’s technology to use a multimedia version of Windows CE, a compact form of the Windows operating system designed for pocket computers. Such a move would potentially allow Microsoft to dominate standards development on both the PC and the television set.

“The PC and TV industries are both at a crossroads. The PC industry has been trying to be more relevant to more people while the TV industry is moving to digital,” said Vigil. “This is to make sure the technologies converge rather than moving at right angles.”

WebTV would be run by Perlman as a Microsoft subsidiary, and would remain in its Palo Alto location. Vigil said the company would become the development team for a broad range of hybrid products built around the Windows CE operating system, including future digital televisions.

WebTV already has several direct competitors, and a number of computer companies have been looking for ways to market an inexpensive, stripped-down personal computer that consumers might use to surf the Web. But consumers have generally proved hesitant to buy PC-type products that don’t include the latest bells and whistles.

Even more important, the World Wide Web does not currently offer very much in the way of programming or services that are interesting to a mass market. Microsoft has been spending hundreds of millions of dollars to develop news and entertainment programs aimed at consumers, but thus far there have been few hits.

“They wouldn’t feel the pressure to do this if it wasn’t for the struggling content arm that needs a better infrastructure for delivering their product,” says Jesse Berst, a veteran Microsoft watcher who now works for trade publisher ZD Net.

The acquisition is likely to heighten concerns in many quarters that Microsoft’s growing dominance will ultimately be bad for the further development of the Internet. But few expect there to be any antitrust or other obstacles to completion of the cash-and-stock deal.

Helm reported from Seattle and Groves from Los Angeles.

* MICROSOFT’S MEDIA DREAMS: The software giant is struggling to be a player in online news and entertainment. D1