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After spending billions of dollars and the better part of a decade trying to make inroads in the high-stakes world of television, Microsoft is changing the channel on its plan to connect TVs to the Internet and push software into consumers' living rooms.

The new focus is on delivering interactive digital TV applications that financially troubled cable companies can both afford and easily use to differentiate themselves from satellite companies offering rival digital services, while at the same time supporting Microsoft's long-term strategy of becoming the premier content gateway to the home.

New TV Tools

Though Microsoft TV Advanced software--designed for a new generation of set-top TV boxes that never made it to market--has failed to capture any big customers, Microsoft is putting the finishing touches on new software for the installed base of "thin-client" set-top boxes that have been deployed by cable companies.

The Interactive Program Guide, released last year and designed to make it easier for TV watchers to find shows and customize their viewing, was the first shot in a salvo of new software from the company's Microsoft TV unit. New services are slated to undergo trials and to be unveiled late in the second quarter, according to cable industry executives and sources briefed by Microsoft.

Upcoming software, to be incorporated into the Microsoft TV thin-client platform with IPG, is designed to enable operators to offer features such as multiplayer trivia games and local-content management of instant information services for local news, sports, and weather, according to sources familiar with Microsoft's plans.

Making a Change

The new product line represents a change in direction for Microsoft. For all its R&D, marketing might, and the approximately $10 billion spent on stakes in cable companies, the Microsoft TV product family has been bested in the market for cable television software by rivals with far fewer resources.

Now, bowing to market reality, a humbled Microsoft is trying again. Microsoft TV software will be tested by cable giant Comcast in the second quarter, in addition to software from financially ailing rival Liberate Technologies, according to cable company executives.

"If Microsoft succeeded in a deal with a big company like Comcast, it would send shock waves through the industry," says Jim Brancheau, an analyst with Gartner. Such a deal would signal that Microsoft's perseverance has started to pay off, Brancheau says.

Microsoft went on an investment spree in the late 1990s, snapping up $5 billion worth of AT&T and $1 billion in Comcast, as well as varying amounts in companies outside the United States.

Obstacles to Overcome

Microsoft got a black eye when reports surfaced in 2000 that it could not meet timetables for delivery of set-top box software to AT&T. Economic pressures later forced AT&T to scrap plans for advanced interactive TV services.

Last year, Microsoft's stake in AT&T went to Comcast when Comcast acquired AT&T Broadband. As part of that transaction, Comcast, which has more than 6 million digital TV subscribers, made a deal to put Microsoft software on a trial run this year.

In the United States, Microsoft's other TV-related initiatives include Ultimate TV, a service for DirecTV satellite subscribers that lets them play digitally recorded programs at any time, and MSNTV services (formerly called WebTV), which lets TV viewers access the Internet. However, Microsoft last year drastically scaled back R&D for UltimateTV. MSNTV, though it reaches about 1 million users, is not expected to grow very fast.

"Why buy a special box for Net access on a low-res TV monitor when you can go get an Emachines computer for $300 to surf the Web?" notes Greg Ireland, an analyst with market researcher IDC in Framingham, Massachusetts.

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