Microsoft plugs in: deal with Charter boosts software giant's interactive TV prospects - Interactive TV

In a deal that potentially moves Microsoft Corp. from the bottom to the top of the interactive television market, Charter Communications last week signed a seven-year deal with the Redmond, Wash., software giant that could eventually put its middleware into 1 million advanced set-top boxes.

Only last March, Charter, the country's No. 4 cable operator, had agreed to use Liberate Technologies' middleware on 300,000 boxes in the same St. Louis system where Microsoft TV, Microsoft's interactive television platform, will now be tested. That deployment continues, but the Charter-Microsoft announcement sent Liberate shares down 7.5% on Thursday. Liberate closed Friday at $7.12, down another 23 cents.

The deal could have huge implications for the nascent interactive television (ITV) industry, which proponents insist is poised to take off after years of false starts and hesitation on the part of cable operators. ITV would offer such services as home shopping, banking and games, thus opening huge new areas of revenue growth for the cable industry. However, many operators have still not deployed the so-called middleware that enables many interactive functions on set-top boxes. That a major MSO such as Charter is teaming with the world's best-known software company on ITV could give the industry a much-needed boost.

Until this deal, the terms of which were not disclosed, analysts had put Liberate at the head of the ITV pack, followed by OpenTV, while bugs and slow development bogged down Microsoft's efforts to tap into a market that could reach $40 billion over the next five years.

AT&T Broadband's announcement earlier this year that it would shift focus from the advanced set-top boxes, the DCT-5000s, to the less sophisticated DCT-2000 line, was widely seen in part as a slap at Microsoft, which was struggling to develop middleware for the higher-end boxes. And it was not the first time Microsoft deployments were stalled. An announced deal with UPC, Europe's major cable operator, for more than 2 million boxes, has yet to be implemented.

The Charter deal now appears to revive the flagging fortunes of Microsoft TV even as it runs contrary to the industry tendency to stick with the lower-end DCT-2000 digital boxes.

Charter spokesman Andy Morgan, who said the two sides would not release any financial details, added that no one should be surprised at Charter's commitment to the more robust boxes.

"We're going to be working with the 5000 series, and as we do the field trials and we move into a launch, we'll probably move up into the higher boxes in the 5000 series," he says. "We see a lot of potential for the company and our customers--they have a high-speed cable modem and a built-in hard drive--so it gives the customer the capability of taking advantage of our broadband network."

One key is that the Microsoft software will eventually allow streaming Internet video through the box, said Charter's new CTO Steve Silva. In a statement, Silva said that Charter would be the first operator to offer an ITV service that incorporates Internet-based streaming audio and video as well as the Flash animation programs often seen on websites.

Charter owner Paul Allen--Bill Gates's former partner in Microsoft--has long made streaming media a core concept of his "wired world."

Carmel Group analyst Jim Stroud emphasizes the timing of Charter's renewed interest in thicker-client boxes, which comes as cable's two major satellite competitors prepare to merge.

"I think in some ways it's a response to the EchoStar-DirecTV merger," he says. "Cable has to do anything it can to compete, whether it's high-end boxes, VOD. Against a single competitor, they are going to have to strengthen their products and services."

That means offering the hard drive, streaming media and other more robust services that the DCT-5000 can provide that the DCT-2000 can't, he says.

Josh Bernoff, Forrester Research's ITV analyst, says whatever the cause, thanks to Charter's renewed interest in the DCT-5000s, Microsoft now has a major trial after having been all but shut out of the U.S. market. The company's only previous deployment has been with TV Cabo Portugal SA, a Portuguese cable company.

Microsoft has middleware for the lower-end boxes, Bernoff says, but it has proved unable to compete with Liberate and OpenTV in that arena.

"It's clear that the people at Charter are big believers in a much more sophisticated set-top box, and when you have a more sophisticated set-top box, Microsoft TV becomes a more realistic option," Bernoff says.

For his part, Microsoft's Jon DeVaan, SVP of the company's television division, emphasized that Charter had made his company its "primary strategic partner for interactive TV."

Charter's Morgan refused to go that far, saying only that the MSO traditionally liked having more than one vendor for all of its services.

Understandably, Liberate executives don't paint the Microsoft deal as a major blow to their hopes to seize the lion's share of the middleware market. San Carlos, Calif.-based Liberate has deals with AOL Time Warner, AT&T, Comcast, Insight as well as a number of foreign operators.

As for Microsoft, they point out that trials come first, and with Microsoft's long history of delays and bugs, its eventual deployment by Charter is not assured.

"We have yet to see an actual, live Microsoft solution running," says Liberate spokesman Charlie Titschler.

And Liberate doesn't believe that the cable industry will do an about-face and embrace the 5000s, he says.

"If you look at the industry as a whole, the low end is where people are focusing here in the U.S., for the foreseeable future," he says.

Despite all that, there is little question that the Charter-Microsoft deal has hurt Liberate's position as the ITV leader.

"This is a serious threat to Liberate, especially with the high-end boxes," Bernoff says. "And it doesn't help OpenTV either." Mountain View, Calif.-based OpenTV's CEO James Ackerman dismissed concerns for his company, noting it still leads in actual deployments around the world, with 18 cable and 25 satellite partners--including both DirecTV and EchoStar.

Ackerman says any ITV advances in the United States will ultimately help all the players.

"With OpenTV now deployed on more than 2 million boxes on satellite and Microsoft getting a million, how can that be anything but good news for the interactive television community?." Ackerman said. "We've seen it firsthand: When people have access to interactive games, e-mail [and] banking, they love it."

Some executives see Microsoft's hand behind Comcast's bid to take over AT&T's cable operations, which, combined with the Charter deal, would give the Redmond, Wash., giant the foothold in the industry it has always wanted.

Liberate's Titschler says whether or not Microsoft invests in or partners with Charter, Comcast and AT&T, in the end operators want working software for ITV, something Microsoft has yet to demonstrate.

"Microsoft has invested over $12.5 billion in the cable industry--and yet all four of those companies (AT&T, Comcast, Europe's UPC and Japan's NTT) are actively deploying our software," Titschler says.

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