Are there strings attached?
Up until just a couple of months ago, the cable industry seemed to be the butt of a well-worn Rodney Dangerfield joke — the industry just couldn't get no respect. It's amazing what $1 billion here and $1 billion there can do to change people's perceptions practically overnight.
Suddenly this summer, cable operators were touring the Silicon Valley. Bill Gates and his Microsoft minions were making house calls to MSO headquarters around the country. Gates plopped down $425 million to acquire WebTV, and then stunned many when he cut a $1 billion check and handed it to Comcast Corporation.
In fact, at press time, reports and rumors were swirling both in and out of the industry that Microsoft and Tele-Communications Inc. are close to a deal worth $600 million to $1 billion. Word on the street has it that Microsoft's most recent foray into cable could involve Microsoft taking TCI's digital set-top burden literally and figuratively off the MSO's shoulders, and more importantly, off its ledgers.
In exchange for supplying TCI the digital boxes it desperately needs, possibly through some sort of OEM or outsourcing arrangement, Gates and company get a major on-ramp into a market they have publicly staked a good part of their future on — the 66 million cable TV homes in the United States. Yet the deal is not the slam-dunk or one-sided affair that is usually associated with the software giant's financial largesse.
Cable operators, as Gates has reportedly found out in his Comcast deal, play hardball when it comes to who controls access to and influence over its broadband pipe. Similarly, the supposed TCI/Microsoft deal would hinge on the MSO's stipulations that the boxes be available in a timely manner, that they be multipurpose in functionality, that they be inexpensive and that they be based on the pending OpenCable platform. Apparently, contrary to Microsoft's corporate druthers, proprietary software solutions would not be a part of the deal.
According to some, even the OpenCable effort itself has been influenced by the presence of the Redmond, Wash.-based behemoth. David Robinson, vice president/general manager of NextLevel's Digital Network Systems group, considers Microsoft's influence "seminal" in getting the industry up and running toward an open, standard, digital platform.
"The Microsoft investment in Comcast," says Robinson, "sparked an acceleration of (a) desire to really understand that middleware/software solution. This is especially true given that NextLevel and Scientific-Atlanta and the rest of the industry have pretty much nailed down the hardware-physical layer stuff. It highlighted that there is a lot of uncertainty left in the software stack. And with Microsoft saying it has a lot of confidence in the (cable) platform with its $1 billion Comcast investment, it got people moving and saying, 'Hey, we've got to move faster on this'."
The "physical layer stuff" Robinson refers to was covered by the recently-announced "Harmony" agreement between NextLevel and Scientific-Atlanta. In that cross-licensing agreement, the companies agreed to use NextLevel's data encryption standard (DES), while NextLevel has the option to license S-A's DES. In addition, they agreed on five transmission-related building blocks that will be included in their respective digital set-tops. This includes: MPEG-2 audio and video decoding and transport; quadrature amplitude modulation; Dolby AC-3 audio; and ATSC system-information tables.
Now comes the really hard part. To accomplish that task, CableLabs and its members established its OpenCable initiative both in an acknowledgement of recent and ongoing technological advancements, and to further Congress' and the FCC's mandate of retail availability of set-tops in the not-too-distant future. In order to tap vast stores of software expertise in the computer and consumer electronics industries, CableLabs issued a request for information (RFI) a little more than a month ago that sought input into the open specification process and the creation of a draft specification for advanced set-top boxes.
"It was a pretty broad request for information," says Tom Elliot, vice president technical projects at CableLabs. "We did ask for a lot of detailed information. But we also asked for concepts. We're intentionally looking for innovative, creative approaches."
By the time the deadline had expired, 15 companies or groups of companies had submitted a variety of seemingly musical-chair proposals. Joint filings included ACTV Inc. with Sarnoff Laboratories Inc.IBM Corp., Pioneer New Media Technologies, PowerTV Inc., Sun Microsystems Inc. and Toshiba Corp.; Intel Corp. joined with Cisco Systems Inc., Netscape Communications Corp., Network Computers Inc. (NCI), Oracle Corp. and Thomson Consumer Electronics; and Thomson also filed separate comments with NCI.
Individual comments were received from NextLevel Systems Inc., Oracle, Thomson Sun Interactive, Cisco, S-A, Samsung Information Systems Inc., WorldGate Communications, Criterion Software Inc. and Pioneer. Bringing up the rear, with last-minute individual proposals, were Intel and Microsoft Corp.
"The ultimate objective," says Alex Best, senior vice president engineering for Cox Communications, "is to be able to offer a standards-based product that is capable of being sold through retail stores." That kind of approach, which removes a huge capital item off their balance sheets, would, overnight, create a new financial model for cable operators
According to Elliot, work began almost immediately on evaluating the proposals. Barring the emergence of a clear "home run" approach, this summary stage will be followed up with an iterative stage where OpenCable personnel will go back and ask questions and get clarifications.
While there are literally hundreds of details to be worked out to develop an open-standards digital set-top, there is near unanimous agreement on the two key sticking points this consensus-seeking effort faces. The question of which operating system and which APIs (application program interfaces — essentially the software tool kits used to develop content) will be used in future set-tops has brought software-savvy heavyweights like Microsoft, Oracle, Sun Microsystems and Intel weighing into the fray, which is further complicated by the fact the two factors are closely linked, because APIs are usually OS-sensitive.
The battle over these two crucial aspects revolves around their operational efficiency, flexibility, and most importantly for a potential consumer electronics product, cost. "You have to have a set of standards that the OS could write or modify to," says Bowmar (Bow) Rodgers Jr., chief operating officer at PowerTV Inc. "The operating system written to the APIs will have to be small enough, use memory efficiently enough, and be able to give you such things as VOD, NVOD, resident applications like electronic program guides, etc., in a redundant, robust way.
"The devil, as they say, is in the details. You could probably have a great big OS doing a lot (of) functionality, but if it blows the cost of the box because it starts demanding more memory, it starts demanding a faster processor, then you start changing the business model. And that's a key part of getting these digital boxes into consumers' homes."
While the operating system question has a common sense solution, that logical solution will have to overcome both technical and "political" roadblocks. "From an operating system standpoint," says Jim Slade, vice president of business and product development at Pioneer New Media Technologies, "the ideal solution is operating system independent. But it's not clear whether that's achievable or not.
"Of course, the political side of that is Microsoft and Windows CE, and what role does it play? As it stands right now, I think most of the players in OpenCable would say Windows CE doesn't play a role.
"I think those of us who can take a step back from it and look at the broad picture, understand that Windows CE is going to play some sort of role somewhere by the mere fact that Bill Gates wants to do something in cable. And Windows CE is his bread-and-butter for the future."
Because content is king, and promises to be even more so in the future, APIs that are ubiquitous, relatively easy to use and affordable are an absolute must for the growth of digital television. The phenomenal growth of the Internet offers a perfect model, if not at least a partial solution itself. "I can't speak for CableLabs or OpenCable," says Bob Van Orden, director of Digital Video Systems for Scientific-Atlanta Inc., "but one of the things we see going on in the industry is a real movement and interest to develop applications the way they are developed for the Internet.
"Look at Web pages today, which are a highly successful model for application development. It's all HTML, and typically Java scripts. It certainly seems to me, personally, and a lot of people we talk to in the industry, that it makes a lot of sense and it's a really good model. It's a relatively low-cost, low training format to develop content.
"If the power of that could be leveraged into this environment, that would be a good thing. You know, I've heard quotes that there are already 400,000 to 500,000 HTML developers in the world today. So, they are pretty well-known applications." Van Orden, in fact, admits he is one of them, having developed a couple of HTML presentations that were piped through S-A's digital set-top.How long is this OpenCable effort going to take?
Most of those involved are reluctant to venture a guess. Of those who did, a two- to three-year timeframe was suggested. But, given the fact that there are already literally millions upon billions of dollars being spent (by insiders and outsiders) to speed up, if not influence, the outcome, that lengthy timeline could already be a thing of the past.
That timeline could be even further telescoped if Microsoft accepts the industry's insistence on open standards, joins the effort as an enthusiastic partner and puts its vast software development expertise to work on the OpenCable platform.
After all, stranger things (Remember Microsoft's investment in Apple?) have happened.DAVID vs. Goliath for OS supremacy
Depending on your view, anytime well-heeled Microsoft gets involved in a new market or new project (analysts predict it will post fiscal first quarter revenues of $3.1 billion, up 35 percent from the year-earlier period), certain images almost automatically come to mind. Words like "predator," "evil" corporation (Jim Clark, Netscape's chairman) and "choke hold" (Phil Monego, chief executive of NetChannel Inc.) start popping up in conversations.
When it comes to determining the operating systems (OS) for future digital set-tops, the David vs. Goliath scenario is particularly apt, no matter where you're standing. On one side, you have the behemoth from Redmond, Wash. looking to expand its Microsoft brand to all corners of the telecommunications world. Across the field of combat, you have established, albeit smaller and possibly more agile, competitors like Cupertino, Calif.-based PowerTV Inc. and Des Moines, Iowa-based Microware Systems Corporation.
Microsoft's most recent foray into the cable industry, according to Arthur Orduña, Microware's director of marketing/consumer products group, is really the dropping of the last veil on Microsoft's true intentions with its Windows CE platform. "This handheld PDA (personal digital assistant) stuff is bull," says Orduña. "This is (a) testing ground, as far as we're concerned. The real target has always been the television set and the telephone. That's the war.
"Their market is beyond the desktop, beyond the PDA, beyond the PC. Their market is the embedded marketplace, where there are just some little players right now like Microware. They're going after that marketplace because the TV and the telephone are going to get smarter.
"How are they going to get smarter? They're going to stick more powerful microprocessors in there. And memory is going to go down in price. And so, they'll be able to put it (Windows CE) in there, and they will be able to dominate those platforms. Software is going to be the bridge between the computing world and the consumer world. That's an incredibly powerful argument."
Orduña believes that Microsoft's sights have been aimed in television's and cable's direction for a long time. "Well, we know this has been their intent for a hell of a long time," says Orduña. "Let's put it this way. Before the competition at Bell Atlantic four years ago was modular Windows. It was Microsoft taking their Windows technology for the PC and trying to cram it into a set-top box environment."
He says Microsoft's logic then was that with modular Windows, companies could leverage all the Windows developers. But the problem, says Orduña, was that the modular Windows effort failed on purely technical issues. Simply put, "They couldn't get it to work," says Orduña.
The next Microsoft push, he says, occurred about three years ago when the company developed its Tiger server and a set-top operating system for digital, interactive set-tops. That effort failed, says Orduña, because "it was still essentially a PC disguised as a set-top, and it cost like a PC." The Tiger line was eventually repackaged and redirected and became a part of Microsoft's Netshow suite of streaming-media products for the Internet.
Since that time, Orduña believes the folks at Redmond may have learned a few things, as evidenced by their development of Windows CE. "They couldn't fit the entire 32-bit Windows API in there. They decided to 'fake' it by creating an API subset that people could use Windows-based tools for.
"Windows CE is essentially their attempt to go back and say, 'We understand it's got to be smaller. But we still need Windows in there (set-tops, consumer electronics, etc.), and it's going to look like Windows'."
Orduña believes that it's this insistence on the Windows "look and feel" that is another potential stumbling block for Microsoft. "You have to remember," says Orduña, that "these people make their money off brands. You can't screw with their brand. And part of the brand and branding is 'look and feel.' You have to know it's Microsoft.
"But we think there are still a lot of people out there who say, 'I like Windows on my PC. I like the Microsoft look and feel on my PC. But I know better what my consumer, my subscriber, my customer is going to look for'."
The idea of conflicting or overlapping brands on one screen, whether it's a PC or a television, says Orduña, can quickly escalate into a hot issue in a visual environment where impressions are everything. "Think of all the money that a Disney or a Time Warner has already put into Internet research, into creating their 'look and feel' on the Web. Windows CE is applications, not just the OS. And when you start messing around with the application level, in some places, that's almost religious.
"We're working with companies like Americast, that Disney is part of. And Disney doesn't want anything except something that looks like Disney. In other words, you don't mess with the Mouse.
"What we're saying is that we'll give you a solid, better-tested OS (DAVID V2.2) than this brand-new thing. We'll give you the connectivity to any network you want. We'll give you the openness (so) that you can create any kind of look and feel you want."
Microsoft, which declined to comment on the Open-Cable initiative and related issues, apparently is looking to play several hands, of which Windows CE is just one, to put together a winning video bid. These other hands include a $425 million buyout of WebTV, a $1 billion investment in Comcast Corporation and continued discussions with a variety of MSOs, coupled with the public acknowledgment that the company continues to look for other cable industry investments.
According to Orduña and recent press reports, one of Microsoft's first attempts to put together such a bid apparently has been trumped by a less-than-enthusiastic response by some MSOs. "If you're an MSO," says Orduña, "you heard the latest Microsoft pitch that's centered around a set-top box that can access the Internet. They're saying it's got a great Web browser. They'll make sure the application development programs are in place, and they'll license it to NextLevel and Scientific-Atlanta. Then they're saying, in return, that when your subscriber writes out a check for his $40 monthly bill, they're going to grab $5 of that. Is that OK with you'?"
That economic model, says Orduña, runs against the cable grain in a very basic way. "That's your money. It's your system. We make our money off your OEMs. Because right now, if you're a system operator, do you pay NextLevel any money based on your subscription revenue? And what Microsoft is attempting to do is break that traditional model."
While the David vs. Goliath analogy brings a certain sly smile to Orduña's face, he's under no illusions that Microware or any other company in Microsoft's way will ever score a direct, debilitating hit that will defeat the software giant. Instead, he puts his faith in the demand for open standards and the promise of content diversity that the two-way, high capacity broadband pipe can deliver.
"The bottom line is this," says Orduña. "Is the TV getting smarter? Yes. Is there going to be tons of opportunities out there because the pipe owners themselves are starting to want more and more digital applications to offer subscribers? Absolutely.
"Is the pipe big enough for multiple players? Yeah. Does Microsoft have the clout and the technology and all the resources put together to completely dominate this market the way it dominates the PC industry? I don't think so. Can it carve out a big niche for itself? Sure.
"You're not going to beat Microsoft. But what we are saying in consumer electronics is that this is a space that Microsoft isn't in yet. So, the goal is not to beat them. The goal is to have them acknowledge the fact that each of us is going to have certain parts of the market."
Goliath refused to comment.