Will Sun Set On Microsoft Deal with TCI?

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Tele-Communications Inc.'s lengthening set-top playerlist that now includes Microsoft Corp. and Sun Microsystems Inc. will force cooperationbetween those bitter rivals, while showing that the cable industry was serious about notgiving any company too much control.

On the evenings of Jan. 8 and 9, TCI executives dealt deepinto the night, closing the Sun agreement first, then the Microsoft deal -- in which TCIwill order 5 million copies of the Windows CE operating system.

The news bunched up at the end of the week partly becauseMicrosoft chairman and CEO Bill Gates, as well as Sun's chairman and CEO ScottMcNealy, wanted to trumpet their choice deals during their speeches at last weekend'sConsumer Electronics Show in Las Vegas.

The deals lock Microsoft in to provide its skinny WindowsCE system (known as WinCE), with Sun's 'PersonalJava' applications softwareriding on top of it.

'This is all good news -- the logjam has beenbroken,' said Bruce Leichtman, director of media and entertainment strategies for theYankee Group. 'This is exactly where the cable industry wanted to be, in terms of notgiving anyone too much power.'

Rivalry aside, industry observers and analysts foreseesignificant work ahead for TCI, NextLevel Systems Inc. (soon to be renamed GeneralInstrument Corp.), Microsoft, Sun and the as-yet-unnamed microprocessor vendor.

'This is not a no-brainer -- this is a customizedversion of Windows, and it's a design viewpoint that's not been donebefore,' said one financial analyst, who asked not to be identified. 'Holdinghard to that '99 ship schedule is looking pretty hairy.'

A GI executive, speaking on condition of anonymity, saidthat WinCE and PersonalJava 'are not incompatible, but they certainly overlap.'

John Malone, chairman and CEO executive officer for TCI,discussed the Microsoft deal during a teleconference with reporters on Jan. 10.

'We chose Microsoft because we felt they were thefurthest along in terms of the convergence between the TV set and the Internet --particularly in light of their WebTV develoments,' Malone said.

Malone repeatedly referred to the arrangement as 'anarm's length contract' for software licenses only, and not funding or set-topfinancing by Microsoft.

He did confirm, however, ongoing negotiations for a set-topfunding pool.

'With respect to how this all gets funded, there are anumber of proposals floating around with respect to leasing pools and financing packages,that we're exploring,' Malone said.

'[Those decisions] will be made on the merits of theinvestment, and not as an inducement to pick a particular technology,' he added.

Craig Mundie, senior vice president of Microsoft'sConsumer Platforms Division, declined to comment on whether or not Microsoft isparticipating in those dicussions. 'That's really John's business,' hesaid.

Malone said that beyond the deal for a customized versionof WinCE, he's also interested in the 'Solo' chip in Microsoft's WebTVPlus box. That chip handles display of Internet-related content and three-dimensionalmodelling on TV sets.

He also said that the 5 million copies of WinCE will likelyexpand, as TCI's HITS (Headend in the Sky) affiliates sign on. Last month, TCIordered 11.5 million set-tops from GI -- 6.9 million are earmarked for TCI, and theremainder for TCI's 'friends and family.'

The amount of memory that will be needed to support bothWindows CE and PersonalJava still remains unresolved. The current configuration of the GIbox specifies at least 8 megabytes of RAM.

Malone, notwithstanding previous assertions that he wantedto prevent Microsoft from dominating the set-top platform, expressed uncertainty as to howbig a part Sun's Java would ultimately play in TCI's interactive architecture.

'If we are able to get sufficient applicationssupport, we would configure the box with sufficient memory that Java would play uniformlyon the whole platform,' he said. 'It's really an economic issue thatrelates to how much additional memory we need to embed in the device in order to operatesimultaneously in the Windows CE and the Java environment.'

The softness of the Java commitment reflected, in part, thegreat gap between Sun and Microsoft in the preparations the two companies had made forentry into the television arena. Sun, in fact, wouldn't be as far along as it is ifofficials at the company hadn't stumbled on interactive software supplier OpenTV,with which it is now partnered in pursuit of the TCI business.

Ironically, OpenTV, which describes itself as the leadingsupplier of interactive platforms in Europe, was actually started by Sun as a jointventure with Thomson Consumer Electronics -- a contender against GI for TCI's 11.9million unit set-top order.

The two entities teamed up in mid-November to create aset-top reference design based on the OpenTV operating environment and Sun'smicroSPARC and JavaChip processors. That put OpenTV in the lead slot as the supplier of'middleware' software from the Sun end in the negotations with TCI, said JonHaass, director of product marketing for OpenTV.

'The OpenCable demonstration Scott McNealy showed atthe Consumer Electronics Show was based on OpenTV's system,' Haass said.

OpenTV CEO Jan Steenkamp said, 'Now we have to gothrough the next dimension of understanding how TCI sees the applicatons and wants todeploy interactive TV.'

The issue, Steenkamp said, isn't so much about memoryor the operating system as it is about what exactly TCI wants.

'We're going to show TCI exactly what aTV-centric application from the Java camp does to enhance performance and give them someof our solutions for integrating MPEG video and data together,' he said.'Although we're coming in late, we can give them a foot up.'

Left unclear was the extent to which WinCE and OpenTVworking in the same environment makes sense from a cost standpoint. Malone noted thatincluding memory to accommodate interfacing the Java-based system with WinCE adds cost tothe platform, while the whole idea behind OpenTV is to lower box costs by creating a more'network-centric' operating environment.

But Malone appeared intent on weighing the OpenTV valueproposition against the higher cost quotient entailed in use of WinCE.

'[A] decision we have to make is how much, if anyextra memory we want to put in the box, and that will be a function of what we hear fromour applications partners with respect to Java versus other ways of implementing theirapplicatons,' Malone said.

The 'Java memory decision' will be made in thenext three or four months, Malone added. 'Then there will be a whole series ofapplications arrangements made -- for instance, who does our e-mail implementation, whosupplies the program guide, and the Net browser.'

'There's a lot of work that remains to bedone,' Malone acknowledged. 'This agreement [with Microsoft] was a key decisionbecause, until you pick an operating system, your hardware vendors are just treadingwater.'

Monica Hogan contributed to this story

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