Eye Opener: Microsoft's war for the living room

With consumer electronics makers ready to release ultimate multimedia devices, Microsoft is developing WebTV, home networking and games. But will it be too late?

Microsoft may have finally found the recipe to capture the couch potato and move PC technology from the living room to the den.

The key ingredient is games. The big software maker is busy putting the pieces together to make Windows CE a premier gaming platform. Ultimately, the idea is to have multifunction set-top boxes that not only can play games, but surf the Net, control home entertainment, and play DVD movies.

There's only one hitch: Sony seems to have beaten Microsoft to the punch. When the Japanese consumer electronics maker announced details of its heavily anticipated PlayStation2 two weeks ago, its plans went far beyond just another game machine. "If Sony makes it out with a cable-ready version of their PlayStation2 before Microsoft comes out with a Windows CE-based gaming box, Microsoft is in trouble," said Jeremy Schwartz, game market analyst at industry watcher Forrester Research.

On 13 September, Sony announced the pricing and support for PlayStation2. And with hardware specs far ahead of the competition's -- 10 times faster than Sega's Dreamcast and three times faster than Pentium III, claims Sony -- PlayStation2 is the game console to beat. But more important, Sony execs used the announcement to admit something they'd previously denied: The electronics maker is aiming the PlayStation2 at becoming the new household entertainment centre.

Sony stressed the device's ability to tie together living room components -- such as a VCR, stereo and TV -- play DVD movies, and eventually surf the Web via a broadband modem. To top it all off, Sony has designed the next-generation device to look more like a stereo component than a game device. "Sony was calling (the PlayStation2) a 'Trojan horse' entertainment appliance," said Forrester's Schwartz. "They've just dropped the Trojan horse part."

Other game console makers are joining in the game as well, but for the moment, Sony appears to have the lead. They're all racing to grab as large a piece of the living room pie as possible.

Going beyond the $7bn (about £4bn) that the interactive entertainment industry will pull in this year, their strategy threatens to subsume the $300m generated by DVD player sales in 1999, a hefty portion of the $5bn in annual revenues for consumer Internet access, and at least a fraction of the future PC systems market, valued this year at $20bn. "The PC industry in general should be worried about PlayStation2," said one industry insider, familiar with Microsoft's plans, who asked to remain anonymous. "It would be crazy for Microsoft to just sit there."

Whatever else Microsoft can be accused of, being a couch potato is not one of them. Since roughly half the US homes still don't have a PC, the software giant has been rethinking its PC-centric strategy for some time. From Universal Plug and Play -- a Microsoft-led initiative designed to link all sorts of appliances in one huge data network -- to the company's WebTV set-top box bringing Internet into the living room, Microsoft has signalled its intent to be a major player in the coming home appliance market.

"There are three major sources of revenue (in the living room): games, Internet and TV," said Alan Yates, director of marketing for the WebTV platforms division. "The people that put together the most compelling product based on a combination of those subsidies will be very successful."

Part 2: X-box marks the spot