WebTV grabs lead but can it hold it?

When Microsoft last month agreed to supply various technologies to cable giant Tele-Communications Inc. for its next-generation, Internet-ready set-top cable boxes, many industry observers began forecasting the end of WebTV. After all, Microsoft gave away some of WebTV's most impressive tricks. But recent retail trends, as well as a realistic look at the pace of cable set-top rollouts, suggest that reports of the Internet-TV category's demise have been greatly exaggerated -- or at least accelerated.

It's called Solo. Named after a German shepherd owned by WebTV co-founder Steve Perlman, Solo is a custom-designed yet inexpensive chip that accomplishes many of WebTV's most impressive tricks: non-flickering Internet images, for example, elegant zooming techniques and a picture-in-picture feature that provides for simultaneous channel surfing and Web surfing.

(Microsoft (MSFT) is a partner in MSNBC, and MSNBC is one of many content partners of WebTV.)

In the wake of the deal struck between Microsoft CEO Bill Gates and TCI chief John Malone over a multimillion-unit order of computer-like set-top boxes by TCI, Microsoft's Windows CE operating system drew most of the attention. CE, it was agreed, would be inserted into 5 million boxes, which will provide services such as e-mail, Internet access and video-on-demand to cable subscribers.

But in retrospect, there was another lynchpin in the negotiations as well: the Solo chip (and bargaining chip). Now, it appears, a new generation of cable set-tops built by a smorgasbord of companies -- General Instrument, Sony, Sun and others -- will enter the market as early as late this year with WebTV's vaunted Solo technology.

So will WebTV itself, the company that emerged from nowhere to be bought last year by Microsoft for $425 million, simply fade away once those cable boxes enter the market?

That's certainly the impression one could draw from Microsoft.

Mike Conte, group product manager in the company's digital-television operations, calls WebTV "a huge retail success. We can't make them fast enough." But at the same time, he notes that WebTV has "served as the inspiration for where these other set-top boxes will go." Listen carefully, and one even notices generous use of the past tense.

"They were quite important," he says, "partly as a proof of concept" -- especially as Microsoft was selling its wares to TCI. (TCI didn't order WebTV boxes largely because it favors open technological standards and it doesn't dare give that much clout to one technology provider).

So if even Microsoft hints that WebTV already may have served its grandest purpose, what are consumers supposed to think?

The answer: It depends on the time frame. Despite the showy claims of cable operators, who promise delivery of millions of set-top boxes over the next few years, most U.S. consumers won't be able to sign up for basic e-mail service through their cable operators before the century ends.

Sean Kaldor, analyst with International Data Corp., estimates that interactive-TV appliances will gain fairly quick acceptance in this country. But even at that, their installed base won't crack the 5 million mark (or about 5 percent of U.S. households) until 2001.

Meanwhile, distribution is likely to be uneven. In order to sign up for a new-fangled set-top box, a customer will have to be served by a cable operator that actually has the boxes on hand (most won't during the next two or three years). Further, only those customers served by upgraded, two-way cable lines will be able to get maximum use out of the boxes.

That means consumers who are looking for interactive entertainment, e-mail service and Internet browsing but who don't own personal computers have only a handful of choices today. And the cable industry can't be expected to expand that menu for most viewers for several years.

Therefore, even though WebTV is being cherry picked for its best features, the short-term prospects for it and its rivals, including Internet-screen-phones and other low-cost appliances, remains reasonably strong.

And longer term, WebTV may offer a more robust computing experience than its narrower cable set-top-box cousins. With an infrared keyboard, a printer port, a full suite of Web surfing tools and more WebTV may well evolve into

Microsoft's "network computer" play. After all, NC-evangelist Oracle is pouring many of its network computer hopes into Network Computer Inc., whose partnership with NetChannel and RCA offers the most direct competition to WebTV.

Indeed, demand for Internet appliances -- a category WebTV invented a year-and-a-half ago -- is growing quickly. Both WebTV and its leading competitor, the NetChannel service on RCA's network computer, say they sold out all inventory over last year's holiday selling season.

WebTV's subscriber base now tops 250,000. Sales and orders for RCA boxes hit about 50,000 -- though the company was able to deliver less than half of those last year.

In the grand scheme of the consumer-products world, those aren't large numbers. But thanks to a paucity of competing technologies right now, those numbers may get significant soon. Perlman, for instance, forecasts that WebTV will exceed 1 million subscribers by year-end.

That's why one NetChannel official says she expects NetChannel and WebTV to have a lot more company in the Internet-TV business soon. "Over the course of the next six months," the official says, "we'll see more brand name players step out."