By Matt Rosoff [bio]
Posted: Jan. 16, 2006

• Illustration: Philips VoIP Phone

The following is the full text of an article published by Directions on Microsoft, an independent research firm focused exclusively on Microsoft strategy & technology. Each month we make one or more key articles available to non-subscribers.

PC-centric Stance Softening?

For the second consecutive year, Microsoft did not make any major product announcements at CES, but instead concentrated on third-party devices and services that use Microsoft technologies, such as the Windows Media Format. The company also demonstrated features of its next major OS release, Windows Vista (due in late 2006), such as integrated search and a new user interface.

But perhaps most striking were several announcements in which the PC was not the central device or played no role at all. This is an important shift: until now, Microsoft's entertainment strategy has positioned the PC as the preferred device on which content is recorded, stored, edited, and transferred to other devices, even if this created some awkward scenarios. For instance, although the Xbox 360 game console uses a TV set as its display and has a built-in hard drive, it cannot record TV programs; rather, consumers must record TV on a Media Center PC, then transfer the recording over a home network to the game console.

Now, Microsoft may be realizing that many consumers do not trust a PC as their main home entertainment device because of its inherent complexity and unreliability—unlike a PC, stand-alone consumer electronics devices seldom crash and never need to be patched, for instance. So, rather than insisting that the PC play the central role in home entertainment, Microsoft may begin to promote scenarios that are less dependent on the PC but that could still lead consumers to upgrade their PC or purchase other Microsoft software.

Microsoft's CES announcements can be grouped into three broad areas, based on the type of device: PC, mobile, or in-home devices.

VoIP and Media Improvements for the PC

New hardware and services aim to tap the burgeoning interest in Voice-over-IP (VoIP) technology. Microsoft also announced new content partners for Media Center PCs, showed a modest upgrade to the Windows Media Player, and gave a Vista preview focused on consumer priorities, such as photo management and search.

VoIP Handsets

Cordless home telephones from Philips and Uniden will let users place calls over both regular phone lines and the Internet using a forthcoming VoIP service from Microsoft and MCI. The phones could make VoIP calls more attractive to users who want to save money on long-distance calls while retaining the look and functionality of a traditional phone. (For a picture of the Philips phone, see the illustration "Philips VoIP Phone".)

To use either phone, the user connects the wireless base station to a public switched telephone network (PSTN) line and to a PC's USB port. Users can then place regular PSTN calls or use Windows Live Messenger 8 to make PC-to-PC calls for free, or PC-to-PSTN calls at rates starting at 2.3 cents (US) per minute. The Uniden WIN 1200 Digital Cordless Phone will be available in North America for US$100 in 2006; the Philips VOIP433 Dual Phone will ship in Europe, the Asia-Pacific region, and Latin America in spring 2006, and pricing will vary.

(The forthcoming Microsoft-MCI VoIP service is detailed in "MCI PC-to-Phone Service for Windows Live" on page 32 of the Jan. 2006 Update.)

New Media Center Partners

Microsoft and satellite TV provider DirecTV announced that future Media Center PCs will be able to act as DirecTV receivers. (Media Center is a remote-controllable interface in some editions of Windows that facilitates entertainment functions, such as recording TV shows or watching DVDs.) The DirecTV announcement fills in the final gap in Media Center's support for HDTV: Media Center can receive over-the-air HDTV today, and will support HDTV over digital cable later in 2006. (Media Center's forthcoming support for digital cable is described in "Digital Cable Coming to Media Center" on page 12 of the Jan. 2006 Update.) The companies did not say when DirecTV-enabled Media Centers will be available, but they will probably not emerge until Windows Vista is released in late 2006.

Microsoft also announced five new partners for the Media Center Spotlight, a screen within the Media Center interface that features downloadable Internet content, such as videos. The new partners include Comedy Central, GameTap (a subscription service from Turner Broadcasting with more than 300 games), MTV, and Showtime, bringing the total number of Spotlight sites to 13.

In addition, Microsoft and Intel used CES to highlight Intel's Viiv brand, which denotes a specific set of Intel-provided processors, chipsets, and networking functions that are integrated in home entertainment PCs. All current Viiv PCs run Media Center. However, Intel is also promoting Viiv to manufacturers of non-PC consumer devices, such as set-top boxes, and appears to be using the brand to establish itself as a home entertainment player.

Although Microsoft remained silent on the specific editions available for Windows Vista, it strongly hinted that there will not be a separate Media Center edition as there is with Windows XP. Rather, Media Center functionality will probably be one of several features used to differentiate high-end consumer versions of Vista from their less expensive siblings.

Windows Media Player 11

Windows Media Player 11 will ship with Windows Vista and be available as a download for Windows XP. The new Player offers incremental improvements, such as better search (with Vista), faster response time when scrolling through large libraries of content, and more prominent use of graphical elements, such as album art.

Microsoft and MTV also announced a new digital music subscription and download service called Urge that will be integrated into the new Media Player alongside existing partner services. However, the companies did not provide pricing or features, making it impossible to tell how Urge compares with existing services offered through the Media Player, such as MSN Music and Napster. All these services trail Apple's iTunes Music Store, and another entrant may further divide their small share of the market.

Vista Preview

In his keynote address, Microsoft Chairman and Chief Software Architect Bill Gates demonstrated some consumer-oriented features of Vista, including the following:

• Better local search capabilities, including the ability to find files based on their attributes (e.g., artist, author, date created) as well as their contents (e.g., text within a Word document)
• Gadgets, which are small programs that perform a single function (such as displaying RSS feeds or sports scores) and are accessible from the desktop
• A built-in digital photo library and photo editor; edits can be rolled back at any time in the future (Vista saves the original copy of the photo by default)
• New user interface features such as translucent windows and the ability to create a 3D stack of windows displaying the contents of all currently open programs.

While this was the most detailed public demonstration of Vista so far, most of these features had already been introduced at the Oct. 2005 Professional Developers Conference. (Apple and its fans have also pointed out that many of these features are already available in the latest version of OS X, the Macintosh's current OS.)

Mobile Devices

Mobile news at CES 2006 included Windows Media music downloads for Verizon phones, new Portable Media Center models, and Internet access for vehicles.

Verizon Music Service

Microsoft and Verizon announced V CAST, a service that will allow users to download songs to their Verizon phones and PCs. Operated by Verizon, the service uses a new Windows Media codec called Windows Media Audio (WMA) Pro, designed to compress files more efficiently for transmission to and storage on mobile phones. Songs downloaded to both a phone and PC will cost US$1.99, versus US$0.99 for PC only. Users will also be able to transfer their existing audio libraries to capable Verizon cell phones.

The V CAST service is more flexible than similar services. For example, Sprint's does not allow PC-to-phone transfers and costs US$2.50 per song, and the mobile version of Apple's iTunes software (currently available only on one Motorola phone) has a limit of 100 songs per phone, even though the phone has more storage space available. V CAST is also the first instance of a WMA-based service that doesn't require a PC at all.

However, V CAST works on only a small number of phones and plays only WMA files, forcing users to convert MP3 files with the Windows Media Player on their PC before transferring them to the phones.

Portable Media Centers

New models of Portable Media Center (PMC) devices are available from partners LG, Tatung, and Toshiba. PMCs are handheld devices capable of displaying photos and playing audio and video, and they use a Microsoft-designed interface that resembles the PC-based Media Center.

Online video provider Starz announced a new subscription-based video service, Vongo, that will let users download feature films and other video content to their PCs, then transfer these selections to their PMCs. The service will cost US$10 per month.

PMCs were introduced in fall 2004, but largely failed in the market and have since been upstaged by Apple's latest iPods (released in fall 2005), which added video playback capabilities; Apple also updated the iTunes Music Store to offer prime-time TV programs and other videos for US$1.99 apiece. The new class of PMCs, which are cheaper and more compact than most previous models, and the Vongo service, which addresses the lack of available video content, could help the PMC gain ground in this space.

MSN TV on the Road

Microsoft and KVH Industries announced a mobile Internet receiver with a customized version of the MSN TV service for use on the TV screens being built into many vehicles. The receiver uses the emerging EVDO (Evolution Data Optimized or Evolution Data Only) protocol, a high-bandwidth (3G) cellular data transfer protocol that offers typical speeds of 400 to 700Kbps. When EVDO is unavailable, the receiver will switch to the more common 1xRTT protocol, which offers speeds between 50 and 80Kbps.

The device's user interface is based on MSN TV 2 (the successor to Microsoft's Web TV service and receiver, which was introduced in fall 2004), and includes slimmed-down versions of Internet Explorer, the Windows Media Player, and the MSN Messenger client, as well as built-in links to MSN services such as MSNBC news, e-mail, and instant messaging.

The companies did not announce pricing, but the product could be prohibitively expensive. According to KVH, the target price for the device is less than US$1,000, with a monthly service fee (combining both EVDO and MSN TV 2 access) of less than US$100.

Home Devices

For the home, Microsoft announced better integration between DirecTV set-top boxes and a next-generation DVD drive for the Xbox.

DirecTV Deal

In addition to releasing Media Center PCs that can function as DirecTV receivers, Microsoft and DirecTV also promised to cooperate in several other areas, including the following:

• Future DirecTV set-top boxes will support the Windows Media Connect protocol, allowing users to connect them to a PC over a home network and then use the TV to access content from that PC, such as audio files and digital photos
• Some DirecTV boxes feature built-in digital video recording (DVR) capability; in the future, users will be able to stream recorded programs from those boxes to any Windows PC over a home network, or directly to a PMC device via a USB port
• The companies will work to integrate DirecTV and the Xbox 360 in unspecified ways; for example, users might be able to stream recorded TV content from a DirecTV DVR in one room to an Xbox 360 in another room over a home network.

Many details about the companies' agreement were left unstated: for example, it's unknown which DirecTV boxes will support PC-connected scenarios, when these boxes will be available, or what they will cost. Nonetheless, the agreement is interesting because it shows Microsoft's willingness to embrace stand-alone DVRs, rather than insisting that the Media Center PC be used for this function.

Xbox 360 HD DVD Drive

Microsoft will offer an add-on HD DVD drive for the Xbox 360 in 2006, allowing the console to play high-definition movies and interactive features on HD DVD disks. The move will help Xbox 360 remain competitive with Sony's forthcoming PlayStation 3, which will play high-definition disks in the competing Blu-ray format without needing an add-on.

The announcement was part of a larger effort by Microsoft to boost HD DVD: the company also highlighted a stand-alone player from Toshiba that will be available in spring 2006 for US$499, and reminded consumers that Vista will have native support for HD-DVD, but not Blu-ray. (The emerging format war is covered in "HD DVD Gets Microsoft Backing" on page 29 of the Nov. 2005 Update.)