From 9/12/97 IHT but this edit from NYT site

Microsoft Faces Challenge on Internet-

Cable TV Link


LOS ANGELES -- A powerful team of companies is mounting a direct challenge to a plan by Microsoft chairman Bill Gates to use cable television to dominate the Internet.

While more attention has focused on Gates' big financial bet on blending the two technologies, key members of the cable industry have been developing a system that may bring the Internet to millions of TV households far more quickly than Gates has envisioned -- and at lower prices.

"If they pull this off, they will blow apart the current Internet price curve and change Internet culture at the same time," said Andy Sernovitz, president of the Association for Interactive Media, a Washington-based trade association.

It is no secret why so many big players are angling to tap the rich information of the Internet and make it accessible to the portion of the population that is not computer literate. Only about 40 percent of American households have personal computers, but approximately 65 percent of the nation's households have cable TV. The blending of the Internet and television advertising also holds out a potential huge source of new revenue.

The cable industry's new strategy has been developed by a small start-up company, Worldgate Communications of Bensalem, Pa., but includes a number of big backers. In a symposium held here today and attended by Hollywood producers, television executives and the advertising industry, Worldgate, which has backing from two big makers of cable television equipment -- Nextlevel Systems and Scientific-Atlanta -- sketched its plans.

Other backers include Citicorp and the computer chip and cellular phone maker Motorola, as well as cable system operators and major advertising agencies. Several industry executives said that Worldgate had also recently closed a deal with @Home, a Silicon Valley company that is already developing a national Internet-access network for cable systems. Worldgate and @Home executives, however, declined to comment. Worldgate has raised $11 million and is now seeking additional private investors.

The system as envisioned by Worldgate would be faster, cheaper and less demanding of the consumer than Microsoft's current capabilities. At a suggested retail monthly fee of $12 or lower, Worldgate plans within a few weeks to begin offering Internet service through a set-top cable convertor box, the existing TV set and a remote control. A wireless keyboard would be optional.

The service will be offered first in a Philadelphia suburb and in St. Louis, with other cable companies and cities to be added in the next year.

The assumption is that the cable company would provide the convertor box as part of normal service. The customer would not need a PC or any additional equipment -- unlike Microsoft's Web TV service, which requires the user to buy a special $200 set-top device and pay a monthly fee of $20.

Moreover, Worldgate's service would offer data speeds of 192,000 bits a second -- four times faster that the fastest modem connections over conventional telephone lines, which is the way most home PC and Web TV users reach the Internet.

"Worldgate is Web TV and Microsoft's worst nightmare," said Richard Doherty, president of Envisioneering Inc., a consulting firm in Seaford, N.Y.

"They have the cheapest cost of infrastructure, and they can switch the Internet on for more Americans than anyone in the country."

Microsoft is not standing still, however. Its Web TV subsidiary is scheduled to make an announcement about a new generation of technology next week in New York.

And Steve Perlman, president of Web TV Networks, which Microsoft acquired for $425 million earlier this year, said that Worldgate was understating the real cost to consumers of its system and overstating how quickly local cable systems would be upgraded for interactive service.

"Cable operators are upgrading, but to think that this will happen overnight is wishful thinking," he said.

Currently, a few cable television companies in selected metropolitan markets offer high-speed Internet access to PC users over special cable modems. But unlike PC cable modems, which compete with conventional video programming for the cable system's carrying capacity, Worldgate's approach would employ a largely unused portion of the video spectrum called the vertical blanking interval. That means that a cable system will be able to continue to deliver all of its existing channels.

And unlike Web TV's technology, which amounts to a television set-top computer, virtually no computing takes place in the consumer's set-top box in Worldgate's system. Instead, the processing occurs at the cable operator's site. Only a relatively compact video stream is sent down to the home and only simple commands or keystrokes are sent back upstream.

"We thought, 'Why put the computer in the home?' " said Worldgate founder and chief executive Hal Krisbergh, who ran the cable business of Nextlevel -- the former General Instrument Corp. -- for a decade. "We realized if we did this we could offer very broad access."

Krisbergh acknowledged that the system would raise thorny privacy issues because Worldgate could closely link advertisers with the TV viewing and Internet browsing habits of users. "We know everything," he said. "We have to be very careful how we use this information."

For all his optimism about Worldgate's prospects, Krisbergh acknowledged that Gates remained a daunting competitor, given Microsoft's formidable marketing and technology skills.

"I feel like I'm in the swimming pool," he said, "and there's this big dorsal fin in here with me."

Copyright 1997 The New York Times Company