Microsoft seen missing key test on interactive TV

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LONDON/AMSTERDAM (Reuters) -- U.S. software maker Microsoft Corp. is expected to miss the September deadline for its high profile European introduction of TV software, sources familiar with the situation said on Friday.

The delay would force Microsoft's first customer, Europe's largest cable TV operator, United Pan-Europe Communications NV, to introduce its digital set-top boxes with only bare-bones functionality.

"It's very much possible that the first set-top boxes will not have the Microsoft software," one source told Reuters.

Pushing back the introduction would impede sales of the interactive television system heading into the end-of-year holiday season, the biggest selling season for such consumer items.

A Microsoft spokesman declined comment on whether it would meet the long-awaited deadline. But European Internet business group manager Harko Enting added that Microsoft had a "Plan B" ready which would allow UPC to go ahead with the roll-out.

"In the back-up plan we will provide a minimum of software, and we will download the interactive software to the set-top boxes at a later stage," Enting said.

The basic software would include TV-broadcast tuning and one or two additional functions such as a Web browser or an electronic program guide.

But the first set-top boxes would lack more than a dozen interactive services UPC had asked for, such as integrated video recording that moves beyond mere videocassettes, voice communications or movies-on-demand.

"But at least UPC can go ahead with the launch," he said.

The cable company declined to say whether Microsoft would miss the deadline, but said in a statement made available to Reuters that "the set top computer is software upgradable." When new software becomes available it will be downloaded to subscribers without needing a technician to go to the home.

UPC emphasized that the introduction of the set-top boxes is still planned for the end of September.

The company is expected to make a statement about its set-top box struggles when it publishes second quarter results on Tuesday.

Industry sources told Reuters that UPC developers have threatened to throw in the towel in the past months because of problems with Microsoft's software. The cable company had considered switching to software from Microsoft rivals, they added.

The problems with the set-top boxes caused concern among analysts who point out that UPC's high stock market valuation of nearly 12 billion euros (U.S. $10.9 billion) is only based on the assumption it will sell additional services through the digital set-top box.

A delay in rolling out these services will mean UPC will take longer to generate additional revenues. "The market is pretty unforgiving. (If the roll-out of the set-top boxes is delayed) it could knock off quite a bit off the share price," said analyst Bert Siebrand at SNS Securities.

UPC had previously said it would distribute 30,000 set-top boxes before the end of the year. The launch was expected to establish Microsoft as a top provider of software for next generation television, in which program guides, Internet and video-on-demand would be seamlessly integrated with mainstream broadcasting.

Chase H&Q analyst Peter Misek said Microsoft's software was state-of-the-art, but warned: "I would be very surprised if (UPC) doesn't keep its schedule for the wholesale roll-out."

The software is being developed by UPC's eight percent shareholder Microsoft in a joint research centre near UPC's Amsterdam headquarters.

But despite working around the clock, the development team was unlikely to make the software available in time, sources told Reuters.

"Microsoft has not been used in a roll-out yet," said one industry source. "The software is just not ready."

However, a premature introduction of software that is not ready could be even more harmful, especially when given to computer-illiterate TV viewers who are not ready for reboots or "fatal" computer errors.

"Long term a delay of three months will have no effect," said SNS analyst Siebrand. "They should take their time and get it right," he added.

Microsoft is already under fire from rival interactive software developers, such as OpenTV and Liberate, which accuse Microsoft of using its checkbook to buy into the interactive TV market after it took stakes in several European cable companies.

OpenTV has a foot in the door at UPC, as it is working with cable companies part owned by UPC.

Philips and Motorola will produce UPC's set-top boxes. Philips, which will produce 250,000 UPC boxes in the next 12 months, said it would deliver on schedule.

UPC is 51 percent owned by UnitedGlobalCom.

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