Set-Top Software Rivals Target Different Niches

Liberate Technologies, the bright comet that flared across
the set-top-box software world last year, is kicking up more sparks in 2000.

Last week, on the heels of its Jan. 13 acquisition of
Source Media Inc.'s "VirtualModem" technology, Liberate announced that Canada's
Shaw Communications Inc., a Liberate investor, will deploy its software for interactive-TV

The Calgary, Alberta-based MSO plans to make interactive
services available to more than 300,000 subscribers in the second half of this year.

Liberate's announcements coincided with news from both
PowerTV Inc. and Microsoft Corp. as the set-top-box software sector enters a crucial
period of development.

Venerable set-top-box operating-system maker and
Scientific-Atlanta Inc. subsidiary PowerTV said Jan. 12 that it was integrating Sun
Microsystems Inc.'s "PersonalJava" into its platform.

And entertainment-on-demand and interactive developer
Intertainer Inc. was named the first company to offer a PersonalJava-enabled service on
the PowerTV platform.

Overshadowing the news, though, was revived speculation
that PowerTV would be spun off from S-A, allowing PowerTV to compete in set-top platforms
outside of S-A's.

Officially, S-A and PowerTV are mum on any plans to spin
off PowerTV, citing a quiet period in anticipation of an earnings report due this week.
"PowerTV's board has not yet approved an IPO [initial public offering]," an S-A
official said on condition of anonymity.

S-A has told analysts that it could take PowerTV public
this year.

Meanwhile, at the recent Consumer Electronics Show,
Microsoft Corp. outlined a new version of its "Windows CE" OS. According to Alan
Yates, director of TV-platform marketing for Microsoft's WebTV Networks division, a few of
the new enhancements to WinCE will make their way into "Microsoft TV," the
company's set-top client/server platform.

These software makers are positioning themselves for what
is expected to be an eventful year.

"We think this year is a breakout year for advanced-TV
and interactive services," Yates said, adding that he expects AT&T Broadband
& Internet Services to roll out set-tops equipped with Microsoft TV client software
sometime this year.

With Liberate staking new ground following a wildly
successful IPO last year, giving it a market capitalization of more than $7.5 billion,
PowerTV is assuredly looking at what a comparable war chest could mean for extending its
products beyond the S-A hardware platform.

"PowerTV has to get over the hurdle of being owned by
a set-top-box company," said Gerry Kaufhold, principal analyst with research firm
Cahners In-Stat Group (a sister company to Multichannel News).

While several high-profile agreements have been announced
between cable operators and software companies, including Microsoft's $5 billion
investment in AT&T Corp., the playing field for set-top software -- especially the
middleware layer that resides between the OS and specific applications -- is still wide

As Michael Adams, principle network architect for Time
Warner Cable, pointed out, a middleware layer that can run several applications on
multiple set-top boxes/digital-ready TVs and future iterations of those devices is a
crucial component of digital-services implementation.

Time Warner, he added, is still evaluating several
middleware layers to run on its digital boxes, but it has yet to choose one.

Formed in 1994 with seed money from S-A, which remains an
80 percent stakeholder, PowerTV boasts an installed base of more than 1 million set-tops
using its OS. But it has not been able to capture market share outside of S-A set-top

PowerTV has ported its OS to work with Pioneer New Media
Technologies Inc.'s "Passport" program guide, though, and it is working with
Pace Micro Technology plc in its U.S. deployments, chief operating officer Bow Rodgers

Those relationships pale in comparison with Liberate's long
list of business deals.

While Liberate technically offers application software, as
opposed to an OS, PowerTV is positioning itself to "providing the entire software
stack," including OS and middleware, Rodgers said.

He emphasized PowerTV's use of "Java," HTML
(HyperText Markup Language), "JavaScript" and PersonalJava to offer flexibility
to application developers and network operators alike. PowerTV offers a suite of
applications for its platform, including e-mail and Web browsing.

With VirtualModem, Liberate will be able to offer a much
thinner client than its "TV Navigator" client for Motorola Inc.'s General
Instrument Corp. "DCT-2000" and "DCT-1200" set-tops, Liberate vice
president of marketing Charlie Tritschler said.

"We really wanted to take advantage of the platform
out there today," he said, noting that there are 4.5 million DCT-1200 and DCT-2000
boxes in the field.

Microsoft, meanwhile, has targeted the upcoming advanced
digital set-top for Microsoft TV, which Yates said will include components of the new
version of WinCE that relate to TV devices.

For example, "DirectX," Microsoft's graphics
technology, will make its way into Microsoft TV. DirectX "supports a much more
flexible and rich graphics environment for TV display," Yates said.

This year will be key for Microsoft as it expects AT&T
Broadband and Canada's Rogers Communications Inc. -- in which Microsoft owns stakes -- to
begin rollouts of advanced digital set-tops with Microsoft client software installed in
some configuration.

Yates called those rollouts "North American
showcases" for Microsoft TV technology. "We expect many more network operators
to jump on the bandwagon," he added.

While Microsoft's software has yet to take to the field in
a set-top, Yates pointed to the company's experience in platform development.

"People tend to overlook how complex it is to fully
support a platform," he said. This includes ensuring backward compatibility, scaling
to high volumes and supporting peripheral devices, such as printers, DVD players and hard

"We understand the platform business, and we know how
to bring it to a mass-market consumer scale," he said, adding that future versions of
Microsoft TV will feature real-time performance guarantees and TV connectivity to home

Whether or not cable operators buy into a single vendor for
OS and middleware software on advanced digital set-top boxes remains to be seen.

Kaufhold said In-Stat has been asked by its clients to
project what the set-top box will look like in 2002. "We're still trying to figure it
out," he added.

Kaufhold and the industry may not have to wait long, as
operators such as Time Warner are reaching critical masses of installed digital set-tops.
"Things are happening more quickly than we thought," Adams said.

Working quietly behind the quickly unfolding events is
Cable Television Laboratories Inc.'s OpenCable project, a fast-track effort to establish
standards for interoperable set-top boxes.

CableLabs accepted more than one-dozen requests for
proposals for the middleware component of set-top software last year, indicating that the
level of interest by software companies is intense. "The real money is in
middleware," Kaufhold said.