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Technology Stocks : Gemstar Intl (GMST)

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To: pompsander who wrote (6488)2/4/2005 7:55:10 AM
From: John Hayman   of 6516
snip> cable providers are unlikely to switch entirely to Microsoft's television software, preferring to maintain both Microsoft and Gemstar-TV Guide International as strong competitors in that market. <snip

Microsoft Shows Initiative ; Array of New Products Demonstrates Commitment to Multimedia Markets

Microsoft Corp. spent this week displaying technology to improve how people watch TV, access movies, listen to music, play video games, view photos, navigate their cars, use their watches and wake up in the morning.

But that dizzying array of consumer initiatives is also meant to improve something else - Microsoft's own long-term growth prospects.

Thirty years after its founding, the software company best known for an operating system and a productivity suite is turning more and more to the flashy world of consumer electronics. The effort reflects pressure to continue posting strong revenue growth even as the company moves into corporate middle age.

Microsoft's consumer initiatives are not a new effort, by any means. But the breadth of Microsoft-related products at this week's Consumer Electronics Show in Las Vegas suggests that the company's ambitions in the market are bigger than ever.

Those products include some that most people probably wouldn't expect to contain Microsoft technology, such as wide-screen televisions from Digitrex and a combination digital video recorder and DVD player/recorder from LG Electronics.

Microsoft also showed alarm clocks from MZ Berger and Oregon Scientific that will display the weather forecast, using the same FM radio-based technology in Microsoft's previously released smart watches.

"We're probably developing software for a wider range of hardware than any company," Bill Gates, Microsoft's chairman and chief software architect, said during his appearance at the trade show this week.

People at Microsoft say the continuing expansion into consumer electronics results in part from a desire to apply their technological expertise to digital media, communications and other situations people encounter in their everyday lives.

At the same time, it reflects the vast market potential represented by consumer electronics.

"If you're Steve Ballmer, your biggest challenge is growing revenue, and for that you need big markets," said Ted Schadler, Forrester Research principal analyst, referring to the Microsoft chief executive. "The living room is a big market. Even a 1 percent share of that market is big enough for Microsoft to be interested in."

Microsoft is projecting revenue growth of 5 percent to 6 percent for its current fiscal year, down from the 14 percent growth it posted last fiscal year. The consumer electronics market in the United States alone is expected to approach $126 billion in 2005, an 11 percent increase over 2004, the Consumer Electronics Association says.

"It's a huge potential market," said Aaron Woodman, program manager in Microsoft's consumer strategy group, which coordinates consumer-related initiatives across the company's seven divisions. "There are dollars to be had there. We think it's going to be a great business."

But so far, from a financial standpoint, Microsoft's consumer initiatives are still works in progress. The profitable Microsoft divisions responsible for the company's more traditional businesses, Windows for PCs and Microsoft Office, brought in more than $22 billion in revenue last fiscal year, significantly more than half the company's total revenue.

In contrast, the company's MSN, Mobile and Embedded Devices, and Home and Entertainment divisions posted a combined $5.3 billion in revenue during the same time period. The latter two of those divisions haven't yet become profitable.

The centerpiece of Microsoft's bid for the living room is the Windows Media Center PC, a remote-controlled computer that can be used to watch and record television and other media. More than 1.4 million of the machines have been sold since its 2002 launch, the company said this week. But that remains a small fraction of the overall PC market.

Even as it expands more into consumer electronics, the company is maintaining close ties to the personal computer. It offers various technologies, for example, that let people use the PC as a hub for storing media content from stand-alone devices.

"The PC is already part of the home ecosystem. There's a natural migration for the personal computer to become part of the emerging home-media ecosystem," said Pat Griffis, Microsoft's director of worldwide media standards, during a exposition panel discussion yesterday about the battle for the digital home.

But the company's dominance of personal computer software also makes some in the consumer electronics industry wary of giving it even more power. For example, industry analysts say
In addition, Microsoft faces some of the same challenges in consumer electronics as it does in personal computers and computer servers.

For example, Hewlett-Packard this week showed a new HP Media Hub running on the open-source Linux operating system. The move was notable in part because HP sells more Windows Media Center PCs than any other computer maker does. Linux is a growing threat to Microsoft in the market for personal computers and computer servers.

As Microsoft expands from the PC into home electronics, the company's legacy also comes with it - for better or worse. At Gates' standing-room-only appearance at the Consumer Electronics Show this week, a video-game machine crashed during a demonstration of a game, displaying the "blue screen of death" familiar to many longtime Windows users.

A similar theme arose yesterday, during the show's panel discussion on the digital home.

At one point, Philips Semiconductors President and Chief Executive Frans van Houten called on the industry to come up with ways to make devices from many different manufacturers work more seamlessly together.

"We have that - it's called Windows," said Microsoft's Griffis.

Van Houten was quick to respond. No one, he said, wants to be sitting on their couch enjoying a show only to suddenly find themselves watching "that blue screen."
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