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Lately it seems that every time some competition is gearing up to give Microsoft a real, honest-to-goodness run for their money, Bill pulls a rabbit out of a hat and makes it disappear. Yesterday he pulled a $450 million rabbit out of a black hat that sits on top of your television set.

In case you haven’t heard, Microsoft bought WebTV.

Although it seems like the perfect addition to Microsoft’s killer hardware business ($3 million per employee in revenues per year), WebTV doesn’t actually make hardware products. Instead, they license their reference specification to consumer electronics manufacturers with healthy economies of scale – like Philips Magnavox and Sony – and operate the WebTV Network, collecting recurring revenue from subscribers. Sales of the units, which appeared right around Christmas time last year, have been disappointing at best. But they’re still the only real game in town when it comes to hooking your television to the net.

Even though some may argue that WebTV is a stillborn platform, the acquisition comes at a time when Microsoft is firing on all cylinders. They didn’t buy the company for the 50,000 existing users, they bought it for the reference spec, and the right to define how the television and the Internet will eventually converge.

On its own, controlling the reference spec for a $300 consumer appliance doesn’t seem like much power. But when you already own so many different parts of the technology stream (the PC operating system, applications, development tools, server products, etc.), your power is obviously multiplied. Standards derived by standards bodies are one thing, but standards derived in the marketplace are another.

The name of the game here is “leverage.” And with this acquisition, Microsoft gets a whole truck load of leverage…

Windows CE

According to press releases, Microsoft is planning on integrating the Windows CE operating system into the WebTV box. Sure, people will complain about how their televisions never crashed before, but this is the part of the leverage strategy that will drive Larry Ellison and the NC proponents bonkers.

In my opinion, the diminutive version of the Windows operating system doesn’t cut the mustard on a handheld, where power, memory and connectivity resources create challenges for even the most creative PDA provider. But with Windows CE on the set-top box, we could end up with the $300 computer that for so long has been the Holy Grail of the industry. In addition to a mail client and a version of Internet Explorer, Windows CE already includes stripped down versions of Word, Excel and Schedule Plus. Add NetShow technology for streaming multimedia, and this could be something to write home about.

Oh, and don’t forget that the core Windows CE technology is being “beta tested” by all those folks forking over $500 for a Cassiopeia.

Broadcast Push

The announcement of the acquisition was made at the National Association of Broadcasters conference in Las Vegas, in conjunction with a host of other proposals for standards related to digital broadcast technology. The most significant of these is a way for broadcasters to use the Vertical Blanking Interval in broadcast television to interlace digital content using the IP Multicast protocol. Today, most push content on the Internet isn’t really “pushed” at all; rather, it’s just a bunch of scheduled individual pull sessions hogging network bandwidth. But imagine a WebTV box hooked to your television, taking digital push content (in the form of HTML or audio or video or plain old ASCII) from the cable TV network. If you want access to the rest of the Internet, you could wait until @Home finally gets their act together and you can get all your entertainment over the one coax line, or just plug a phone line into the box like you do today.

Internet Explorer 4.0

With the release of IE 4.0, Microsoft is poised to take the browser to the next level in content presentation. Last week in HotWired’s Webmonkey, Taylor fawned over the features in IE that will turn HTML into a true multimedia authoring system. The combination of cascading style sheets, absolute positioning, the “z-index,” and a scripting language makes the plain-old web browser the heir apparent to the world formerly dominated by Macromedia Director. It’s this kind of whiz-bang stuff that could make surfing on a television actually an enjoyable experience. Oh, and don’t forget those active frames on the Windows CE / WebTV “desktop” (memo to billg@microsoft.com – we may need a new metaphor here), the perfect receptacle for all of that content being vertically blanked at us over the television broadcast network.

Content, Content, Content

The acquisition also gives Microsoft the ability to leverage their efforts in the content production and distribution areas. Even with a revamped look and Internet focus, the Microsoft Network has been floundering as of late. And the rumored Compuserve / AOL acquisition talks only highlight the challenge that Microsoft faces in growing their subscriber base. An easy-to-use device like WebTV coupled with the Microsoft Network could be the perfect way to merge the two platforms. After all, MSN is already organized around a “channel” and “show” metaphor.

As for the combination of broadcast television and multicasted content, MSNBC is the perfect petri dish: deep corporate pockets willing to invest in convergence, content rich with hypertextual possibilities (“click here to see the Heaven’s Gate website”), and a brand new production studio in lovely Secaucus, New Jersey.

The immediate challenge for Microsoft will be to boost the disappointing sales figures of WebTV. The Microsoft brand will certainly help in this regard, but consumer confusion over what the machine actually does could hinder their efforts. According to a recent story in Computer Retail Week, some consumer electronics sales people are using the idea of WebTV to merely entice people to buy full-fledged PCs. “We use [WebTV] to sell up. People come in and look at it, and we tell them all the things it can’t do, and they wind up buying a computer,” said Doug Powell, a computer sales associate in Albuquerque, New Mexico.

Of course, this could end up being a good problem for Microsoft to have…