Microsoft began peddling its IPTV software for set-top boxes in 2004 and signed up primarily telephone companies for trials in 2005. This year AT&T ( T) and Verizon ( VZ) plan to roll it out commercially, Gates said earlier at the Consumer Electronics Show (CES) held earlier this month in Las Vegas.

Adoption of IPTV is catching on in places such as Hong Kong, where a majority of consumers weren't getting cable or satellite before IPTV came in, says Media Research Group senior analyst Bob Larribeau.

By contrast, the U.S. is a saturated paid TV market, with about 80% of households subscribing to satellite or cable, he says. Cable companies aren't flocking to Microsoft's IPTV service because they're afraid of Microsoft strong-arming the user experience as it's done on the PC, and they want as much as of the tens of billions of dollars they spent on their current networks as possible.

AT&T and Verizon, however, are jumping on the bandwagon, looking for new revenue to supplant their maturing wireline businesses. "The DSL guys have all the motivation in the world to innovate because telephony is being absolutely destroyed by Internet phones and cell phones," Perlman says. "It's do-or-die for them at this point."

Cost and easier connectivity to other devices than cable or satellite TV will be major factors in wooing consumers to IPTV, says analyst Kurt Scherf of research firm Parks Associates.

"Microsoft's advantage is it sits on 90%-plus of computers," Scherf says. "Bring in the game-console platform, and all of a sudden you get a network where the PC talks to the set-top box and the console." In addition to competition in the IPTV arena from Siemens ( SI), as well as smaller pure-plays such as SeaChange International ( SEAC), industry observers say other tech bigwigs are poised to enter the fray.

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