CES Notebook: Gates Still a Gladiator

Microsoft won't back down from its digital living room foray.
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Editor's Note: Senior writer Troy Wolverton is attending the Consumer Electronics Show in Las Vegas. He is keeping a journal noting some of the convention's highlights.

LAS VEGAS --

Microsoft

(MSFT) - Get Report

may have little to show for investments made outside of core businesses such as operating systems and office software, but if Chairman Bill Gates' speech here Wednesday night is any indication, the software giant remains as ambitious as ever.

Gates laid out a vision of a digital lifestyle in which "the magic of software" -- presumably the company's own software -- will allow access to personal information and media just about anywhere on a wide range of devices, including large glass panel displays and touch screens.

This vision isn't going to happen overnight but will be available by the end of the decade, Gates predicted. Programs that manage digital music and help people navigate television schedules and record shows are the first examples of the big changes that are coming, he said.

"All of this is becoming very mainstream," Gates said. "Software will come in, make things both simpler and more effective."

Of course, given that this is Microsoft, the company's Windows platform is central to the vision. Gates and other company representatives touted the variety of devices now running versions of Windows or related software, from tablet PCs to relatively simple cordless phones. They also gave the audience a preview of Windows Vista, the next release of the company's operating system that is slated to debut toward the end of this year.

Some analysts have been skeptical of how well Vista will be received in the marketplace, because it is missing some key technologies that Microsoft originally planned to incorporate, including a revamped file system. But the presentation, as might be expected, didn't dwell on what's been left out.

This being Microsoft, the company also has felt free to incorporate features already found on

Apple Computer's

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rival Mac OS X operating system. One such features is a search bar that will return immediate results.

Another is a feature called sidebar, which will allow users to run a series of small programs that give things such as sports scores or up-to-date news headlines. The feature is remarkably similar to the widgets feature that Apple built into the latest version of its operating system.

However, one of the new things about Vista is that laptop users running the operating system will be able to access the sidebar programs via a small LCD screen on the outside of their computers without actually booting them up.

The Vista preview was certainly a main focus for Gates, but he and other representatives touted the company's success beyond the world of traditional PCs. Gates noted that 100 smart phones are now running the company's Windows Mobile operating system, and predicted that 5 million phones will be shipped with the software this year. That's a drop in the bucket in the overall mobile-phone market, but that number of shipments would represent 36% year-over-year growth, Gates said.

Likewise, he argued, the company is starting to see some success in the living room with its Media Center PC initiative. Although critics have argued that the company has seen little success with Media Center to date, Gates argued that it is starting to get traction in the marketplace. The company has now sold 6 million copies of the Media Center software, up from just 1.5 million a year ago, he said.

"Those are big numbers. Most pieces of software don't ship anywhere near that," he said.

The other big living room effort from Microsoft is its Xbox 360 game console. During Gates' presentation, Peter Moore, Microsoft's vice president in charge of its games business,

gave an update on the new game system, which Microsoft launched in November.

Left unsaid was how many systems the company has shipped to date and why it apparently had such a difficult time meeting demand for the device over the crucial holiday season. Video-game industry heavyweights such as

Electronic Arts

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and

Activision

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have warned of disappointing holiday results thanks in part to the paucity of Xbox 360s on store shelves.

Microsoft, of course, isn't the only company with ambitious plans to be at the center of the digital living room. As was the case last year, Gates' keynote was immediately preceded by a press conference from

Sony

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, in which the consumer electronics giant laid out its own plans for the year ahead.

Among the new digital televisions and camcorders and the like, company representatives highlighted two new features for its PlayStation Portable, the handheld gaming system that Sony debuted in the U.S. last year. Despite

indications of somewhat disappointing sales to date, the features indicate that Sony continues to have high ambitions for the PSP.

Starting in March, Sony's digital music store, dubbed Connect, will begin selling feature-length movies and television shows, according to John Koller, a senior product manager at Sony Computer Entertainment. The plan is for PSP users to be able to buy and download the video content through the Connect service, Koller said.

The new video service -- and its link to the PSP -- appears remarkably similar to what Apple

introduced this past fall for its iTunes store. Customers of iTunes can download episodes of a number of current television shows and

Pixar

(PIXR)

short films and transfer them to video-playing iPods.

Koller didn't know how much Sony plans to charge for the videos or how many or what types of videos will be available on Connect.

In addition to the video download for the PSP, Koller also touted a recent update to the device that allows users to link it to Sony's LocationFree system. Similar to

Sling Media's

Slingbox, LocationFree allows users to watch video recorded at their home remotely via Internet-connected portable devices. Thanks to a recent software upgrade to the PSP, users can now view streamed television shows and movies on their PSPs at wireless "hotspots."

Interestingly, Koller gave his presentation at the "PlayStation 3 pavilion" but said nothing about the upcoming game console, which Sony plans to release this spring and, with its ability to play digital music and movies, represents the company's own effort to be a part of the digital living room.

Amazon.com

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may be best known as an online bookstore, but the company is becoming a significant vendor of consumer electronics as well. Amazon doesn't break out its electronics sales, but the business segment made up chiefly of consumer electronics has posted more than $2 billion in sales over the last 12 months.

Prior to Sony's press conference I talked with Frank Sadowski, Amazon's vice president in charge of global consumer electronics vendor management, about the company's consumer electronics business. Among the highlights of our conversation:

Amazon's three fastest-growing electronics categories are LCD flat-panel televisions, MP3 players and digital cameras.

Apple's iPods not only represent the "dominant" share of MP3 players sold on Amazon, but also the fastest-growing line of players. Although Sadowski declined to give any market-share figures, he did say that non-iPod players do represent a "significant" portion of Amazon's MP3 business.

Sales of digital music players exploded this past year, rising more than 200%, according to the Consumer Electronics Association. But Sadowski doesn't expect that growth to slow muchthis year. Indeed, he predicts at least two more years of "explosive" growth in the MP3 player market.

Sadowski expects the flat-screen TV business to become increasingly difficult for retailers in the next year. With retail prices on the devices continuing to fall, retailers are going to be struggling to maintain profits on them. Fortunately for retailers, wholesale prices are falling as well, which should give them some cushion, he said.

Another category likely to be a hit this year are high-definition digital camcorders, Sadowski predicted. Not only are a growing number of them available on the market, but prices are starting to drop to the point where they'll attract a wider audience. That audience is starting to want digital camcorders that can take advantage of the growing number of widescreen and high-definition displays and high-powered sound systems, he said.

One complaint voiced about online electronics retailers is that they are heavily dependent on brick-and-mortar rivals, whose stores customers treat as showrooms for the online vendors. But Sadowski argued that the relationship is symbiotic, noting data that indicate that a good deal of offline purchases are prompted by online research.

Amazon investors have for years groused about the electronics business, charging that it was bringing down the company's bottom line. Sadowski declined to say whether the electronics business is profitable these days, but said that Amazon expects it to be. Amazon's electronics business is getting so big that the company as a whole can't be profitable unless the electronics business is, he said.