WebTV Networks

Founded by Steve Perlman in 1995, WebTV Networks began life as Artemis Research. Perlman brought along co-founders Bruce Leak and Phil Goldman shortly after conceiving the basic concept.

Artemis Research hired many engineers and a few business development types early on, having about 30 employees by October 1995. The company kept a low profile and operated "under the radar" by not disclosing its projects or plans. In fact, the first web site for Artemis stated that the company was focused on sleep deprivation research involving rabbits.

The sleep deprived engineers found this funny as Phil Goldman's pet rabbit (inspiration for the General Magic logo) was often found roaming the building as late into the night as they were. However, many animal activists were not in on the joke and took offense to the website.

The Concept

As Perlman tells the story, he was watching television one evening and saw a commercial that ended by displaying the web site address for the company. He often recalls this as a Campbell's Soup advertisement. He was wondering exactly why Campbell's Soup would provide a web address for a telelvision audience that (most likely) was neither interested in eating soup at the moment nor likely to be driven to the web at that precise moment.

It occurred to Perlman that if the television audience were enabled by a device to augment television viewing with receiving information or commercial offers through the television, then perhaps the web address could act as a signal and the television cable could be the conduit. Thus, the basic idea for WebTV was hatched: a happy marriage of the Worldwide Web with television.

The Launch

By the spring of 1996, WebTV Networks employed approximately 70 people, many of whom were finishing their senior year at nearby Stanford University, or were former employees of either Apple Computer or General Magic. They were desperate to obtain business deals with either Sony or Philips in order to have a product on the store shelves for Christmas 1996. However, it wasn't until they told Sony that there was a deal with Philips that Sony came back to the discussion and asked to be part of the platform. As a result, the company offered the complete package (service and box) on September 18th, 1996 to the US-based market.

That first holiday selling season, the company garnered approximately 12,000 subscribers. That number grew to 35,000 by Easter, and more than 150,000 by autumn 1997. AOL claimed that a huge percentage of its traffic was suddenly coming from WebTV customers. At that rate, it was the second most successful launch of a new consumer electronics product category (behind digital satellite television).

The initial price for the box was about US$325, with the wireless keyboard for an extra US$100. There was absolutely no difference between the Sony and the Philips box except for the housing and packaging. In fact, WebTV manufacturered the boxes for both companies through a local electronics contractor.

The monthly service fee was about US$20 for unlimited on-line usage and up to six e-mail addresses. The box included a 56K modem which was used to connect to the WebTV Service, no hard drive, and only 8MB of RAM. The MIDI musical instrument library was supplied by Beatnik, a company founded by New Wave music icon Thomas Dolby and fit within 128KB.

Big Surprise: Microsoft Takes Notice

In September 1996, Perlman stood on a chair at a company lunch celebrating the launch of the backend service software. In his typical energetic style, he promised the 120 employees that WebTV would be the biggest success ever, and that they would never have to fear that Microsoft would buy the company and ruin it because he, Leak and Goldman had agreed that they would never sell the company to Microsoft.

In April 1997, at another company meeting, Perlman announced to a shocked room of 250 employees that the three founders and the investors had agreed to sell the company to Microsoft. Bill Gates told an audience at NAB in Las Vegas the same news and received the same dumbfounded response.

Of the three, Bruce Leak was given credit for having worked the deal.

According to SEC filings, by that time, Perlman had 7 million shares of the company while his two co-founders had 4 million shares each. For some reason, this was redistributed in time for the Microsoft deal so that they each had 5 million shares.

Microsoft offered about US$12 per share for the privately held company. In order to convince the employees (especially the engineering team, of which the Microsoft deal required 80% to remain) to sign up for the new owner, the founders realized that they needed to sweeten the deal, and thus gave up some of their stock to raise the effective price for employee shares to about US$18. Even still, many engineers privately fumed, publicly protested, stalled on projects and discussed mutiny. For many, this marked a turning point in their ability to trust the three founders.

The deal was challenged by Sun Microsystems and others. In August 1997, the DOJ cleared the acquisition and WebTV Networks became a wholly owned subsidiary of Microsoft. There were about 22 new millionaires created at that moment, though most would lose that status as soon as they paid their taxes.

More information on WebTV should be published as part of MSN TV.