What made WebTV possible

The patented technology that was at the core of WebTV’s offering was the ability to display de-interlace the video feed and send a progressive scan signal to a television set. Steve Perlman had learned a lot about working with video signals during his time at Apple. He was the one responsible for developing the technology that brought color to the Macintosh as well as the Quicktime video format. After he left Apple, Perlman did a startup that developed a modem to link Sega game systems over a phone line so players could play each other remotely. The technology worked but the business was a lukewarm success and after a few years of exhaustive work, Perlman was looking for the next thing. He discovered the web and saw an impedance mismatch with the technical barrier of needing a computer to access web sites. He set out with the vision to make the web accessible to non-technical folks via TV.

We saw the same mismatch with Open Source. You have this vast pool of powerful applications out there but the great majority require technical knowledge in order to use them. Like the web sites full of valuable content that were inaccessible to 95% of the population back in ‘97, we see Open Source as a largely-inaccessible territory for many non-technical people. JumpBox aims to do for Open Source what WebTV did for the Internet- expose it via a simple interface so that non-technical people can appreciate the benefits of these applications which have previously only been available to computer-savvy people.

It was 1995 and Perlman went on one of his three-day non-stop working binges and developed a prototype that could display the visual output from a computer on a television. He showed it to his buddy Bruce Leak, who was a former colleague from Apple, and they knew they were onto something big. They had ties to a money guy named Marvin Davis, an investor for whom they had made a ton of money on a previous startup called Catapult Entertainment. They contacted Marvin and raised $1.5MM and went out and secured office space in an old BMW dealership in Palo Alto. It was a classic scene trying to order bandwidth - their ISP thought it was a practical joke because there was no reason a car dealership needed the kind of bandwidth they were asking for. They started hiring, building out the product and courting manufacturers like Sony and Phillips.

“You go first”

With a team of thirty employees they had a significant burn rate and got squeezed when the second half of their funding was withheld out of skepticism. They had a letter of intent from Sony on a 1yr exclusive manufacturing contract and all the investors they spoke with were interested but nobody wanted to take the first risk. Perlman drained his personal bank account, liquidated all his assets and went all in to keep the company breathing during this time. They were days away from completing a deal with a semiconductor company for investment and were getting bullied with a clause in the contract that would have forced them to exclusively source the chips via the semiconductor. It was a frustrating arrangement and Perlman made the decision to walk because that arrangement would have locked them into a single provider and surrendered the ability to get competitive pricing for a core component of their offering.

Talks with VC’s weren’t going any better. They were skeptical on the adoption of the technology- they felt people wouldn’t want to interact with their TV in this way. Perlman said, “We found that nobody was willing to make that first step. In fact, I think a lot of them were sort of like vultures waiting for us to fail, and then pick up the pieces- because they saw the value of what we were doing for a bargain.” They finally found a VC firm that was prepared to go in for $4.5MM but days before the deal was to close, they received a letter from Sony saying the deal was off. Given that it was 1yr exclusive arrangement WebTV hadn’t pursued any other manufacturers. It was an ugly day and they had to disclose this development to the VC, Jeff Brody. He could have walked away from the deal but instead said, “I believe in you guys, and I think this is going to make it. We’ll still go forward on the same terms.” That ounce of faith was a pivotal moment for the company - another VC followed suit and matched the investment to make a $9MM round.

The midnight run

Things began to fall into place after that. Phillips came back and wanted to do a deal. WebTV hired a consultant who was a personal friend of the CEO for Sony and he revived talks with them to determine why the deal had fallen through. Sony immediately dispatched their CTO to the WebTV offices and suddenly they had to scramble to get the unit in a working condition. The way they developed they had to compile a build and the version they had was completely untested at the time. With only 2 1/2 hrs until the Sony CTO landed they had no choice but to roll the dice with the version they had and hope it worked. Fortunately it happened to be a good build and the demo went off flawlessly. It earned them a subsequent demo with the CEO of Sony and they won him over by doing some last-minute development to make a version of WebTV that could display Japanese web pages.

They inked a deal with Sony but couldn’t promise exclusivity because they were already working with Philips. So the situation actually worked in their favor in the end giving them distribution through two powerful electronics manufacturers. They went back and raised a series C round for $35MM and cranked out a product. Nearly one year to the day of their first angel investment they were selling a working product. The WebTV product solved network challenges of having presence of a local ISP in every city, translating the http content to a format that was viewable on a smaller screen, making an interface that catered to non-technical users and fixing the video signal to display properly on a TV - there was a ton of technical magic that went into delivering the experience.

Politics

In April of 1997 Microsoft acquired WebTV for $425MM in cash and stock. It was arguably a defensive play to ensure that nobody else cornered the market on the living room web surfing experience. They mandated some asinine decisions about not supporting competing technologies like Java and Real Player. Perlman was focused on providing the optimal experience to the end user and found himself against a wall facing idiotic defensive technology decisions from MS. Perlman said, “I began to get to know the other top executives at Microsoft, they were talking about negotiating this and that funding, and cutting back products to the point where they no longer made sense. I said, ‘Look, can’t we all agree on what is the right objective for the whole company and then fund that? I don’t care if it’s in your group or my group or whatever, but we should do the right thing.’ It didn’t work that way and, of course, any big company is like this. People have certain things that they control. That’s why there’s politics in large companies.”

On perseverance

Like every one of the FAW stories, Perlman’s team went through a tunnel of extreme adversity and ultimately emerged triumphant on the other side with a popular product. When asked what he could attribute their perseverance to he explained that the core trio of founders in the company held it together. “The key thing about Phil and Bruce is that they had hearts of gold. They were nice people. They were not in it to get rich. I mean, money certainly is freedom. But they both had a vision of creating something great that people would love. That attitude from the three of us permeated the rest of the organization…And through those really difficult things that I told you about, where we were running out of money, when we got the certified letter of rejection from Sony- all those different things I think would have easily knocked over a weaker triad.”

The WebTV company was profitable in its eighteenth month and subsequently every month ever since. It is now known as MSNTV and has grossed over $1.3BN in it’s eight year lifespan.

This entry was posted by Sean Tierney on Sunday, May 13th, 2007 at 9:09 pm and is filed under Blog. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.