MOUNTAIN VIEW -- For more than a decade, Microsoft has tried various ways to marry the Internet to the television. Now the company has decided to focus its Internet television efforts on its Xbox game console.
On Monday, the tech giant announced it has struck a deal with Ericsson to sell its Mediaroom business unit. Based in Mountain View, Mediaroom makes set-top box software and so called "middleware" for AT&T and other pay-TV companies that deliver television video using Internet transmission methods.
"With the sale of Mediaroom, Microsoft is dedicating all TV resources to Xbox in a continued mission to make it the premium entertainment service that delivers all the games and entertainment consumers want -- whether on a console, phone, PC or tablet," said Yusuf Mehdi, a corporate vice president in Microsoft's interactive entertainment division.
The companies did not disclose how much Ericsson is paying for the Mediaroom unit, but CNet News, citing an anonymous source "familiar with the deal's terms," reported the amount to be "just south of $200 million." The companies expect the deal, which is subject to regulatory approval, to close in the second half of this year.
A Microsoft representative declined to comment beyond the blog post and a news release.
Derived from WebTV, a set-top box technology that Microsoft bought in the 1990s that allowed consumers to surf the Web on their TVs, Mediaroom's software allows set-top boxes to record television programs and to tune in live and on-demand channels streamed using Internet protocol. With IPTV, operators are able to send just one or a handful of video streams to each customer, rather than broadcasting all available channels to all customers, which is how cable TV systems typically operate.
The Mediaroom software and middleware are largely used by telephone operators around the world who want to offer pay television service, and have been deployed by 40 companies worldwide on some 22 million set-top boxes in use by more than 11 million households. AT&T's U-verse system, which had 4.5 million TV subscribers at the end of last year, is Mediaroom's biggest customer, according to Microsoft.
For Ericsson, which offers a rival set of software and related equipment and services for delivering Internet television, the deal allows it to acquire Mediaroom's customers and catapults the company into being the leading IPTV middleware provider with some 25 percent of the market.
Ericsson's own software is focused on transmitting traditional television programs to mobile devices. Thanks to the mergers, subscribers to AT&T U-verse and other IPTV services might be able to more easily watch programs on a range of devices, from TVs to smartphones.
"What the customers of Ericsson want quite clearly is to drive toward this 'TV anywhere' future," said Simon Frost, head of TV marketing for Ericsson. "That's what we see as a big opportunity. It's what our customers want from us."
Mediaroom employs more than 400 people worldwide, more than half of whom are based in Silicon Valley, according to Microsoft. Ericsson does not plan to lay off any of those employees as a result of the merger, Frost said.
In recent years, Microsoft has augmented the video capabilities of the Xbox. Users can watch videos streamed from Netflix (NFLX) and Hulu, rent or buy videos from Microsoft's own Xbox Video service or even tune in live or on-demand TV from pay-TV operators.
The deal is a good one for both companies, said Brett Sappington, director of research at Parks Associates, a consulting firm. It positions Ericsson to be a major player in an industry that's consolidating. And it allows Microsoft to focus on one of its core products rather than having to compete with some of the giant telecommunications service companies that are starting to dominate the IPTV market.
"At a certain point, Microsoft had to make a decision on where to place its bets, and it's placed its bets on Xbox," Sappington said.
Microsoft fell 11 cents, or 0.4 percent, to $28.59 Monday, while Ericsson gained 11 cents, or 0.9 percent, to $12.22.
Contact Troy Wolverton at 408-840-4285. Follow him at Twitter.com/troywolv.