Microsoft Looks for Space in China's Living Room

Microsoft Corp. wants to play a bigger role in China's living rooms, and the company is willing to spend millions of dollars to get there.

The company's latest home-entertainment moves in China include a planned US$12.3 million investment in Sichuan Changhong Electric Co. Ltd. The deal, announced earlier this week, gives Microsoft a small stake in one of China's largest TV makers, which in turn agreed to develop TVs and other products able to link with the Internet.

"Microsoft and Changhong have partnered in exploring the use of digital media technologies to benefit the consumers for a better in-home networked digital entertainment experience," Microsoft said Friday in an e-mail statement.

Its investment is intended to build goodwill, rather than bring a specific product to market.

"The investment is more like a gesture of saying, 'We're friends strategically,'" said Jason Yin, managing director at In-Stat China.

Critics have compared the Changhong deal to Venus, an ill-fated project launched in 1999 to develop Windows CE set-top boxes for the Chinese market. But that's not an accurate comparison. "It's very different," Yin said.

Unlike Venus, Microsoft isn't trying to bring a new piece of hardware to market. Current versions of Windows are capable of connecting a TV with the Internet, and these types of systems are already available in China.

Changhong's own M10 Living Room Entertainment Center is an example. Based on Windows XP Media Center Edition, the M10 is designed to connect with a television and comes with a remote control and wireless keyboard, allowing users to access music, videos and the Internet from a couch instead of a desk.

Changhong also offers other consumer products that connect to the Internet. For instance, it sells a 32-inch LCD (liquid crystal display) television with a camera that can be used for Internet video calls. And the company has worked with China Telecommunications Group Corp., one of the country's two major fixed-line operators, to sell IPTV (Internet Protocol TV) set-top boxes.

Microsoft hopes closer ties with Changhong will strengthen the channel through which its home-entertainment software reaches Chinese consumers. Those products include Windows Media Center and Mediaroom, the company's IPTV software.

"Microsoft now has a better understanding of the value of local partners in penetrating China's market," Yin said, citing the example of Xiamen Amoi Electronics Co. Ltd., which develops and sells Windows Mobile smart phones in China.

Whether Microsoft's small investment in Changhong yields the desired result remains to be seen. In past years, the company used investments to build closer relationships with Chinese partners to varying degrees of success.

"The investment doesn't always mean they get what they want," Yin said.

The Changhong investment is just one part of Microsoft's home-entertainment push in China, and the company continues to seek out new deals and alliances.

On Thursday, Microsoft signed an agreement with Shanghai Media Group (SMG), the country's second-largest media company. Under the terms of that deal, SMG will use Microsoft products across its new-media division, which includes Internet video, IPTV and mobile television. The partners hope their combined strengths in software and content will convince more companies to join them.

Financial details of the deal were not disclosed.