Microsoft exits personal video recorder field. (Media & Technology).

Microsoft Corp. has picked up its marbles in retreat from UltimateTV, a digital video recorder business once intended to take the world by storm.

Digital video recorders -- also called personal video recorders -- allow consumers to record television programs on a hard disk drive rather than on tape. About 600,000 DVRs have been installed since TiVo Inc. and ReplayTV Inc. sold the first such products in 1999, according to Yankee Group analyst Adi Kishore.

While TiVo and ReplayTV sell DVR boxes that connect to any TV, UltimateTV was for use with DirecTV's satellite receiver. Analysts say fewer than 100,000 UltimateTV units were sold before Microsoft's decision to disband the product's 500-person workforce in Mountain View.

What went wrong? The technology works, but the business plans of the early DVR pioneers went awry. A mass market has been slow to develop, and it's unclear whether any single company holds a vital batch of patents to exploit if large cable-TV operators begin incorporating DVR functions in their set-top boxes.

Microsoft, for its part, bet on the wrong horse in a fierce satellite-TV rivalry. The software giant backed News Corp.'s October bid for Hughes Electronics Corp. with a pledge of $3 billion and the expectation that UltimateTV would become part of News Corp.'s global satellite operation. But News Corp. lost Hughes to rival EchoStar Communications Inc., which is expected to impose its own technology on the combined company if the merger clears regulatory hurdles.

EchoStar developed its own digital video recorders after an earlier falling-out with Microsoft. The two companies jointly developed the DishPlayer, the first DVR designed for a satellite-TV company, but EchoStar says that Microsoft owes it more than $50 million for failing to honor certain agreements.

Microsoft "turned its attention away" to develop UltimateTV for Hughes's DirecTV satellite service, EchoStar alleges in an October lawsuit filed in a federal court in Colorado.

EchoStar subsequently introduced its own DVR products and pays no licensing fees to Microsoft, TiVo or ReplayTV, according to company spokesman Marc Lumpkin. EchoStar hasn't been sued for patent infringement by any of the three companies, Lumpkin says.

But lawsuits are flying elsewhere. Sonicblue Inc., the company that acquired Rep]ayTV last year, filed a complaint against TiVo in December, alleging that TiVo infringed on its patent for a program guide. TiVo is countersuing.

Meanwhile, Sonicblue is being sued by major movie studios and TV networks, which claim that the ReplayTV 4000 device allows users to violate copyrights because they can e-mail recorded programs to other ReplayTV owners.

ReplayTV and TiVo each got their start in Silicon Valley in 1997, but their business plans quickly diverged. TiVo was the first to get its product into stores and to tap the stock market. The company raised $92 million in an initial public offering in September 1999, and saw its price soar as high as $71.50 in early 2000. For the past 12 months, however, the average closing price was $5.61.

Analysts say that TiVo has more than 300,000 customers but paid a heavy price by subsidizing the cost of hardware. As of Oct. 31, the company reported an accumulated deficit of $421.4 million. Last year, TiVo pared its work-force and said it plans to eliminate equipment subsidies.

ReplayTV tried to follow TiVo to the public market in 2000, but had to scrap its initial public offering when stock prices deteriorated. The company pursued licensing deals until it was acquired in August by Sonicblue, the maker of Rio digital audio players. Sonicblue Chief Executive Kenneth Potashner says that ReplayTV had sold 50,000 to 70,000 units prior to the acquisition.

The chief executive defends the e-mail feature that has been challenged by the Hollywood studios' lawsuit. Sonicblue has limited the number of copies of a program that can be forwarded to other ReplayTV owners. Once forwarded, a program cannot be forwarded a second time, Potashner says: "We tried to be a good citizen here."

Some large cable-TV operators are looking for ways to offer DVRs, spurred by the desire to sell new services and by competitive concern that EchoStar is forging ahead, if enveloped by the cable-TV industry, digital video recording may yet catch fire. But for early DYR investors, the prospect is bittersweet unless the companies' patents take hold.