Microsoft paid $425M for WebTV's 56,000 subscribers — and the service never scaled

WebTV Networks, founded in Palo Alto in July 1995 by Steve Perlman, Bruce Leak and Phil Goldman, sold a set-top box that put the Internet on a television: a thin client with a dial-up modem, a keyboard, and a service costing $19.95 a month. By April 1997 it had about 56,000 subscribers. Microsoft announced on April 6, 1997 that it would buy the company for $425 million — more than half in stock — a price that valued each subscriber at roughly $7,600.

Bill Gates framed the deal as the strategy for delivering the Internet to consumers through digital broadcasting, and the company planned to use Windows CE across appliances. The bet was that the television — present in 98 percent of American homes — would become the second screen of the Internet. WebTV was Microsoft's entry into the digital-television gold rush, an attempt to own the living room before anyone else.

The market never arrived at the price Microsoft paid for it. Subscribers grew to about 150,000 by autumn 1997, 325,000 by April 1998, and roughly 800,000 by May 1999 — real growth, but a rounding error beside the 98 percent of homes the deal was priced against. The service reached profitability in spring 1998 and grossed more than $1.3 billion over its first eight years, yet hardware was subsidized, each box needed its own subscription, and dial-up-only clients were stranded as the web outgrew reformatting for a 560-pixel television.

WebTV was rebranded MSN TV in 2001, and the service limped on for another twelve years. In July 2013 Microsoft announced the end; on September 30, 2013, the service closed, sixteen years after the acquisition. The living-room market Microsoft paid to own went instead to Apple TV, Roku and streaming boxes. The three founders had each taken $64 million out of the deal; the subscribers who made the service real never numbered a million.