Microsoft has overpowered the competition to rule the world of PCs, and now it aims to do the same in the home entertainment market. Kate Bulkley reports

Last week the Commission fined Microsoft for using its dominant position in the PC market to flatten the competition. Under the ruling, Microsoft is forbidden from giving its Media Player (which allows PC users to play videos from the internet) "favourable treatment on Windows", its operating system software that runs 90% of the world's PCs.

But the ruling only touches on the underlying question of who is going to rule the home entertainment space as convergence of household electronic gadgets begins to take effect. After years of talk, this converged world vision has the PC, the TV, DVD players, video games machines, portable devices such as personal digital assistants (PDAs), smart mobile phones and gadgets such as the new iPod all linking together. The only question seems to be which companies are going to do the linking.

Late last year, Microsoft made the first major strike with the launch of its new Media Centre products in Europe - nearly a year after devices were available in the US. After some unsteady steps in the pay TV business, the Media Centre is Microsoft founder Bill Gates's first major step into the home entertainment space that seems to have a chance. Media Centre basically soups up a PC so that it organises music, videos, photos and can be linked by a wire to any TV screen in the house. It also has a personal video recorder so you can hook it up to your TV and organise your night's viewing without having to rent a Sky Plus box from BSkyB. And, say retailers, because it includes a remote control as part of the package, it is easy for even computer-illiterate people to run.

Two weeks ago, Microsoft announced the rollout of what it is calling the Media Centre Extender which, when it starts selling in Europe early next year, will let consumers wirelessly connect their Media Centre PC to their TV. Next year, Microsoft's Xbox console will include "Extender" functions too. Also unveiled at the Cebit technology fair in Germany earlier this month was a portable version of Microsoft Media Centre (MMC) that lets you organise all your digital media (from DVDs to music to information downloaded from the internet) and take it with you.

The digital cognoscenti have already given this portable product, which should be on sale at the end of this year, the nickname "iPod killer". Not only does it do all the things that the iPod does - download, store and organise music, plus synching with your PC calendar and contacts list - it has a screen as well, so it will play DVDs and other video. So far there is no crossover announced between the forthcoming portable Media Centre and Microsoft software-powered digital smart phones, but it would be a logical next step.

High street outlets like Dixons and PC World are moving the original MMC-enabled PCs faster than anyone wishes to tell you and head of marketing at PC World (part of the Dixons Group) Chris Matthews says the reason they are selling is all about ease of use. "We do demos in our 125 stores on MMC and if you give someone the remote control, in five minutes they will be able to download CDs, record TV, listen to radio, download album covers - all through the remote. It makes it very simple."

But while Microsoft is pushing consumers to convergence via the PC, Sony and the rest of the competition are trying to dominate digital media with their own products.

Sony's campaign is led by the PSX, which is basically a next-generation PlayStation. When attached to the TV, the PSX stores and plays back the user's movies, photos, music and videos. It also burns CDs and can be used to play games. The next version will also include PVR functions and next year Sony will launch PSP, a portable version of the PlayStation, which will do all the things the portable Microsoft Media Centre does as well as playing sophisticated video games.

Both Sony and Microsoft (and others) are looking to be the home entertainment hub, but they come at it from different areas of strength. For Sony, the PlayStation, the world's dominant gaming device, is the obvious place to start. For Microsoft it's the PC, as Gates's software runs the vast majority of the world's computers.

In a speech earlier this month in London at the FT New Media and Broadcasting conference, the chairman and CEO of Sony Corp America Howard Stringer called 2004 "the year of convergence". If this is true, it opens up important new possibilities for Sony. "With all these broadband connected TVs, PVRs, PlayStations, cellphones, MP3 players and more, we will no longer need a permit from the gatekeepers when we want to reach the consumer. We'll use our ongoing dialogue with the customer to develop greater loyalty and to offer new tools to create and share content," said Stringer.

There may be everything to win but there is also a lot to lose as well, particularly for companies like Sony which also own large swaths of content from music (through its record company) to movies (through its Hollywood studio). Both have already seen increasingly big losses from online and off-line piracy as digital technology makes it easier to steal content.

Not everyone agrees that Microsoft has the right approach, though.

"You are talking about putting a PVR and a DVD and other functions all on one device, on the assumption that people want one device," says Brian Sullivan, director of new product development and sales at BSkyB. "It sounds logical. But when you pick it apart there are elements that aren't necessarily consumer friendly. What happens if you are using a Media Centre and the processor on the computer goes bad? You are not going to just lose your computer, you are going to lose your TV and your music and everything."

Reining in the ambitions of Microsoft with its deep pockets and its entrenched position in the PC market is no easy thing, although many, including the European Commission, have tried. Perhaps allowing Microsoft to bundle its Media Player would actually be better for consumers, since so much content is being encoded using Microsoft's software (optimising it for play on the Microsoft player).

In fact, an analyst for the Ovum consultancy in London thinks that the Commission made a "tactical error" by focusing on the desktop when Microsoft's overall strategy has shifted to services and devices beyond the desktop. "Microsoft has to some extent built its own insurance policy against rulings like this," says Neil Ward-Dutton, principal analyst at Ovum, "in that it has moved a lot of its real intellectual property invention focus away from the desktop and towards other types of devices and network services. So in terms of Microsoft's wider intent to leverage its dominance on the desktop to other domains, this [ruling] doesn't really affect any of that at all."

Stay tuned for more appearances by Microsoft on entertainment devices everywhere, then.

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