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Microsoft must still be smarting from a blow delivered by AT&T Broadband. On June 6, the telecommunications giant announced that it was scaling back its plans to implement Microsoft's interactive television software in its next generation of digital set-top boxes (STBs).

Almost a quarter million units of AT&T's most advanced STB, the DCT-5000, have been languishing in warehouses waiting for Microsoft to finish the software package that would enable Internet applications, at-home shopping, banking, and other features for AT&T cable subscribers. In the interim, AT&T executives decided that instead of giving television sets some of the capabilities of home computers, they would concentrate on offering a variety of services, including telephone and high-speed Internet connections, in addition to video offerings.

Despite several studies showing that television viewers are basically passive, and aren't interested in interactive features much more complex than ordering pay-per-view movies, in 1999, Microsoft pumped $5.5 billion into the AT&T project in the belief that interactive TV had a big future. The deal included a licensing agreement for as many as 10 million STBs, a number AT&T execs now believe is unfeasible. "In the sober light of morning they realized they couldn't afford to build out this network," cable industry consultant Richard Doherty told John Markoff of the New York Times.

AT&T will scale back the capabilities of the DCT-5000 to make it more like the current DCT-2000, which has rudimentary ITV features. A new STB will have an inboard hard-disc recorder to give it recording capabilities, AT&T officials said. The company has more than 16 million cable subscribers, of whom 3.1 million have "digital" service. Microsoft's interactive software has found a home with TV Cabo, a Portuguese cable service, according to Microsoft president Steve Ballmer.

In a related development, Internet pioneer Yahoo! has reportedly hired former Warner Brothers studio boss Terry Semel to head a project called "Yahoo! TV." Yahoo! is said to be in discussions with Hollywood-based Live Planet, backed by actors and writing buddies Ben Affleck and Matt Damon. Live Planet created an Internet program, The Runner, and "Project Greenlight," an online screenwriting contest. Yahoo! is said to be hunting for production talent and technical workers to help create what could become "something like a traditional TV station," according to the NY Post. The Internet could make a single TV station an international network of its own, much the way Atlanta's "SuperStation" WTBS became an international TV presence when Ted Turner put it on satellite in the late 1970s. Former personal video recorder maker Replay TV, Inc. attempted to get into the program production business last year with its short-lived Replay Studios, but aborted before creating anything of note.