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Ina Fried

Staff Writer, CNET

Microsoft has made significant inroads with the latest version of its Windows Media Center, but the entertainment-oriented software has yet to find a permanent seat in the living room.

After selling just a million copies in its first two years, the latest version–Windows XP Media Center Edition 2005–has racked up 400,000 sales since it debuted in October, Microsoft said at the CES trade show Wednesday.

The operating system is similar to other versions of Windows XP but adds a second interface, where users can display pictures, play music, watch videos or record TV shows using a remote control.

“The price of Media Center PCs came down a lot, which is partly why we were able to double our sales this holiday,” Microsoft Chairman Bill Gates told CNET Wednesday.

Microsoft sees Media Center playing a big role in its plans for reaching consumers, an increasingly important audience for the company.

Meta Group analyst Steve Kleynhans said the sales increase, though lower than hoped, is still a positive sign for Microsoft.

“It’s actually not that bad, that in three months, they could increase the overall install base by about 40 percent,” Kleynhans said. “They certainly raised the perception of it. You hear a lot more positive things being said about Media Center generally.”

Earlier incarnations of Media Center largely found their mark with early adopters but had little mainstream appeal. The company is hoping to change that with this go-around: Microsoft has said its goal is to see this version of Media Center account for greater than 10 percent of consumer PC sales. Eventually, Kleynhans said, it should become the consumer face of Windows.

“You are going to see Microsoft move to make Media Center the standard operating system for consumers,” he said. “Definitely for Microsoft, this is the route they want to go.”

The accelerated push comes as competitors scope out the home entertainment market with new initiatives. Earlier this week, Hewlett-Packard said it plans to launch a home media blitz this year, with a Linux-based entertainment hub.

Expansion plans
One of Microsoft’s big pushes now is to get other companies to develop Media Center-specific software and add-ons.

On the hardware front, the Redmond, Wash.-based company announced on Wednesday that a number of universal remote-control makers, including Logitech and Royal Philips Electronics, will start selling products that can control a Media Center PC along with other home theater components.

There is also a growing list of companies writing content specifically for the Media Center’s “10-foot experience”–the company’s name for the remote-control interface. On Thursday, Microsoft announced that Discovery Channel, Fox Sports, TitanTV, XM Satellite Radio and Yahoo were all building channels for Media Center, joining other recently signed-up partners such as Reuters and National Public Radio.

“We’re seeing just huge momentum across the board in every aspect of the Media Center business,” said Kevin Unangst, director of Windows XP product marketing.

Microsoft is also trying to popularize the software interface behind Media Center. The company already uses a very similar approach in its Portable Media Center devices. On Wednesday, Gates announced that Microsoft is licensing the interface and code for its digital video-recording abilities to Korea’s LG Electronics, which will build a DVD recorder that also can record TV shows onto a hard drive.

Media Center has a simple interface with squares that link directly to functions such as “My TV,” “My Pictures” and “My Music.”

“That look is starting to become very recognizable,” Kleynhans said.

Microsoft has also launched an effort in which independent testers will certify the video quality of particular Media Center-based PCs. The move is designed to illustrate the progress such PCs have made, as earlier machines were criticized for quality that in some cases failed to match that of a sub-$100 DVD player.

Now that Microsoft has improved the quality of the video and broadened the base of Media Center customers, Kleynhans said, the company is in a position to get significant outside support.

“They had to establish it before they could get an ecosystem around it,” he said.

Kleynhans noted that Windows accounts for a significant chunk of Microsoft’s overall sales. To boost revenue, Microsoft either needs to sell more copies of the operating system or find ways to generate more dollars from each copy it sells.

Although Microsoft has reduced the premium it charges for Media Center, the software still sells for more than the basic Windows XP Home edition. And as for boosting overall Windows demand, Microsoft is not expecting an all-new version of Windows until the release of Longhorn in 2006.

“They are hoping to shift the mix to eke out a few extra dollars,” Kleynhans said. “At the same time, it does provide a little extra sizzle to the PC market, which has been somewhat languishing over the past few years.”