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MICROSOFT SPINOFF PROMISES A BRAVE NEW WORLD Interactive Home Systems develops electronic imaging technology


In a nondescript business park near downtown Redmond, Wash., a baby Microsoft is being born.

Behind a door labeled simply IHS, with the slogan "No Crybabies," the software keys to an electronic-imaging kingdom are being forged.

IHS, for Interactive Home Systems, is keeping the exact nature of its strategic planning under wraps. But backing it are the vision, intensity and financial resources of the man who co-founded Microsoft 17 years ago and is its chairman -- Bill Gates.

He may be embarking on a repeat act.

Already IHS has extended well beyond its initial charter of providing images for Mr. Gates' new home in Medina, Wash. Recently, it unveiled a pioneering digitized art "kiosk" at the Seattle Art Museum displaying 250 of the 1,000 museum works that Mr. Gates licensed last May.

IHS is negotiating similar arrangements with the National Gallery of London, the Smithsonian Institution and the Art Institute of Chicago. Representatives would not say how close deals are.

With 35 employees, IHS is about twice the size Microsoft was when, in 1979, the software company moved from Albuquerque, N.M., to Bellevue, Wash. IHS is hiring at a brisk clip, recently adding a British director, imaging-license specialist, image editor and an attorney specializing in intellectual property and technology.

Its new president, Steve Arnold, a former psychologist, was lured from Lucasfilm Ltd., where he specialized in interactive media, including video games and educational applications.

IHS' new talent pool suggests a broad scope for its future pursuits -- extending beyond still images to sound, animation and entertainment markets in multimedia computer technology. And that is where the deep pockets of Mr. Gates -- who remains the company's sole financial backer -- may have their ultimate payoff.

"The multimedia market has enormous potential," said Nick Arnett, president of Multimedia Computer Corp. in Santa Clara, Calif. Mr. Arnett ticks off a number of segments -- starting with the $2 billion K-12 education market, with a 30 percent annual software growth, as "the hottest arena right now."

Corporate training and education, estimated to be a $75 million business, is expected to reach $1 billion by 1995, Mr. Arnett said. Multimedia also is expected within a few years to reach billion-dollar levels in health care, the travel industry, business sales and marketing and entertainment, Mr. Arnett said.

When it began life as Home Computer Systems Inc. in September 1989 -- a name that lasted only a few days -- IHS aimed to develop "electronic systems for the home," as its

corporate license later stated.

Specifically, Mr. Gates' new home. Mr. Gates, who uses his home for many company-related events, envisioned the new 4.5-acre residence as an "estate-of-the-art" showcase that would dazzle technological and business leaders from throughout the world. Integral to the floor plan were yet-to-be-marketed, high-resolution, wall-sized, flat-panel color displays capable of showing lifelike digitized images of photography and art.

The point behind the technology was to allow the images to change depending on who was in the room and what their preferences were. In addition to its technological challenges, however, the scheme brought up new licensing and distribution issues.

In many cases, museums either own or control the works or reproductions of the works. Gaining even limited rights to convert them electronically can involve a multitude of agreements with museums, agencies and the artists themselves.

"It's a ton of work," said Bruce Miller, IHS project manager for the Seattle Art Museum undertaking, labeling the process "an aspect of multimedia that's slowing everything down."

Digitizing artwork also is an expensive procedure, Mr. Miller acknowledged. Neither Mr. Miller nor Mr. Arnold would say how much IHS has spent so far -- a figure that "would miss the point, anyway," Mr. Arnold said. "We're still basically in research-and-development mode, where costs are always high."

And the return -- for now, at least -- is minimal. Equipment needed to make such images commercially feasible is still expensive and, in the case of software, complex to develop.

"It makes sense for them [IHS] to be starting now on buying up rights," said Jesse Berst, publisher of the Windows Watcher newsletter in Bellevue. "But it's a gamble."

Financial risk is one reason IHS has absorbed the entire cost of the SAM exhibit, said Jay Gates, museum director, who is no relation to Microsoft's chairman. "If they hadn't picked up every cost, we couldn't have afforded it," he said.

One of the goals of Curt Blake, who left Aldus as general counsel to head up IHS' legal and business affairs, is to "identify the hot spots" in negotiations over digital rights, he said. Legal boilerplate could then be written to reduce "excessive negotiating time."

Mr. Blake compares the electronic-rights field with software licensing in 1984, when Aldus was formed: "You not only had to negotiate the deal, you had to educate people up to a certain comfort level of understanding the technology and what they were committing to."

The SAM system, activated by touching an oversized monitor in a free-standing kiosk, shows digitized images of art objects -- some from multiple views -- along with text blocks explaining their backgrounds. It is among the most sophisticated of its kind in the world, rivaled primarily by the J. Paul Getty Museum in Malibu, Calif., and National Gallery of London's "MicroGallery."

The system gives tips on what to look for in the works themselves, shows a map of where various works originated and otherwise offers a sophisticated tutorial of museum displays. It even uses sound, sometimes humorously, to make a point. A list of photographers is punctuated by the sound of a motor drive; writers by typewriter keys clacking and software developers by the plastic clicking of a keyboard.

The SAM agreement with IHS provides for a royalty to the museum when a digitized image is sublicensed or distributed, although neither side would specify the terms. Royalties typically are keyed to volumes and percentages of sales.

Beyond museum works and famous photographs, there are countless needs for manipulating and customizing audiovisual data. For every photo that gets reproduced in a magazine or newspaper, hundreds more from the same shooting go unseen.

Televised images are selected for viewers by networks. Portland Trailblazers fans -- such as club owner Paul Allen and his Seattle friend Mr. Gates -- might want the camera to focus on how their club is defending against Michael Jordan instead of Mr. Jordan's moves themselves.

Placing television studio capabilities in the hands of individual viewers ultimately boils down to the same issues as putting information data bases in the hands of personal computer users. That is something Mr. Gates and Mr. Allen know how to do.

The trickling down of such technology to the end user will take years, Mr. Arnold acknowledged. When it happens, it will have the same impact on visual information that the personal computer had on text-based data in the 1980s.

"Once people have the capability of meaningful control over the technology, you'll see the couch potatoes get up off their couches and do amazing things," Mr. Arnold said.

"For us, the big win will come in changing the relationship," he said, "between people and information."

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