The offices have been laid out. The applications are flowing in. And come next spring, 10 proto-companies will meet in Seattle for a three-month bootcamp focused on new uses for the Kinect, Microsoft’s breakthrough motion- and sound-sensing system.

For Redmond-watchers, that may not seem like such a big deal. Microsoft already cultivates startups through its BizSpark program, and is putting plenty of steam behind the Kinect as a next-generation user interface. I have no idea how much money Microsoft is paying to bankroll the new Kinect Accelerator program, but it’s certainly in the realm of a rounding error.

But the thing that makes this Kinect program really interesting is Microsoft’s partner: TechStars, the startup accelerator with branches in Seattle, New York, Boston, and Boulder, CO.

TechStars is a top-tier example of the startup incubator programs that are sweeping the country right now, a phenomenon that challenges the established education and entrepreneurship systems. Those programs have already gotten plenty of interest from entrepreneurs, the press, and early stage investors. But now, mammoth tech companies are taking a longer look, too—and doing more than just offering free software or a few mentors.

“Corporations have been trying to create innovation ecosystems forever. Historically, those that do it themselves have tended to struggle in general,” TechSars co-founder David Cohen says. “We believe we can help Microsoft get it right. It appears to be working so far—we have some amazing applications and the interest is very high.”

“Traditionally, it’ll be, ‘Hey, here’s a toolkit and here’s some terms and conditions, and, essentially, have fun. Good luck,’” says Microsoft Studios general manager Michael Mott, the company’s point person for the Kinect Accelerator. “Now, we’re saying, here’s that same set of technologies … and here’s a little bit of expertise and guidance, not only from us but also from this great incubator of startups, TechStars. In that case, I think it’s a little bit more of a wraparound approach and a little bit more hands-on than we maybe have done in the past.”

The Kinect Accelerator will look very much like a typical TechStars class, with 10 companies chosen to participate in an intensive three-month program of product-building, testing, and business development. At the end, there will be a big demo day party, where the entrepreneurs can show off their work to insiders and potential investors.

But this version is a wholly Microsoft endeavor, and focused on one technology, the Kinect. “This is Microsoft’s program,” Cohen says. “We’re powering it, which means we’re responsible for making sure it’s awesome.”

That’s a first for TechStars, which, like other independent accelerator programs, chooses its own class of entrepreneurs from a wide-open field of applicants. This year’s Seattle class, for example, produced startups tackling everything from smartphone-powered robot kits to international money transfers.

That’s a totally new way of thinking about something like TechStars: Not only does it run bootcamps of its own, but it can be hired out to help the world’s biggest companies develop their own entrepreneurial ecosystems.

It’s a huge validation for the TechStars model and its people, and there’s a more concrete upside as well. Just like in a regular TechStars program, the companies will get an investment: $20,000 from TechStars in exchange for 6 percent equity. (Significantly, Microsoft will not take a stake in the startups or their intellectual property.)

When it was announced last month, the Kinect and TechStars partnership instantly reminded me of Google’s recent two-year deal to be a global sponsor of Startup Weekend, the Seattle-based entrepreneurship program that has been steadily growing beyond its signature hackathons.

Google’s deal with Startup Weekend is more than just a check. Googlers will also host developer workshops ahead of Startup Weekend events, and bring promising entrepreneurs from the global Startup Weekend network back to Google headquarters for a week of collaboration. In short, it’s tapping into the Startup Weekend network of more than 250 events worldwide to find promising talent—and make sure they’ve got Google on their minds.

Kinect Accelerator is different on the details, but it has the same flavor. It’s probably a smart move for a lumbering technology giant that is often criticized for being too bureaucratic to get out of its own way and innovate. Not coincidentally, Xbox and Kinect are very prominent examples of consumer offerings that Microsoft has actually done very well.

The Kinect Accelerator will be directed by Dave Malcolm, a former longtime Microsoftie who has been a TechStars mentor in Seattle. The startups will operate out of Microsoft office space in South Lake Union, a block away from the growing Amazon campus.

Teams will get Xbox kits, Kinect hardware, and the upcoming Windows software development kit for Kinect, along with the usual array of developer tools and software. Products that might have phone and tablet interfaces or other applications are also welcome, Malcom says: “The solutions these 10 companies create simply have to leverage the Kinect in some form.”

“We are looking for the 10 teams who have the most compelling, big ideas that we think, post this program, they have the best chance of getting follow-on funding and building real businesses that scale and have an impact,” Malcolm says. “We would like people to think big when they come to us with applications.”

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I’m still re-adjusting to Pacific time after spending most of last week back in Boston for XSITE 2011, the latest installment of our annual conference that brings together entrepreneurs, investors, academics, and more for an all-day confab on innovation. Among the top-notch speakers and presenters was Edward Jung, a Microsoft veteran and co-founder of Bellevue, WA’s Intellectual Ventures.

Xconomy’s Bob Buderi put together this preview of Jung’s keynote, which centered on ideas for a new approach for solving enormous societal problems, including health care, education, and energy. Jung’s thesis counts on involving government as a key partner, providing long-term, stable financing and finding a big private sector entity to integrate the moving parts.

Even though I was out of town, we still had a good bit of news from the past week on the Seattle-area technology beat:

—Startup Weekend told us about its plans to establish a sister organization that sets up permanent, staffed offices that will give entrepreneurial communities a central place to organize their efforts with academics, investors, non-profits, and the public sector. Called the Startup Foundation, the project is funded by a new grant from the Kauffman Foundation and is kicking off next month in seven cities, including Xconomy hubs Seattle, New York, Detroit and Boston. The Seattle office will be run by current Startup Weekend marketing honcho Jennifer Cabala, a familiar face around the Seattle scene.

—We had two entries in one day from Nuance (NASDAQ: NUAN), the Boston-based speech-recognition and mobile software company with a big Seattle presence. First off was an acquisition of SVOX, a Zurich-based embedded speech software company, for $125 million.

We followed that up with this in-depth interview with Brad Bargen, a veteran of Tegic Communications who now oversees customer-care and text-input product development at Nuance’s Seattle office. We talked about all kinds of interesting things, including Nuance’s friendly rivalry with hot crosstown startup Swype, also made up of former Tegic folks, and Nuance’s efforts to make language recognition of all kinds more natural and intuitive.

—Microsoft (NASDAQ: MSFT) took the next step in trying to capitalize on the success of the motion- and sound-sensing Kinect controller for Xbox by opening the device’s software for hackers and modders to play with. This first go-round of the software development kit is limited to noncommercial uses, but encouraging a for-profit developer corps is on the roadmap. I was particularly impressed with Microsoft Research scientist Anoop Gupta’s quick mention of videoconferencing when I asked him where this technology could go next—that has big implications for Microsoft’s $8.5 billion acquision of Skype.

—Seattle social-game startup Giant Thinkwell, part of the first class of Seattle TechStars companies, started building up to today’s rollout of its first official celebrity-endorsed game: Mix-N-Match, a collaboration with Seattle hip-hop legend Sir Mix-A-Lot. Mix-A-Lot has always shown a humorous bent in his music, so it’ll be fun to see what he and Giant Thinkwell have up their sleeves. It’s a big step for the startup, which has been searching for celebrity partners as it tries to build a business around personality-branded Facebook games.

—Finally, we saw stealthy consumer electronics shopping startup Decide throw open the curtains on its site, which hopes to help shoppers save money and avoid new-model buyer’s remorse by synthesizing a ton of market information in one place. Others are playing in this sector, but Decide does boast co-founder Oren Etzioni, the University of Washington professor who was also behind airfare-shopping prediction site Farecast, which was purchased by Microsoft for $115 million in 2008.

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[Updated 2:10 pm with more details throughout] It’s not just for bootleggers anymore. Today, Microsoft (NASDAQ: MSFT) is making good on its promises to officially open up the Xbox 360′s Kinect motion sensor, offering a software development kit download for non-commercial uses. That means it’s aimed at “enthusiasts and academics,” some of whom the company said it invited over to its Redmond, WA campus for an all-day hackathon yesterday to start road-testing the kit.

While today’s beta version of the kit for Windows 7 isn’t aimed at commercial developers, Microsoft has already said it’s heading that way eventually, with Microsoft Research distinguished scientist Anoop Gupta telling CNet earlier this year that he thinks it could be “a meaningful business” in both software and hardware.

One of the chief areas that seems primed for Kinect’s technology is a combination with Microsoft’s recent $8.5 billion acquisition of Skype, the online video-conferencing service. Gupta told me in a follow-up interview today that video-conferencing—something Microsoft calls “telepresence”—is one of the big areas he personally sees as a holding rich potential for Kinect development.

For non-gamers who may have missed all the hubbub, Kinect is a bar-shaped sensor that uses cameras, microphones, and sophisticated software to detect live movements by people playing Xbox games. It is sensitive and sharp enough to distinguish depth, sense separate people standing in the same area, notice faces and pick up on hand movements.

Interest in the device quickly spread beyond video games, inspiring all kinds of futuristic-semming motion-controlled hacks right after it hit the market in late 2010—one of the most noted early adaptations was the effort by some University of Washington engineering students to use the Kinect for research into how surgeons can better control robots to perform delicate surgeries.

Microsoft was caught off-guard by the immediate enthusiasm for Kinect hacks, at first poormouthing the phenomenon and then clarifying that it intended to open up the technology all along. I guess this week’s hackathon leaves little doubt about the company’s seriousness for developing an ecosystem around the product, but it remains to be seen how soon Microsoft will go after the commercial side.

Gupta declined to give a timeline for a commercial release, saying in Microsoft’s in-house video conference that “Although our intent is to release a commercial SDK, we’re not making any announcements about it now.”

There’s not really anything stopping someone from doing some homework ahead of time, of course, and those academics have been known to turn their research into businesses from time to time. But Gupta also reminded business-minded hackers that the programming interface could change when CNet caught up with him in April.

“For a while, it was [that] you were waiting for the SDK,” Gupta said to developers in Microsoft’s announcement. “Now, it is I am waiting to see what are the exciting things the community is … Next Page »

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Microsoft’s blockbuster $8.5 billion deal to acquire Skype dominated headlines far beyond the Puget Sound region last week, raising all kinds of interesting implications for mobile computing, business communications, video games, and more. Many commenters were walloped by the sheer scope of Microsoft (NASDAQ: MSFT) products that Skype could be plugged into, but in our initial report, we called out mobile and video as the two broad areas to watch.

Xconomy writers from around the country also weighed in with follow-up reports from different angles. Xconomy Boston’s Greg Huang sat down for an exclusive interview with Microsoft’s Qi Lu, president of Microsoft’s online services division. Skype won’t report to Lu, but he praised the power of bringing a big consumer brand under Microsoft’s umbrella. Lu also pointed to “powerful scenarios” in combining Skype with Windows Phone, Xbox Kinect, and the Lync messaging service on the business side.

In San Diego, Xconomy’s Bruce Bigelow had this Q&A with Bryan Hertz of Telcentris, a small California-based startup that makes a Skype competitor. Hertz pointed out that some of the initial mixed reaction might have to do with Skype’s upstart profile, including its roots in the music-sharing service Kazaa: “People saw Kazaa and then Skype as a way of ‘beating the system.’ Microsoft IS the system, so it’s easy to assume the worst.”

Here’s the rest of the news making headlines at Xconomy from the past week on the Seattle-area tech scene:

—Speaking of Microsoft, co-founder Bill Gates was on hand for an event from environmental nonprofit Climate Solutions focusing on the future of clean energy. As Luke reported, Gates said he was bullish on the science and business opportunities—but less optimistic about leadership from the government in setting carbon limits and paying for research and development. If Gates’ talk is up your alley, you should definitely check out our next power-packed Xconomy Seattle event, Separating Hype from Reality in Alternative Fuels, this Thursday.

—Xconomy San Francisco’s Wade Roush interviewed Dan Reed of Microsoft’s Extreme Computing Group—basically, the guy who’s in charge of figuring out what the future will hold for the world’s largest software company. Reed and Roush chatted about smart radios, data center design, artificial intelligence, and more—and all this was just a preview to today’s Beyond Mobile event in San Francisco, where Reed will join Bill Mark of SRI International, Larry Smarr of Calit2 and others for an in-depth discussion on the next 10 years of computing.

—Lest Microsoft steal all the headlines, we also had a couple of interesting items from the world of gamification—the drive to apply common video game features and experiences to a broader array of consumer life, from shopping to health and beyond. First up was BigDoor Media‘s announcement that it was partnering with Major League Baseball to bring game mechanics to the league’s live game-tracker site. Following that, we got an in-depth interview with Scott Dodson of Bobber Interactive, a Seattle startup that’s bringing game features to children’s finance. Dodson, a leading thinker on gamification, is optimistic about what the future holds—but he’s also worried that too much use of shallow elements could saturate the market and bring the whole thing down.

—Finally, a pair of great guest posts from people in the Seattle-area technology community. First up was Kal Raman of GlobalScholar, who wrote about the opportunity that entrepreneurs in the region have to bring innovation and data-driven solutions to the country’s education system. We also cross-posted this piece from Eric Koester of Zaarly, who recounted his recent trip to Washington, D.C., to speak about on the importance of maintaining a strong ecosystem for startups.

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Microsoft’s biggest acquisition to date was on display this week, in Boston. I’m not talking about Skype. I’m talking about Qi Lu.

Lu, the president of Microsoft’s online services division, was in town on Wednesday to meet with employees at the firm’s New England Research and Development Center (NERD) in Cambridge, MA, and, in addition to private meetings with local companies and universities, to give a public talk that was co-hosted by Xconomy.

For those who don’t know, Lu was brought in at the end of 2008 by CEO Steve Ballmer to spearhead Microsoft’s fast-growing online efforts—including Bing, MSN, and mobile advertising. Before that, Lu was a senior exec at Yahoo for a decade, where he ran engineering for the search and advertising group. He had previously worked at IBM’s Almaden Research Center and Carnegie Mellon University.

So Lu is basically The One, charged with bringing the world’s biggest software company to a more competitive position in the digital, online, and social era (no pressure). And he was quite a steal—especially compared to the $45 billion that Microsoft offered to pay for all of Yahoo in early 2008.

This week, when he was in Cambridge, Xconomy sat down with Lu for an exclusive interview. Between that and his talk at the NERD center (see photo below), we learned a great deal about Microsoft’s (NASDAQ: MSFT) evolving strategy in search and the Web—and where the company sees itself playing across the various fields of consumer online services. We’ll have a separate story on that soon.

But first, we had to get Lu’s take on the big news of the week, and what everyone was buzzing about—Microsoft’s $8.5 billion acquisition of Skype, the Luxembourg-based Internet phone and video firm (which has a big Silicon Valley presence). Skype will become a separate division within Microsoft; it won’t be integrated into Lu’s online services division. Partly because it isn’t in his direct purview, Lu didn’t go into much detail. But from the high-level comments he made during our interview, and at his public talk, it sounds like there are plans to use Skype’s technologies across a wide range of Microsoft businesses.

“This acquisition is very strategic,” Lu told us. “Certainly we are very confident that … Next Page »

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With its $8.5 billion acquisition of Skype this morning, Microsoft (NASDAQ: MSFT) appears to be embracing one of the classic digs at Redmond: It’s grown too big to truly innovate.

According to the companies’ announcement, Luxembourg-based Skype, which has offices and investors in Silicon Valley, will be its own division within the Redmond, WA, software behemoth. Skype’s current CEO, Tony Bates, will report directly to Microsoft head honcho Steve Ballmer. If that kind of structure was something Skype fought for, the fact that it got it could be seen as an acknowledgment that swallowing Skype too fully could mess up a good thing.

Much is being made of the zillion different ways that Microsoft products and services could be integrated with Skype, but two of them are the most meaningful: Windows Phone and Kinect. The Windows Phone combination—if done right—gives Microsoft a killer answer to Apple’s FaceTime and Google Voice.

In a really interesting blog post on the deal, Skype investor Ben Horowitz of Andreesen Horowitz recounts how both of those products were central threats to Skype’s existence, and how Skype responded by growing its user base. (Horowitz also says the investors who bought Skype from eBay saw that the technical team working on Skype was committed to staying with and expanding the service, no matter who was signing their paychecks.)

Over at the Dallas Morning News, Victor Godinez wonders whether the combination will allow Microsoft to challenge the cell phone carriers to drop mandatory voice plans, and open up data-only mobile as a real possibility. It’s also worth noting that Microsoft said Skype will continue to develop apps for other companies’ platforms—but anyone who’s tried to use Google Maps on an iPhone, for instance, will tell you to wait and see how aggressively that happens.

The Kinect combination is intriguing as well. The motion-sensing camera is obviously Microsoft’s biggest consumer hit in quite some time, and has been showing all sorts of really off-the-wall potential uses, like manipulating surgery robots. The Skype combo brings a far less outlandish use to the forefront: powerful videoconferencing, especially for business.

As Todd Bishop at GeekWire pointed out last night, Kinect already had a video calling feature. With Skype’s horsepower and Microsoft’s track record of delivering products that big businesses want to use, the little Xbox add-on could become a major feature in boardrooms.

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It seems like the pace of mobile and casual game development is already pretty fast. But the folks at Seattle’s Zipline Games think it could be faster.

Today, the startup is unveiling the beta version of its new Moai mobile-game development platform. The idea is to take friction out of game-building by offering a single open-source platform that will allow developers to produce both the front-end elements seen by consumers and the back-end infrastructure by using a single familiar coding language. And after the game’s deployed, Moai offers cloud hosting to keep everything running.

Why is this noteworthy? As CEO and co-founder Todd Hooper put it, publishing a game can require mastery of separate coding languages for iPhones, Android devices, and the back-end architecture. Moai’s open-source platform is based on Lua, a common gaming language, allowing it to serve as a digital translator between all the other languages.

That could speed up game development by allowing even small companies to deliver their product without having to find someone with different coding skills to do the translating for another device or the cloud-based hosting portion.

Zipline’s attempt to help make game development even quicker comes at an interesting time in the growth of mobile, casual, and social games. There’s a bit of tension in the gaming world between bigger console producers and the smaller, startup-oriented mobile and social developers.

This was embodied by Nintendo President Satoru Iwata’s recent keynote speech at the Game Developers Conference in San Francisco in March, where he questioned whether cheap, simple games would erode the ability of higher-end games to charge premium retail prices. Among his notable quotes: “Our industry has certainly expanded, but it also gives me concern because I feel our business is devalued … Next Page »

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A downer in local tech-job news: Sony Online Entertainment is closing its game development office in Bellevue, WA, part of a broader downsizing that also includes the shutdown of offices in Denver, CO and Tucson, AZ. The company’s statement also says it is stopping work on the undelivered game “The Agency” to focus efforts on new massively multiplayer online games. A total of 205 jobs are being cut, the company said, although it didn’t say how many were from each location.

The Seattle Times’ Brier Dudley notes that “Sony spent millions on the game and at one point employed more than 100 developers at the Bellevue studio,” including some lured over from Microsoft to start the office in the fall of 2004. Neither the Times nor GeekWire could get a definitive answer from Sony on how many jobs would be lost in the Seattle area.

Sony’s statement said the development work from the Denver and Tucson offices is being transferred to the San Diego, CA headquarters. The Sony Online Entertainment site still had a blurb about “The Agency” on its site as of Thursday evening, describing it as a chance to “live the life of an elite agent in a world of superspies and rugged mercenaries, who use both high technology and low tactics to accomplish their missions and goals.” The release date was listed as TBA.

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[Updated 4:30 p.m. with comment from CEO] Seattle mobile-game startup Z2Live’s latest venture round is worth about $2.5 million, according to a regulatory filing today. Z2Live had previously announced a Series B investment from Draper Fisher Jurvetson, joining previous investor Madrona Venture Group, but hadn’t disclosed the amount. Z2Live is focusing on social gaming for mobile devices, with an initial game called “Trade Nations.” The company is led by CEO David Bluhm, a startup veteran previously of Medio Systems, and CTO Damon Danieli, a Microsoft veteran who designed some of the core features of Xbox Live. Madrona had previously invested a total of $4 million, including at the seed stage in 2008. Bluhm notes that the round was more for strategic reasons than operating cash, as Z2Live “turned very comfortably profitable back in November.”

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It used to be that purchases began depreciating in value the moment you bought them. A new car, for example, might as well come with a little Kelley Blue Book countdown under the odometer showing its declining resale price. Indeed, the idea that property depreciates is so universal that it’s built into our accounting methods and tax codes. Traditionally, there have been only a few categories of things that don’t automatically drop in value over time, such as homes (up until 2008 anyway), precious metals, and maybe fine art and other collectibles.

But in the realms touched by software and the Internet, something different is happening. These days, many of the tools that modern consumers depend on, such as computers, smartphones, and entertainment devices, actually grow more useful and more valuable over time, thanks to a) the constant stream of new applications that exploit the devices’ capabilities in innovative ways, and b) the relatively new tradition of free updates for applications or operating systems you already own. In fact, when it comes to digital technologies, we’ve entered what you might call the Age of Appreciation. You can buy a gadget like an iPhone, an Android phone, or an iPad, and then sit back and watch it get more powerful without having to spend another cent.

It’s true that hardware itself still ages, breaks, grows obsolete, or loses its luster. Lord knows that my iPad, which seemed so shiny and magical just a year ago, looks a tad antiquated in my eyes now that the iPad 2 is out. I’m definitely not arguing that we can or should stop buying new stuff.

But I do think it’s worth slowing down to acknowledge the amazing situation we’ve created for ourselves, only 70 or so years into the era of electronic computers. In the Appreciation Age, objects containing computers grow in value because their value resides mainly in the software code they run, and that code can be so easily replaced, supplemented, or upgraded.

What got me thinking about all of this was a pair of relatively routine upgrades to Apple TV, the little black box that lets you play TV shows and movies from the iTunes Store on your big-screen TV. Last November, Apple updated the firmware inside the Apple TV from version 4.0 to version 4.1. And then, just a couple of weeks ago, it upgraded again to version 4.2. We’re so accustomed to such decimal-point changes these days—and they usually happen so automatically, quickly, and painlessly—that they often pass unnoticed. But these two updates definitely came with enough goodies to catch my attention.

The biggest change was the addition last November of something Apple calls AirPlay. This feature connects different devices over a home Wi-Fi network so that, for example, a music or video file stored on a Mac or a PC can be streamed to your TV. I like this feature because it has turned my TV into the sound system for my whole apartment. I can start an album playing on iTunes on my Mac or my iPhone, tap the AirPlay button, and throw the audio over to my TV, which (thankfully) has decent speakers. I also like to buy season passes for a couple of TV series on iTunes and download the episodes to my iPad. When I’m at home, AirPlay lets me watch those shows on the big screen, where they belong.

The more recent 4.2 update came with a big bonus for sports fans: Apple added the ability to watch live, on-demand Major League Baseball and National Basketball Association games for people with … Next Page »

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Microsoft Research is having its annual TechFest get-together across the lake, including some pretty cool-looking demonstrations and discussion of what Microsoft (NASDAQ: MSFT) gets for its $9 billion in annual R&D spending. Of course, one of the biggest storylines out of the research shop lately is the popularity of the Kinect motion-sensor for more than just Xbox 360 games.

The Seattle Times’ Sharon Chan—one of the few reporters allowed to cover the Fest this year—reports that senior vice president Rick Rashid says “Kinect is already a multibillion-dollar business.” I guess I’d like to see the income statement on that one. There’s more on the Microsoft Research site.

A few other items to note in the Seattle-area tech scene:

—Seattle-based HomePipe Networks announced $1.1 million in financing led by Mark DiSalle of Scout Analytics. The other investors weren’t named. HomePipe makes networking software that enables users to access content on their home computer anywhere using their mobile phone. The app is available free or for $24 per year at a premium level.

—A new nonprofit aimed at boosting science, technology, engineering, and math education in Washington surfaced this week by passing out $2.4 million in grants to people working in those arenas around the state. Washington STEM said it’s already raised $20 million with a goal of collecting $100 million over 10 years. Big names from the Seattle area are among the contributors, including Microsoft, Boeing (NYSE: BA), the Bill & Melinda Gates Foundation, and McKinstry.

—Seattle-based Ookla is showing off a revamped Speedtest site, blending some social and game-type functions with the existing technology for checking how speedy your high-speed Internet really is. The new features include something called Speed Wave, which lets several people sign into a group for longer-range connection analyses and win little badges and other social network-enabled trinkets for participating. These guys made bigger news recently with their comparison test of iPhone speeds on AT&T vs. Verizon.

—Nominations are open for the second year of Pivotal Leaders, a network of community-nominated entrepreneurs and executives who will be voted the most promising candidates to lead new companies in cleantech. The effort is organized by Pivotal Investments, a Portland, OR-based early stage venture fund focused on cleantech and sustainability. Last year’s group of 32 leaders included folks from established companies like McKinstry and Microsoft, but also entrepreneurs.

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A little Tuesday catch-up following the holiday weekend (for us, anyway) in Seattle-area tech news:

• Amazon made its long-rumored Netflix challenge official with this morning’s announcement of a subscription streaming video service.

Amazon (NASDAQ: AMZN) already had an a la carte version called Instant Videos, which offers about 90,000 movie and TV titles. Today’s news is that a subset of those offerings—about 5,000 titles—can be streamed for free by members of Amazon Prime, the retailer’s premium shipping service.

The selection sounds like it will be familiar to Netflix (NASDAQ: NFLX) streaming customers. Amazon noted that titles like “The Girl with the Dragon Tattoo” and “Amadeus” will be available, which I happened to skip over just yesterday on my Netflix-enabled PlayStation 3.

But Amazon is also making a point to compete on price.

As others have pointed out, Netflix streaming alone costs about $8 a month, or $96 annually. Amazon Prime—based around unlimited fast shipping for select purchases—costs $79 per year, and the streaming videos are a complementary addition.

Which makes me wonder: Is this about streaming videos to consumers, or about building a broader empire known as Amazon Prime? Sounds like a classic loss-leader.

• Microsoft had some media types over for a tour yesterday and revealed … Next Page »

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OK, it sounds like the press has this “Harmonix for sale” thing mostly wrong. At least in terms of what it means for the Cambridge, MA-based company, and the future of its business. Earlier this month, New York-based Viacom (NYSE: VIA) announced it has put Harmonix up for sale after losing money on the business for the past few quarters. Viacom said it is in discussions with several potential buyers and will keep supporting the business until a sale is completed.

Harmonix was quick to post on its gaming forums that the news doesn’t affect the ongoing support of its Rock Band and Dance Central franchises in any way. Reached by e-mail, Alex Rigopulos, the co-founder and CEO of Harmonix, declined to comment on Viacom’s announcement or its significance to the company. Rigopulos had granted me an interview back in September in which he talked about the future of the business more generally. (He didn’t say anything about it being for sale.)

But people outside the company are talking, and an interesting picture has emerged. Several sources, who asked not to be named, say Harmonix and Viacom were a poor match in terms of their business models and capabilities. More specifically, it’s well established that Viacom did not have the expertise to make money from Harmonix’s games. So, while most of the press has harped on the fact that sales of music games have slumped in the past two years—definitely part of what’s behind Viacom’s decision—it’s clear that Harmonix should be able to find an owner that’s a much better fit. What that means for any future success remains to be seen, however.

“There are very few [game] developers that can consistently generate 90-plus Metacritic-scored games. That is incredibly rare, and that means they’re very valuable,” says Nabeel Hyatt, founder of Cambridge, MA-based Conduit Labs, now part of gaming giant Zynga. “Those developers will always have a buyer.”

Some quick background: Harmonix was founded in 1995 by Rigopulos and Eran Egozy, both MIT Media Lab alums. The music gaming company toiled in relative obscurity until its breakout hits Guitar Hero, Guitar Hero II, and Rock Band. In 2006, MTV Networks, part of Viacom, paid $175 million to acquire Harmonix. At the time, it seemed like a good fit; MTV is all about music, and so is Harmonix. [Disclosure: I'm in a band with one current employee and one former employee of Harmonix. The band, Honest Bob & the Factory-to-Dealer Incentives, has songs in Harmonix games.]

At its core, though, this is an acquisition that didn’t work out. Philippe Dauman, CEO of Viacom, spelled out the problem in his remarks last week. “For us, it is about focus,” he said. “The console games business requires an expertise and scale that we don’t have.” In other words, Viacom is a … Next Page »

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Two longtime technology leaders are heading for the exits at Microsoft today. The Redmond, WA, company (NASDAQ: MSFT) announced this morning, amid swirling rumors, that Entertainment and Devices president Robbie Bach is leaving the company this fall. Senior vice president of design and development J Allard is also stepping down from his role, and will become a strategic advisor to CEO Steve Ballmer and his senior leadership team. The company didn’t say how much time Allard will spend in this new role.

Bach is a 22-year Microsoft veteran who has led some of the company’s most important and successful products over the years, such as Xbox in its battles with Sony; Microsoft Office; and Windows Phones. He is leaving the company to dedicate more time to his family and nonprofit work, according to a statement. Allard, meanwhile, is a 19-year vet who is widely known as a creative force behind consumer products like Xbox, Zune, and the Kin phone, as well as the Windows and TCP/IP product families. In his new role, Allard will keep a hand in Microsoft’s consumer strategy, according to the company.

Ballmer heaped praise on both executives on their way out. “Robbie’s an amazing business person and close personal friend, which makes his departure a point of sadness for me,” he said in a statement. “However, given the strong leadership team he has built, the business performance of E&D this year and the launches of Windows Phone 7 and ‘Project Natal’ this fall, we are set up well for success as we continue to drive our mobile and entertainment businesses forward.”

As for Allard, Ballmer said, ““He was one of the key drivers in our early work on the Web, and we’re absolutely delighted that J’s role with the company will evolve in a way that lets all of Microsoft benefit from his business insight, technical depth and keen eye for consumer experience.”

As part of the transition, Microsoft said senior vice president Don Mattrick will continue to lead the Interactive Entertainment Business, and senior vice president Andy Lees will continue to lead the Mobile Communications Business. They will report directly to Ballmer as of July 1. (They had been reporting to Bach.)

News of the re-org, to borrow a bit of Microsoft-speak, comes on the heels of another notable departure at Microsoft. Earlier this month, 17-year veteran Alex Gounares, the former technology assistant to Bill Gates, announced he is leaving to join New York-based AOL. We’ll be watching to see if the senior executive brain drain continues—and who steps up to fill the voids.

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Please excuse the March Madness sports metaphor, but Microsoft is picking up the intensity around its innovative new products (and earlier-stage projects) this week. Between its TechFest research showcase, healthcare software product announcements, and a special local appearance by CEO Steve Ballmer, the Redmond, WA-based company is on a serious PR roll, getting the word out about its technology across a wide range of sectors. Not that there’s anything wrong with that. All of this takes place in the afterglow of Microsoft’s introduction of Windows 7 last fall, and its new mobile operating system, Windows Phone 7 Series. Here’s a quick wrap-up:

—CEO Steve Ballmer is giving a talk on the future of cloud computing at the University of Washington tomorrow morning. It will be at 10 am in the Microsoft Atrium of the Paul G. Allen Center for Computer Science & Engineering. And for the hands-on techies out there, you can take a tour of a portable Microsoft data center (housed in a cargo container), which demonstrates part of the company’s plan to “modularize” this crucial piece of equipment.

—TechFest, the annual showcase of Microsoft Research demos, was in full swing this week. A few projects to improve user interfaces grabbed me the most. One is “Body Computing,” whereby a person could use finger gestures or could tap on his or her own arm to control a computer; the system tracks electrical muscle activity and/or mechanical vibrations using sensors embedded in an armband. Another project is “Mobile Surface,” whereby you can interact with a screen projected on a table (which might show pictures or documents, say) using a mobile phone connected to a camera and projector system. The technology behind it is a bit similar to Project Natal, the Xbox add-on interface slated for release later this year.

—Health-IT software has become a major effort within Microsoft. Its Health Solutions Group numbers about 700 staff (800 if you count the new Sentillion team in Andover, MA). This week, the company announced HealthVault Community Connect, a unified software platform that allows hospitals to gather patients’ electronic medical information and make it available to patients and their referring doctors. It’s a big step in Microsoft’s plan to reach consumers through their physicians and drive mainstream adoption of electronic health records (and the HealthVault platform). The new software for hospitals will be widely available in the third quarter of 2010.

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What’s the connection between hardcore, chest-pounding video game action and Niels Bohr’s interpretation of wave-particle duality? It’s an Iranian-American physicist-turned-entrepreneur named Shahriar Afshar. Five years after Afshar announced the results of one of the most controversial experiments in the recent history of physics—one suggesting that it is possible, contrary to Bohr’s long-accepted theory, to observe light behaving as both particles and waves at the same time—the Cambridge, MA-based startup he founded, Immerz, is about to launch an “acousto-haptic” device that lets gamers both hear and feel gaming action at the same time.

Immerz’s product, called Kor-fx, is essentially a pair of woofers for your chest cavity, designed to enhance the sense of being immersed in a game (or a movie or a song)—hence the company’s name. Immerz showed off the device for the first time last week at the i-stage competition in Phoenix, AZ, where the Consumer Electronics Association—the same organization that runs the giant CES convention in Las Vegas every January—chose it as one of the 11 most innovative consumer technology products shipping next year. The company plans to bring the product to market in the first quarter of 2010, focusing first on PC gamers, and later on console players.

Afshar’s switch from experimental physics to gaming may sound like a strange change of direction—and it is. But there’s some logic to it, just as there is beneath the perverse and often baffling world of quantum mechanics. “My mission in life, ever since I have been mature enough to have a sense of a goal in life, has been to reveal realities that are right in front of our eyes but we missed,” Afshar says. “It excites me that there are so many hidden realities out there that we can unravel”—including the hidden monster who may be sneaking up behind you in a video game.

The Kor-fx device consists of a pair of vibrating transducers attached to a yoke that holds them snugly against a gamer’s chest. They translate the same audio signal going to a user’s speakers or headphones into a shaking sensation that is literally visceral—the vibrations echo through the user’s chest cavity and vastly heighten the sense of immersion when playing an action-heavy PC game, watching a movie, or listening to music.

Because the transducers vibrate in stereo, and because the human tactile system is pretty good at translating vibrations into directional information, it’s actually possible for someone wearing the device to sense which direction gunshots are coming from in a first-person-shooter game like Half Life, and even to feel events occurring “behind” them in the virtual world. Afshar calls this the “seventh sense.” (I’m not just repeating public-relations verbiage here—I’m one of the first journalists who has had a chance to try out the device, which adds an almost frightening level of you-are-there realism to both video games and action movies.)

Immerz, a two-person company based at the Cambridge Innovation Center, has applied for patents on the transducers. It has what Afshar calls “big name” angel investors, though he won’t identify them yet. But it’s also seeking venture-level financing so that it can start to produce the Kor-fx units in mass quantities (the company outsources a lot of its design and manufacturing work). The next big public showing for the technology will be at Pepcom Digital Experience, an event for journalists, analysts, and industry insiders preceding the CES trade show in January.

Afshar obviously isn’t your typical game-industry entrepreneur; my interview with him yesterday started off with a 15-minute discussion of quantum mechanics. In 2004, I learned, the Harvard-trained physicist presented the results of a groundbreaking … Next Page »

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In case you missed it yesterday, the New York Times ran a sweeping review of Microsoft’s position in the tech world on the eve of its Windows 7 rollout this week. That’s the latest version of Microsoft’s iconic operating system for personal computers. But the article smartly goes beyond the company’s strategy for PCs, and examines its near-term prospects in areas like search, mobile, entertainment, and cloud computing.

It’s arguably the most challenging time in Microsoft’s 34-year history. The Times piece points out the company’s revenue declined for the first time ever in its 2009 fiscal year, and it faces increasing competition from the likes of Apple, Google, Amazon, and Salesforce.com. Nevertheless, top Microsoft execs like CEO Steve Ballmer and chief software architect Ray Ozzie continue to defend the company’s position in the market, reiterating its focus on phones, PCs, and TVs—the idea of “three screens and a cloud” that Ozzie talked about back in May. Microsoft also has earmarked nearly $10 billion for R&D spending over the next year, according to the piece.

The conclusion? The Times calls the overall forecast for Microsoft “partly cloudy.” It’s a bit of a letdown, but the story does cover a lot of ground in terms of different technology areas, and competitors coming from different angles.

The story also includes critical comments from a couple of former Microsoft veterans who have strong ties to the Seattle tech scene. Bruce Chizen, the former CEO of Adobe Systems—and now a venture partner with Seattle-based Voyager Capital—is quoted as saying about Microsoft, “They are not the company they once were in terms of market position…They no longer have a monopoly that is critical to the future of computing.”

And Bryan Trussel, the former head of Xbox Live Arcade and now CEO of Glympse, a Seattle-area mobile startup focused on location sharing, is quoted in the context of Microsoft’s recent efforts to work with developers, students, and cloud-computing startups— crucial audiences that company execs have worried about losing touch with. “They got scared,” Trussel says in the piece. “I think they get it now, but the question is how far behind they are.”

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Microsoft’s latest reorganization, which involves labs in both the Seattle and Boston areas, has a new face. It’s Lili Cheng, a 14-year Microsoftie with experience in both research (social computing) and products (Windows Vista user experience). Cheng now officially leads three separate groups that are being rolled into one: her Creative Systems Group within Microsoft Research in Redmond, WA; Rich Media Lab led by Kostas Mallios, also in Redmond; and Startup Labs in Cambridge, MA, led by Reed Sturtevant.

Yesterday, chief software architect Ray Ozzie announced the creation of the new entity, called FUSE (Future Social Experience) Labs, which will focus on social computing as applied to Microsoft products in entertainment and business. Sturtevant, the founding managing director of Startup Labs, is leaving the company, while Mallios will continue to report to Ozzie and is taking on business development duties involved with technology incubation.

But back to the lab’s new head, who spoke with me from Cambridge yesterday. Cheng, after inheriting about 70 staff members from Startup Labs and Rich Media Lab, now manages about 80 people in FUSE Labs, and says she will be splitting her time between the Seattle and Boston areas. She said the employees of Startup Labs (there are 30-some staff members) will be staying in Cambridge.

As Cheng explains, the goal of FUSE Labs is to “bridge the gap” between research and products—an oft-heard refrain at Microsoft (and most big companies)—by working on projects that are two to five years away from commercialization, and interacting closely with product teams.

The specific focus of the lab is social computing—applying social media (things like Twitter, Facebook, and other social-network technologies) to problems in business collaboration and entertainment. The high-level strategy here is to “embed social activity into business scenarios” for Microsoft, Cheng says. She didn’t say anything more specific about Microsoft’s plans for social media, or about how the employees in Startup Labs and Rich Media Lab will be integrated into the social theme. But she adds, “Interacting with other people is so personal and emotional to every single person out there. It’s important for every company out there.”

Cheng’s team has previously built applications like Kodu, which lets kids create games and stories using an Xbox controller and share them on a community games channel; and Salsa, a prototype that connects your e-mail inbox with social networks. (The latter sounds a lot like what the Seattle startup Gist, led by ex-Microsoftie T.A. McCann, has built and is actively testing.)

Asked what her greatest challenge is in the new job, Cheng said it’s addressing how to “take best advantage of this amazing opportunity.” Having been in the social computing space for many years, she says, now it’s time to “just go for it.”

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What’s it like in the world of corporate venture capital these days? For Jeff Schrock, it’s pretty stable and good. Probably more stable than at many boutique venture firms, which are under increased pressure to raise funds and get quick returns.

Schrock is a Seattle-based tech investor with Intel Capital. In a previous life, he co-founded Seattle startup Activate—which was bought by CMGI in 1999 and then Loudeye Technologies in 2001—before becoming an executive at Yahoo and then RealNetworks. He was most recently an investor with Monster Venture Partners, until he joined Intel Capital in late 2008. Schrock is a board member of San Francisco-based Transpera and Seattle-based LearnLive Technologies, and chairman of EVO Media, the Seattle makers of the DevHub publishing platform, which recently became “ramen profitable,” as Schrock puts it.

A quick snapshot of Schrock’s current firm: Intel Capital has invested about $4 billion in some 400 companies, including a $1 billion investment in Kirkland, WA-based Clearwire (NASDAQ: CLWR). It has approximately 70 investors globally, about half in the U.S. and half international. The investment team is organized into eight sectors (including consumer Internet, digital home, and mobility) across 20 or so different geographies. Although Schrock is based in Seattle, his investment focus is not tied to the Northwest. But it’s where he has the most experience and contacts, so he has a unique perspective on the region.

In an e-mail interview, I asked Schrock about his new gig at Intel Capital, his specific investment themes, and the trends he’s seeing in consumer technologies and startups. Here’s a transcript of our interview:

Xconomy: Can you talk about your current role and responsibilities at Intel Capital, and how it fits into the arc of your career as an entrepreneur and investor?

Jeff Schrock: My job is to make profitable investments in companies which move computing and Intel forward. I am on one of our consumer investment teams—so it feels very familiar as much of my career has been in the consumer Internet. (Previously, I was an executive with both RealNetworks and Yahoo!) It is different, however, being on the other side of the table. I spent a good chunk of my early career as an entrepreneur asking, receiving, and sometimes begging for venture capital. I can empathize with the startups and entrepreneurs I have the pleasure of working with. But it’s still early in my investing career, so we’ll see if this makes me a better investor or not.

X: What is special about Intel Capital, and how does it differ from most VC firms?

JS: There are a number of things unique to Intel Capital. First, it is truly a global organization. It’s very easy to collaborate across sectors and geographies. This brings advantages to us, as investors, but also to our portfolio companies who can tap into a wealth of expertise and relationships. Secondly, because of the heritage as a manufacturing company, Intel Capital is very well organized. The decision-making process is quite transparent and structured. As an outsider who’s primarily worked in software companies, this was a welcome surprise. Lastly, Intel Capital is not a fund. Unlike our colleagues in boutique VC … Next Page »

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Cambridge, MA-based GamerDNA, a social network for video gamers, says that it has released an advertising network that enables game companies to deliver ads to people depending on the games they are playing and discussing online. The firm’s early customers for the ad network include big names in the game industry such as CCP Games, Dell, Funcom, Namco Bandai Games America, and Turbine, according to company. Wade has followed GamerDNA and its ambitious plans to grab its share of the growing, multibillion-dollar video game market.

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