WebTV Networks Inc. was founded in 1995 by Steve Perlman, Bruce Leak and Phil Goldman. A prototype of a set-top box was developed in the same year. It used a dial-up modem to provide subscriber services such as HTML-based email. The subscriber services also proxied the websites accessed by the WebTV set-top box so that the content could be displayed more efficiently on a television screen.

Microsoft acquired WebTV in 1997 for $503 million. As a result of the acquisition, WebTV became a Silicon Valley-based division of Microsoft with Steve Perlman as the president. Later, Microsoft worked collaboratively with Sega Corporation to produce the first set-top box developed by a well-known vendor that offered high-end online gaming, Internet access and interactive television.