David vs. Goliath in Race for a New Software Standard : Programming: Plans for non-traditional computer devices pit Microware against Microsoft.

CLIVE, Iowa — Eight years ago, Kenneth Kaplan got an offer to sell his software company, Microware Systems Corp., to Microsoft Corp., which was already well on its way to dominating the personal computer software industry.

“It was pretty tempting,” said Kaplan, the firm’s president and a co-founder.

But one late night a short time later, a Microware executive “slammed his hand on the table and said, ‘I don’t want to work for the blankety-blanks. I want to destroy the blankety-blanks,’ ” Kaplan said.

“That’s been our policy ever since.”

Microsoft is still trying to break into Microware’s business, making programs that run computerized functions of things that are not typically thought of as a computer--like a TV, pay phone, traffic light or a car.

Their growing rivalry, despite its David vs. Goliath nature, is a sign of how computing is changing.

In time, many products will have chips and software running inside them, and most people won’t notice or think of them as computers. Microware hopes to be a standard-setter in program design for those devices.

The company gained attention last winter when one of its programs, called David, was chosen as the software for set-top devices in the interactive TV services Bell Atlantic Corp. will start this winter in northern Virginia, New Jersey and Pennsylvania.

Such set-top boxes are the key appliances that let TVs receive the advanced home shopping or video-on-demand services that phone and cable companies envision.

Microware has also formed a similar agreement with Nynex. Kaplan said he hopes to announce arrangements with at least two more regional Bell phone companies by the end of the year.

The company suffered its first loss last month when Southwestern Bell Corp. chose Microsoft and Lockheed Corp. as its partners for a two-way TV trial in suburban Dallas late next year.

“I’m not terribly concerned about the Southwestern Bell trial,” Kaplan said. “We have so much momentum now. Microsoft doesn’t have a product and won’t for at least a year.”

The two companies have different approaches to the slowly evolving interactive TV market.

Microsoft is developing a full-network program for use in both the switching centers and the homes and businesses at the end of a network. Microware’s software is more flexible, with the set-top box being one of many uses for it.

One sign of Microware’s lead is that David has been licensed by 22 consumer equipment manufacturers, including IBM, Philips Consumer Electronics, GoldStar and Samsung.

The program is a version of Microware’s core OS-9 operating system, developed in the early 1980s as a speedy way for a computer chip to manage simultaneous tasks.

More than 750 companies have put OS-9 in more than 4,000 products, ranging from the CERN particle accelerator (an atom smasher) to pay phones in France to the navigation system in German-made BMWs.

Such industrial applications account for about 70% of Microware’s approximately $20 million in revenue.

Microware has been successful because of the flexibility of its programs to fit with many systems, said Lucie Fjeldstad, a former IBM senior executive and now a multimedia consultant in New Canaan, Conn.

“The problem putting together this jigsaw puzzle together is that nobody has a pattern,” Fjeldstad said. “Because no one knows what technology will become the standard, it is important that each of the pieces be able to plug into the other pieces.”

Microsoft was attracted to Microware after OS-9 was chosen in 1986 by Philips as the base software in the CD-Interactive player, a machine that plays movies, music and games off compact discs.

“They are the 1,300-pound gorilla of the business, and anybody that’s got an interest in anything to do with computers has got to look over their shoulder at those guys, no matter what it is,” Kaplan said.

In addition to the Southwestern Bell venture, Microsoft is in a partnership with Intel Corp. and General Instrument Corp. to make a set-top box. Tests are planned in 1995, said Naren Naph, manager of interactive programs for Microsoft.

“If we sat this one out for the next two to three years we would feel we had missed,” Naph said. “This is a marathon we are digging in for many, many years.”

Neither company expects to see much revenue from two-way TV for some time.