Pace Micro Technology (quote: PIC) is continuing efforts to establish itself as a premier name in digital television set-top box technology through an agreement with Microsoft announced this week. The deal promptly drove Pace's share price up around nine percent Monday, though it fell by five percent Tuesday afternoon as investors took profits. The deal builds on a five-year-old relationship between the world's largest software company and Pace, which claims the crown of the world's largest set-top box specialist. Pace's name might not be familiar to consumers, but if you have cable or satellite television in the UK, there's a good chance you're using a Pace product. The company is one of the set-top manufacturers for British Sky Broadcasting (quote: BSY) and On Digital, and the exclusive manufacturer for Kingston, Telewest (quote: TWT), ntl and others. It is also making inroads into the US market, having recently started making set-tops for Time Warner Cable. In the past Pace has mainly worked with Microsoft on its WebTV product, which Microsoft sees as just the beginning of its foray into the set-top universe. Microsoft has partnered with a whole range of technology providers in putting together its set-top platform, and has agreements with such heavy-hitters as AT&T to deploy the boxes on their television or broadband Internet networks. The memorandum of understanding publicised this week is a formalisation of the two companies' relationship going forward, and indicates that Microsoft and Pace will work together to create technology for a core digital set-top reference platform. Pace says the relationship is important mainly because of the doors it will open. "Microsoft is determined to have its operating system in a large proportion of the interactive platforms in people's homes," said Pace finance director John Dyson. "They won't get to the domination they have in the PC world, but they will undoubtedly be an important player. It's essential for Pace to work with a company like Microsoft." He said Pace's expertise in the world of the set-top box will, in turn, be important to Microsoft as the software maker delves deeper into this unfamiliar market. "A PC is allowed to crash once a week... but if that happens to a set top box people rightly get very agitated," he said. "Quality is really really important in this market." Pace is currently showing off some of its concepts for the future of the networked home at the National Cable Television Association conference in New Orleans. Among these, for example, is Shopping Mate, which incorporates a barcode scanner for enabling TV-based supermarket shopping. What do you think? Tell the Mailroom. And read what others have said. See techTrader for more technology investment news, plus quotes and research.