For Lieberman, its all about perspective

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A little perspective, especially in the overhyped world we live in where every Internet start-up promises to revolutionize the world, can be a good thing. And for Gary Lieberman, broadband technology/interactive television analyst at Morgan Stanley Dean Witter (MSDW), his job is all about perspective. Tracking the players in a wide and varied field, Lieberman keeps his eye on set-tops, PVRs and interactive television, constantly separating the good from the bad in the quest for finding tomorrow's winners today.

Before joining MSDW, Lieberman worked with Richard Bilotti, beginning in 1996, covering cable television and entertainment companies. A graduate of the University of Delaware with a dual concentration in finance and operations management and a minor in management-information systems, he received his CFA designation in 1998.

Broadcasting & Cable's Ken Kerschbaumer talked with Lieberman about the advent of interactive television.

Many analysts are saying the interactive television market will be larger than $5 billion a year within five years. What's your take on these predictions?

I'm extremely bullish. The average person watches more than four hours of TV a day, so the audience is huge. The one critical thing that's missing is that you need to give viewers the tools and the applications so they can interact, and today viewers are somewhat limited in what they can do.

What makes you bullish on it?

It's a natural evolution. For example, for QVC or Home Shopping Network, it'd be great if viewers could just click the button and have the purchase billed to their credit card. So, from that perspective, I think the opportunity's huge.

From a technical standpoint, the set-top box is going to play a pivotal role, but there seems to be some differing opinions over how much computing capability those boxes need. Some operators are waiting for the delivery of next-generation set-tops, while others are moving ahead with existing set-tops. What's your take on how much power those boxes need?

Technically, they are computers, but they're much less powerful computers than anything you can get from Dell or Gateway. And it doesn't need to be as powerful as a PC, because there's a very powerful cable network behind it. The trick is for the operators to learn how to manage an interactive service that does some processing on the set-top box and more processing on the cable network.

Another thing is the cost. The sweet spot for the cable operator is around the $300 price point. So the goal for the various providers of set-top boxes, like Motorola and Scientific-Atlanta, is to get a box that they can sell to the cable operators around the $300 price point.

It sounds like figuring out how to manage the system between the set-top and the system could be a complex undertaking.

So far, it's been pretty complex. I mean, the one fly in the ointment is that you're always going to have new generations of set-top boxes. And, in any given system, you're going to have newer boxes and older boxes, with different levels of processing power. So the question for a cable operator is going to be, can you offer the same applications both to someone with a legacy box and to someone that's got the new, state-of-the-art box? And how does that evolve?

It's a complicated solution, and there are probably a lot of different answers. The cable operators are willing to spend money, but they don't want to have to replace set-top boxes every year or two years. But, at the same time, they want to offer new services. There are a lot of issues that I think these guys will have to deal with in order to find the right solution.

What are the top three or four issues?

I think the first one is just how often are they going to replace set-top boxes? Historically, the typical life of a set-top box is probably six years or greater. But what's the useful life of a PC? It's a lot less than that. So they may have to replace their set-top boxes more often, or they'll develop some sort of solution that uses the network as effectively as possible, in order to prolong the life of those set-tops.

But odds are, if they need to replace them, it's because their services are generating enough revenue to warrant adding new services.

Absolutely. If take rates on new services blow through the roof, then they'll probably be happy to do whatever it takes in order to get those services out there.

What's the next step?

They need to sort through the software issues in terms of what client software is going to be in the box: How fat vs. how thin can it be? I think it will come down to their wanting to offer the largest number of applications to the largest number of consumers.

For example, on a high-end box, maybe they can have a fatter client and do more processing in the box. But, on a legacy box, the network may have to do more of it. So I think the key is for the cable network and the solution to be as flexible as possible.

The thing to remember is, if you have the processing power in the box, you can go ahead with the fatter client. But what's going to happen over time is you're always going to be chasing the carrot. Because a high-end box today won't be the state-of-the-art box in a year or two.

Where do personal video recorders fit in?

I think that viewers are going to become used to the PVR technology very quickly. The best analogy that I can come up with is that it will be like the first time you got a car with power windows. From that point on, you need power windows. That's how powerful the PVR technology is.

Will the interactive-TV experience give way to a personalized-TV experience, in which people download and store information and programming?

I think it will come down to bandwidth at some point. It also will come down to where you want to offer personalized services. People today don't think of downloading stuff to their television set, but, in the future, they might. I think the first step, obviously, will be video-on-demand. A lot of the cable operators are talking about that as the next incremental product that they'll offer on the cable platform.

Is there a killer application out there?

I don't know the answer to that. It's probably going to be something that people don't expect. People didn't expect that Who Wants to Be a Millionaire? was going to be as big a hit as it was. So the killer interactive application will probably be something that takes people a little bit by surprise.

From a platform perspective, I think the goal for the cable industry is to open the platform to as many interactive developers as possible. That killer app may very well come from some 20-year-old in his dorm room. So you want to invite that kind of creativity by opening the platform and giving different developers the tool set to do that.

Do you think the convergence of the TV and PC will happen? Or will the changes be subtle?

I think that the Internet is certainly going to have implications on the TV. Consumers are now more used to actively interacting with content. The Internet has gotten people more used to driving the experience.

I think interactive TV will fall somewhere in the middle of the PC and TV experience. You're not going to lean back quite as much as you once did, but I don't think you're going to lean as far forward as you do with your PC. It's also going to be entertainment-based, and you're still going to want to watch your favorite shows and sporting events and content.

But the ability to interact and to get more information will certainly be attractive. And, hopefully, it will be something that the content providers and the network providers can use to their advantage to increase ratings and get more eyeballs.

So how can an interactive-service provider become a winner in this new market?

There are a couple of things. One is that brands are very important. Someone who has an established brand has a leg up-especially on television. On the technology side, the one that anticipates the need for a solution and develops it first has a window. It takes a year to develop a product, and it'll take someone else, maybe not a year, but a length of time [to catch up]. So that gives a technology company a window.

The second thing is a company needs to integrate its service or technology with all the existing components. It needs to work on Motorola and Scientific-Atlanta equipment and other pieces of the network. And third, and even more importantly, you need to sell it to the cable operators and the content providers, because those are the guys that get you in front of the viewers. And then, probably, finally, it will become a game of staying ahead of new entrants that try to create a better solution and take market away from you.

I think a lot of companies have probably done the first two of those things. Only some of them have actually sold the products to either the network providers or the content providers.

So, in the long run, the winner is going to be whoever stays one or two steps ahead of what's coming down the pipe. They'll need to continually anticipate how things are going to change. In the next year or two, we'll be able to see who has done steps one, two and maybe even three. But those who take step four, which is probably the most important, are still to be determined.

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