Any techie with the faintest connection to Silicon Valley—say, shopping at the Target store in Mountain View, Calif.—will readily quote you Moore's Law. It's named for Intel co-founder Gordon Moore and holds that the processing power of computer chips will double every 18 months but the cost will not. It is that steady advance in powerful, relatively cheap technology that made the dual revolutions of the PC and the Internet possible.
There's also a law at work in the cable industry. It holds that, for any given product, cable operators will deliver only half of whatever they promise and it will take them twice as long to deliver it.
That certainly is the case with interactive television. A year ago, cable operators still spoke expansively about the possibilities created by deployment of high-end digital set-top converters. "T-commerce" tripped freely from the lips of cable operators excited about subscribers' using interactive set-tops to buy merchandise, giving operators a slice of each transaction. They envisioned subscribers' chatting online through their TV sets with other fans as they watch wrestling, although it wasn't clear how that meant more revenues.
Halfway through the year, cable's interactive optimism has given way to diminished expectations. Other than Insight Communications, operators are just testing and toying with most advanced services. No one else, for example, has committed to software that would handle such services as Web browsing, e-mail or chat. The largest operator, AT&T Broadband, for example, has shelved deployment of smarter digital set-tops powered by Microsoft in favor of milking more from the less sophisticated equipment it has been deploying since 1997.
Electronic programming guides—a fairly basic form of interactivity—are the only broadly delivered products, partly because they are a great hook to subscribers and partly because they're cheap and easy. The product that operators are most serious about is video-on-demand (VOD), which is expensive and complicated but, given the track record of pay-per-view and rentals by Blockbuster, at least has a plausible business case.
Five of the top eight MSOs have made aggressive VOD deployment a priority for 2002: Charter, Comcast, Cox, AOL Time Warner and Insight. AT&T Broadband and Adelphia are seen on Wall Street as laggards. Don't expect much more any time soon, says Morgan Stanley interactive media analyst Gary Lieberman.
Operators have learned one lesson from the billions of dollars incinerated in the financial fantasy of the Internet: that is, to spend money on products only when revenues are in clear sight. "They're not doing it if it's not clear what the economic return is," Lieberman says, adding, "They don't want to bite off more than they can handle, so it's one product launch at a time."
"It's going to be attractive someday," says one MSO executive. "A lot of this is crawl-walk-run. What we need to do is manage capital spending, so it has to be reasonably priced. We also have to manage the customer experience. Part of the problem with some approaches is that they're everything: e-mail, chat and Web browsing. And there was no attempt to bring the customer into this one application at a time."
That's bad news for technology companies, content developers and advertisers waiting for interactive to crystallize, because cable is the key. DBS and perhaps even broadcast stations can deploy some crude interactive services. The future of companies like ACTV, Liberate, Intertainer, OpenTV and the other ITV players rests squarely on the shoulders of the cable operators. But, for consumers conditioned by the speed and flexibility of the Internet, only cable systems offer the bandwidth, two-way return path and localized scale to make flexible interactive TV happen.
One of the big proponents of interactive television continues to be Insight Communications, which has 189,900 digital subscribers. Although it had planned to be finished by now, Insight Communications has spent the past year deploying Diva-based video-on-demand and its Local Source information service on the Motorola DCT-2000 set-top box running Liberate software.
President and CEO Michael Willner says Insight is committed to providing interactive services and will make these services available throughout his company by the end of this year.
It's crucial, he adds, that cable operators exploit their two-way infrastructure advantage over DBS.
The company has launched Local Source across all of its headends, including Rockford, Ill.; Columbus, Ohio; and Evansville, Ind. A new electronic mall of 40 national and local stores, called CommerceTV, will be launched in Lexington, Ky., this month. Insight is also working on a deal to deploy Wink interactive software.
The interactive systems that Insight has been operating for more than a year have a 26% penetration rate, Willner says, and churn is one-third the rate of conventional digital systems. "When we convert our systems to include interactive services, the churn rate goes way down."
Insight will continue deploying DCT-2000 boxes because the DCT-5000 boxes are not widely available, according to Willner. "When this next-generation box comes out finally, whether it's a 5000 or [Scientific-Atlanta] 8000 or a 2500, we will deploy premium services that we will sell for a premium price."
However, Insight has sunk $25 million into Source Media, which provides the Local Source technology but had slid into deep financial trouble.
On the flip side is AT&T. As the nation's largest cable MSO, its seeming reticence about interactive television raised eyebrows, particularly when the company decided to back away from using the Microsoft TV platform and the Motorola DCT-5000 set-top box. According to spokeswoman Tracy Baumgarten, AT&T has not yet determined exactly where and how it hopes to make a profit (not merely increase revenues) from interactive-TV services.
"The added choice and convenience of digital VOD should see buys increase from the current analog model, driving additional revenue," she says. "Some interactive functions may be offered at additional fees, such as e-mail or Internet access. Finally, adding functionality like local walled-garden content or a PVR give a certain 'stickiness' to our service, ultimately helping to reduce churn."
Baumgarten says AT&T recognizes that some customers will want more advanced interactive features. "We're talking with hardware providers about a mid-level box that would be able to do everything the DCT-2000 could do, plus have an integrated [personal video recorder]," she says. "And we are continuing to work on interactive services for the advanced set-top box. We no longer have a 'one-size-fits-all' strategy but are working on multiple options to meet the range of customer interest."
Baumgarten disputes Wall Street's assessment that AT&T is backing away from ITV. "We've put VOD in customers' homes with Diva. We've put PVRs in customers' homes with ReplayTV," she says. "In Iowa and now Tacoma, Wash., we are working with WorldGate to understand customer interest in channel hyperlinking, walled-garden content, Web access and e-mail. These trials have helped us expand our interactive television plans to include all these options on a range of hardware platforms."
Charter Communications, nearly two years after starting an interactive-services initiative, remains optimistic that consumers want ITV and are willing to pay extra to get it. But Dave Housman, Charter's vice president of Corporate Development & Technology, says that he has concerns that other MSOs have not kept to their stated deployment plans, leaving Charter at the forefront of ITV deployment.
"There are some MSOs out there that are in a survival mode and are not aggressively pursuing the interactive path they were a year ago," he says. "That leaves us out there alone."
Charter deployed 1.35 million digital set-top boxes and is working to bring interactive services to them. "We haven't lost focus on future products and building a network infrastructure that will deliver streaming, VOD and everything that we've bragged about to Wall Street and the public for so many years."
Depending upon availability, Charter will begin deploying the DCT-5000 by the first half of next year, while continuing to support the Motorola DCT-2000 and S-A Explorer 3000 STBs already in place.
Wink and WorldGate software is currently deployed in a number of Charter systems with favorable results, and experiments have also begun with Microsoft TV and Liberate software. Broadband Partners Inc.'s Digeo service is handling development of the interface applications and other digital services for the DCT-5000 and Explorer 8000 boxes, which will be offered to subscribers sometime next year.
Comcast, continuing last year's policy, remains unwilling to discuss specifics as to trials and deployments, but Mark Hess, vice president of digital TV, says that he sees VOD as an important building block for interactive television. He also sees it extending beyond movies. "The key is to teach ourselves how to do our core product in a narrowcasted way," he says. "And once we're good at that, it isn't just movies on demand but working with [other content]."
With approximately 1.56 million digital set-top boxes in the field, Hess says the key is to make sure any interactive services can be built on top of the Motorola DCT-2000 set-tops and S.A. Explorer boxes Comcast is using. The key now is figuring how to integrate the services within the boxes.
"There are some applications that are going to come out so that the customer can go from one application to another without the customer even knowing it," he says. "Once you teach customers that, when they hit a button, a movie starts, that's pretty magical."
One of those applications will be Liberate Technologies' platform, which the company will deploy on Comcast's basic digital set-top boxes. Hess says that the Liberate platform will allow Comcast to create a plug-and-play environment for new services.
Cox Communications continues to test VOD in the San Diego market (as it did last year), but it will offer an initial deployment of VOD services in Hampton Roads, Va. The deployment will take place in the third quarter for approximately 2,000 customers on the MSO's fifth-largest system. The company plans to use Concurrent's MediaHawk broadband VOD system along with Motorola set-top boxes. Cox will also begin trials with WorldGate in the third quarter, as well as with Liberate Technologies.
'You've got VOD'
With digital-cable subscribers in Tampa Bay/St. Petersburg, Fla.; Honolulu; Austin, Texas; and Columbia, S.C., currently accessing VOD, Time Warner has hundreds of thousands of subscribers involved in the testing phase. The most recent addition to that list is Columbia, where the company is testing a VOD subscription to HBO.
"We're very bullish on the prospects for that kind of on-demand programming and would like to roll it out as soon as possible," says Mike Luftman, Time Warner Cable spokesman. "We've been doing movies-on-demand trials in Hawaii, Austin and Tampa for more than a year."
Luftman expects to add another city for an HBO trial by year's end.
Time Warner Cable is working with two VOD vendors during its trials: Seachange and Concurrent. In Los Angeles, nCube has been selected, but the trial has yet to begin.
"We believe there is a strong future for additional ITV services," says Luftman. "We're working with AOL on a version of AOLTV that would be delivered through our boxes, and we're looking at other things, but they're still in the talking stage."
Luftman says the key is making sure the services deployed meet actual customer demand and are reliable. "Clearly, we know they want movies on demand, and that's why that business is being launched first. But we need to make sure that everything is as bulletproof as possible. We're layering on a lot of new businesses, so we need to be careful that the systems and support staff are all ready to deliver it in a glitch-free way."
One MSO that stands as an example of the challenges of even simple digital deployment is Cablevision. The MSO's basic-subscription base has actually gone down from last year because of the sale of systems in Boston and Cleveland. Deployment of the new Sony DHG-M55CV cable set-top box has been scaled back from last year, and now 100,000 units will be distributed this fall, with no extra charge to consumers to move from analog to digital service.
A variety of digital interactive services, such as VOD, an electronic program guide, e-commerce and IP telephony, will be offered and expanded as the digital service rolls out. Personal video recording is also being discussed but won't be available until the end of next year, according to company spokesman Keith Cocozza.
Cablevision recently began a pilot program in and around New York City to test the boxes and their compatibility with the headend facility in Hicksville, N.Y., and the early results have been positive, Cocozza says. It will use Sony's own Application Middleware (SAM) in the set-top box, in tandem with OpenTV software.
Interactive programming is being developed with Cablevision's own Rainbow Media Holding company (which includes Bravo, Independent Movie Channel and American Movie Classics), which will begin to appear in the spring of 2002.
DBS into the game
DBS also will get into the picture. ShopNBC (formerly ValueVision) is about to launch a national satellite-driven ITV service, in cooperation with DirecTV and technology provider Wink. The service, which the company says will be available to 3 million subscribers initially, will try to take advantage of an age-old merchandising strategy: impulse buying.
ShopNBC, which is 40%-owned by GE/NBC, will offer products on its own home-shopping satellite channel (DirecTV ch. 370) and push merchandise tied into regular entertainment and sports programs.
"Viewers will do retail transactions on their TV sets before they'll interact with enhanced material embedded inside entertainment shows," epxplains Kevin Hanson, chief technology officer for ShopNBC. "Satellite companies are getting into this, but cable is not really ready yet."
Hanson is bullish on offering very basic ITV services by ShopNBC and other providers and says it's the smart way to roll out interactive services: "I think ITV is going to provide a very unforgiving marketplace. Viewer expectations for how their TV set functions are very high, unlike with computers. It's probably a lot more valuable to reach a 100,000 homes with a simple, reliable system than a 1,000 households with a very high-end ITV service that may not always work."
Charlie Tritschler, vice president of marketing for Liberate, expects a "mass understanding" of ITV to develop among the public within the next two years.
Is that wishful thinking? Check back in 2003.