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Interactive TV: The Market Payoff and Playoffs

The way people watch TV is about to change-that's been the promise of Interactive TV for more than 20 years. Today, however, the emergence of digital video and Internet technologies is finally making interactive TV a reality.

The mergers of communication companies with cable operators and online service providers also are transforming the industry. Forrester Research estimates that by 2005 more than 55 percent of U.S. homes will have digital set-top boxes. And a recent study by Mercer Management Consulting revealed a multibillion-dollar potential market for enhanced entertainment services, as well as several surprising ways in which interactive television could affect consumer behavior. About 55 percent of cable or satellite subscribers were willing to pay additional charges of $25 per month or more for a full array of enhanced entertainment services.

Interactive TV will change the way people use television. Up to 80 percent of Mercer's study participants said the technology would cause them to skip advertisements, do less channel surfing, abandon traditional television listings or change their habits for renting and buying other entertainment products and services.

Interactive television may have a greater impact on consumers' Internet behavior than the Internet has had on television. When current Internet users were presented with the option of buying enhanced television entertainment that included Internet functionality, fully half of those interested in enhanced television said they would drop their ISP [Internet service provider] service.

These digital TV subscribers will be able to receive more channels and have the power to watch what they want, when they want and the way they want. Pay-per-view movies will be available at any time through video-on- demand. Consumers will have a visual, intuitive electronic program guide to help search through all program information and services. Personal video recording will enable them to pause live TV shows and resume viewing where they left off, view instant replays, fast forward and skip ahead.

Consumers also will be able to interact directly with television shows. For example, consumers can play along with Interactive TV game shows. They can view local weather forecasts on demand and access up-to-the-minute in-game statistics during sporting events. Cable providers are planning "walled garden" applications that enable users to access e-mail, electronic shopping, Web sites and more.

Additionally, consumers will be able to connect various peripherals to their cable set-top boxes. For example, consumers will be able to plug digital cameras into their set-top box, view and edit their pictures and send them to grandma's television set. Or during a baseball game, they can print out their favorite players' statistics on a printer that sits on top of the set-top box.

Already, many of these features are appearing in different forms, which is strong evidence that consumers are eager to adopt these technologies. The ability to cluster information and electronic devices around the set-top box positions it to become the "gateway" to the home. As a result, there are many technology vendors vying to control this important gateway. The operating system on the set-top box is a critical piece to making Interactive TV succeed and the battle to become the industry standard is raging. Currently, cable operators are experimenting with the various interactive services, so the industry leaders have not yet emerged.

INDUSTRY SOFTWARE VENDORS: MIDDLEWARE

The major vendors in the operating system or middleware segment are Liberate, Microsoft TV, OpenTV and PowerTV. There are a few minor players as well, but the market is consolidating. Recent deals include Liberate acquiring MoreCom, OpenTV buying Spyglass and Microsoft acquiring Peach Networks.

In the United States and Canada, the leaders of middleware solutions appear to be Liberate and Microsoft. The two are openly battling for the AT&T deployments, with pilots of both operating systems slated for 2001. OpenTV has the most success in Europe, but both Microsoft and Liberate have design wins in Europe, as well. PowerTV provides the operating software for Scientific-Atlanta Inc.'s set-top boxes, but the software is capable of running on other boxes also, including those from General Instrument. S-A owns 80 percent of PowerTV as an independent subsidiary, but S-A's strategy is evolving to offer whatever operating system their large network-operator customers request.

In the U.S., the OpenCable initiative aims to develop a set of hardware and software standards for digital set-top boxes. It is being led by Cable Television Laboratories Inc., the cable industry's research consortium. To date, however, the OpenCable initiative has not been successful in getting a consensus on a standard for interoperable set-top boxes. Until OpenCable brings cohesiveness to middleware, or the middleware companies consolidate, these companies will continue to offer their own solutions and U.S. customers will not find cable set-top boxes on the shelves of their favorite consumer electronics retail store.

ITV FEATURE PROVIDERS: PERSONAL VIDEO RECORDING

Personal video recording enables consumers to record their favorite television shows, pause live TV and instantly replay recorded portions of live television broadcasts. The success of two PVR companies, TiVo and Replay, has proven that there is a consumer demand for such functionality. Both companies offer a personal video recorder and a service. The recorder connects between the television set and cable set-top box, satellite receiver and/or antenna. Operators who offer digital set-top boxes in the future may include this functionality with their cable offerings, so it remains to be seen whether TiVo and Replay can withstand such competition.

VIDEO-ON-DEMAND

Video-on-demand delivers your local video store to your television. Consumers can select movies when they want to watch them-as opposed to the current "scheduled" pay-per- view model. They can even fast-forward, pause and rewind-just as if they had a videotape in the VCR. There are three VOD vendors, SeaChange International, Diva Systems Inc. and Intertainer Inc. These companies will be successful as operators offer VOD to their cable subscribers.

ELECTRONIC PROGRAM GUIDE

An electronic programming guide enables consumers to easily find the television programs that they want to watch. It provides additional information on the program and with digital cable, it will also allow pre- programming of what programs to watch. The best-known company that offers an EPG is TV Guide; there are, however, other companies offering EPGs. The patent issue remains to be worked out.

INTERACTIVE ADVERTISING

When television goes interactive, so does the advertising. Ads will become more interesting and will have several links to additional information or direct purchasing. There are two companies that are signing up both advertisers and operators: Wink and RespondTV. Operators are very interested in offering interactive advertising because it is an additional revenue source.

PAYOFF

Jupiter Communications projects that interactive television will reach 30 million U.S. households and generate $10 billion in revenue by 2004. Collectively, the big winner in the Interactive TV market will be the cable operator. The operator is the one that chooses the set-top box, middleware and interactive services to roll out to their subscribers. The operator also is the one to benefit from the influx of new revenues that interactive TV generates.


Patrick Sansonetti is vice president, business operations for Rachis Corporation