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Interactive TV: From Promise to Profit

Let's face it: Deploying interactive television services is a costly business. For many, the cost involved is the single, most serious obstacle to entering the market — especially if there is no immediate financial return on the horizon.

There is clearly money to be made from ITV, though that is much more likely in the future, when the interactive infrastructure and return path expand to meet market demand. Unfortunately, the lion's share of revenue tends to be taken by the platform operator, the interactive-rights owner and, to a lesser extent, the return-path infrastructure owner, if there is one. This often leaves the network, the production company and the interactive developer competing to get a percentage of what remains.

With each participant in the interactive chain wanting a share of the revenue, the logical question is: Can ITV be created, deployed and monetized effectively and sufficiently enough to satisfy everyone?

Depending on where you are in the value chain, the answer is going to be different and will depend on how much it costs you to deploy ITV. By examining the position of each player, the logic of the interactive-TV business model becomes clear, along with the reasons why the platform operator receives such a large share of the revenue. It also illustrates the methods by which interactive-TV costs are pushed from the platform to the network to the developer to the advertiser and finally, to the consumer.

Platform op as king

The most powerful player in the interactive television arena is the platform operator. Having made a substantial investment to launch an interactive platform, it is only fair that the operator charge networks and content owners for access.

In negotiating the charges, the operator must show that the platform is secure, robust, attractive to subscribers, well-marketed, and well-supported with customer care. No less important is the requirement that the vast majority of the customers' set-top-boxes are connected to a return path that can be profitable.

There are a number of ways a platform operator can levy charges on a channel for a proposed interactive service:

  • Charging for additional bandwidth;
  • Developing the service, and then testing, integrating, hosting, maintaining and updating it;
  • Listing it on an electronic program guide or IPG;
  • Charging for the set-top-box modem;
  • Charging for use of the return path infrastructure (for voting applications);
  • Receiving a commission on revenue generated from the use of the return path (t-commerce, betting);
  • Charging for lead generation (supplying the name and address of a customer responding to an interactive ad);
  • Charging for transaction handling/fulfillment, and
  • Charging a premium rate on media for an interactive TV advertisement

Sharing the costs

Faced with this array of costs and charges, a network or content owner who wants to launch an interactive service has a number of options. These can either help share the cost of deploying that service or help avoid some of the charges being levied by the platform operator.

The most obvious way of sharing the cost of developing an interactive service is to find an advertiser who will pay to be the exclusive sponsor. This option is very attractive to advertisers who can have on-screen brand exposure for the duration of a program, in addition to the chance to share in any revenue generated by the interactive service being sponsored.

The advertisers can benefit from the application they are supporting by including qualification questions as part of the feedback mechanism. This means that they better qualify interest in their product, and optimize the fulfillment of that interest, through direct-mail and other marketing activities. This method has been used effectively by the Ford Motor Co., advertising and qualifying requests for information on the Discovery interactive portal carried on DirectTV.

Apart from sharing the cost of an interactive service, there are many ways of avoiding or reducing interactive costs and charges. Training a small team to develop and run interactive services in-house can be more cost-effective than using a third-party developer. Some developers charge for service maintenance and each individual update made. In addition, an in-house team will be able to respond quickly to after-hours faults or crashes.

Creating and deploying one interactive application that can be retooled for other applications can reduce development costs. Time Warner Cable's Oceanic Division in Hawaii enhanced its pay-per-view offering of the University of Hawaii football games last fall by providing viewers with an interactive sports application. Subscribers enjoyed the ability to select camera angles, audio sound tracks, highlights and statistics. Since the PPV channel proved itself a winner with viewers and with cable system management, other sports applications will follow.

Forward-path delivery

Of course, not all interactive services need a return path to generate revenue, thus enabling them to avoid return-path related charges levied by the platform operator. In the U.K., platforms and networks, such as Sky digital, MTV and Music Choice Europe, have used forward-path delivered interactivity to increase either their subscriber base or their audience share and size while reducing churn. This generates indirect revenues through increased subscriptions and higher advertising revenues. Music Choice Europe also created an additional revenue stream by selling banner advertising on its interactive service.

For generating direct revenue from applications such as voting or competitions, the viewer is offered a choice of interacting either via the set-top box, the web, or by telephone line. This creates three simple and logical benefits: access to viewers whose set-top boxes are not connected to a return path, the opportunity for the viewer to vote after the interactive program has finished transmission, and exploitation of a return-path mechanism which may offer more favorable margins. How the viewer actually interacts depends on the nature of the program and how it is advertised.

A key area in interactive television, and one that has sometimes created difficulties, is the issue of rights. The company that owns the interactive rights to a TV property can claim the lion's share of its interactive revenue potential. Broadcast rights are very different from interactive rights. A platform operator or network, which only has the broadcast rights to a popular TV show, is not in a favorable position to claim a share in its interactive-revenue potential.

It is important for content or format owners and networks to develop and own the interactive rights to their properties. Once they do, these rights can be sold to a network or platform operator. Alternatively, a range of interactive services can be developed, and the property or rights owner can take the greatest share of revenue generated. Money generated from the interactive service can then be used to retro-fund its development.

As platform operators offer their subscribers more choice, convenience and value through the introduction of video-on-demand, personal video recorders and network PVRs, networks and content owners will have far more opportunity to develop and deploy interactive programming and enhancements. As digital penetration grows and as new innovations expand platform capabilities and features, economic models will evolve that will enable each participant to benefit. Consumers will truly experience and enjoy the promise of interactive TV.