SEPTEMBER 7, 2000
SPECIAL REPORT--INTERACTIVE TV
Interactive TV's Really Big Picture | Yes, it's finally becoming a reality. While all the pieces aren't in place yet, the promise and the players are becoming clearer all the time
| Want to watch the U.S. Open men's tennis singles semifinals and yet keep up with your favorite player, who's duking it out at the same time on another court? What if you could click on your TV's remote control and instantly get the scores of other matches in real time without missing a single serve of the match you're watching?
If you're a cable-TV subscriber in Los Angeles, St. Louis, or Jacksonville, Fla., you just might be in luck. USA Networks, broadcaster of this year's U.S. Open, has created a system using software from Wink Communications to do just that. During the two weeks of the tennis tournament, 300,000 households that have Wink-enabled set-top cable boxes can check out a full day's scores even as they watch the match that's being aired.
Believe it or not, long-promised and much-hyped interactive-television (ITV) services are finally rolling out. Their availability is still limited in most of the U.S., but cable and satellite operators will provide them to many more subscribers this year. In Europe, ITV already has 15% of viewers and will grow to 60% by 2004, estimates Andrew Wallace, vice-president for global marketing at British set-top-box maker Pace Micro Technology. In the U.S., research firm Jupiter Communications estimates that by 2004, nearly 30 million households, or 27% of the total, will use ITV features, primarily via digital cable.
SLOW UPTAKE. Interactive services, including linking to additional information on customized Web sites, instant messaging friends via your TV, ordering a pizza, and fast-forwarding through the commercials during a "live" television program, are going to change watching TV as we know it. This isn't about surfing the Web from your TV set, which consumers may not be hot to do, based on the slow uptake of services such as Microsoft Corp.'s WebTV. (Although, once the Web becomes enriched with streaming media and broadband, you may very well want to use the tube to watch video clips of a cross-country road race on sports site Quokka.com or to view the home movie your sister e-mailed you.)
And, although interactive TV is about convergence, it isn't about the PC replacing the TV. Rather, it's about turning the TV into an entirely new kind of home-entertainment device by adding PC-like features such as enough storage to provide video-on-demand or store prime-time programs to watch at 2 a.m. It's about integrating instant messaging so you can chat on-screen with friends during a favorite show, or hyperlink to additional information.
"The TV experience 5 to 10 years from now will be dramatically different," says Mike Ramsay, CEO of set-top-box maker TiVo. "Today, we're less than 25% there," he estimates. America Online's acquisition of media giant Time Warner was one clarion call that dramatic change is afoot. "After that, there was no mistaking how important interactivity is to media companies," says David Card, principal analyst with Jupiter.
NEW PLATFORM. In a way, the so-called "killer aps" of ITV are less exciting and more limited than you might think. "Simple complementary information and messaging overlaid on conventional programming will be the rule," Card wrote in a recent report. Larry Marcus, general partner at WaldenVC, a venture-capital firm focused on new media, includes using an interactive program guide, such as Gemstar's, "time-shifting" or recording programs to watch at your convenience, and playing interactive games on his list. As far as interactive enhancements to programs go, those will largely be confined to sports, news, documentaries, game shows, and children's shows, most experts predict.
Still, even such simple interaction combined with the mass audience that only TV can deliver could create a powerful a new platform for commerce and advertising. Interactive TV will generate $20 billion in revenue by 2004, according to Forrester Research: $11 billion in advertising, $7 billion in commerce, and $2 billion in subscription fees. ITV will rival the Net as an advertising medium within three years, Forrester predicts.
For the $91 billion TV industry, interactive services are both a challenge and an opportunity. On the one hand, new TV recording devices, provided by companies such as TiVo, allow viewers to skip commercials, if they like, by giving them the ability to fast-forward through TV broadcasts. That will challenge the tried-and-true TV advertising model, forcing the industry to experiment with new ways of making money. Eventually, however, interactive ads using more sophisticated targeting methods could potentially be more effective.
IMPRESSIVE RESULTS. The theory is that video creates the mood, and the interactivity gives viewers the opportunity to buy. For example, RespondTV created an "enhancement" for a Melissa Etheridge concert last March that allowed WebTV Plus viewers in San Francisco to request a 30%-off coupon for Etheridge CDs from CDNow. While so-called "click-through" rates on online ad banners often run less than 1%, this interactive ad garnered a 22% response rate.
"The world has finally come to grips with the idea that a big t-commerce opportunity is out there that media companies don't want to be left out of," says Gordon Hodge, an analyst with investment firm Thomas Weisel Partners. "The actual examples are really going to be piling on very quickly now," adds Marcus.
Interactive TV is also allowing advertisers to sneak a peek directly into homes. For example, SpotOn, a unit of ACTV, is creating advertising that allows a single sponsor, let's say Procter & Gamble, to send a diaper ad to a home with a new baby and a shampoo ad to a single woman. In theory, networks will one day be able to charge more for more relevant ads. The shady side for consumers is the ability of their cable company to look into their homes, which creates privacy questions that the industry has hardly started to deal with.
"DOING TV." The industry's players, however, have many more-pressing issues to tackle first. Primary among them is sorting out technical standards so that one set of program enhancements can be seen by more than one company's subscribers. "The ultimate killer application is the full integration of all these services into one box, and that is certainly where we will end up over time," says Marcus. "The technology has to be simple," William C. Samuels, chairman and CEO of ACTV, said at an industry conference recently. Viewers "won't perceive doing technology, they will perceive doing TV," he says.
Another hurdle is consumer usage patterns -- and those could be harder to change than many believe. Consumers are hardly clamoring for interactive services, although some evidence shows they'll use them if offered. For example, it's considered a leading indicator that the number of people who use the Net while watching TV is increasing -- to 27 million in 1999 from 8 million in 1998, according to Web market researcher Dataquest.
The best evidence is the popularity of interactive services in Europe. In Britain alone, NewsCorp's BskyB has deployed 3.5 million SkyDigital set-top boxes. Among the households who have those, 45% regularly use the interactive service from OpenTV at least once a week, according to a report by research firm Millward Brown. "Consumers are enjoying interactive TV and coming back," said Jan Steenkamp, OpenTV's CEO, at a recent Jupiter conference.
WHAT'S DIFFERENT. Nevertheless, the fact is that the rollout of interactive services is fueled less by consumer demand and more by competition (satellite companies desire to offer more features than cable, for example). And that makes high-tech management consultant Peter S. Cohan, of Marlborough, Mass., wonder if the current ITV iteration will be doomed to the same failures as previous ones: Just five years ago, Time Warner's highly publicized, expensive interactive-TV trial in Orlando, Fla., flopped with customers.
What's different this time, of course, is the Internet and broadband access to it. First, the Net has made ITV much cheaper. And most analysts believe that it will eventually be free. In fact, the cost of set-top boxes is coming down so fast that service providers may eventually rent them back to consumers for a modest charge the way cable companies do today.
Likewise, although TiVo and EchoStar charge a monthly fee for interactive features, "this will change when TV operators want to encourage penetration of services and revenue streams they provide," says Card. And many analysts believe that one platform or another for interactive television will soon emerge as superior and be adopted as the standard throughout the industry, making it easier for ITV to flourish. The Internet has also made ordinary folks much more comfortable dealing with more than one thing going on at once on a screen and clicking links for more information.
INEVITABLE? All this doesn't mean TV will be revolutionized by next year. When pressed, most analysts see a five-year horizon before ITV reshapes the landscape. But they generally feel it's inevitable. "This is all about creating the ecosystem," says Marcus, who adds that the technological innovation represented by interactive TV is what led him to leave Wall Street recently for the venture-capital world.
"You need the content, you need the infrastructure, and you need the services," he says. "All those pieces of the equation are being solved now with massive capital infusion from people like me." Let the revolution begin!
By Amey Stone in New York, with Stefani Eads
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Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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