BUSINESS OVERVIEW
We are a digital media company that has developed proprietary technologies,
called Individualized Television and HyperTV. Individualized Television enables
television programmers and advertisers to create individualized programming for
digital television. HyperTV enhances standard television content with
information and interactivity delivered through the Internet. We believe that
Individualized Television is the only technology that enables viewers to
instantly and seamlessly customize their viewing experiences. HyperTV is one of
the first technologies to provide synchronized delivery of television
programming and Internet content. INDUSTRY BACKGROUND
INDIVIDUALIZED TELEVISION
Although television programming is produced for national, regional and local
audiences, it has not been commercially exploited as an individualized services
medium. According to Paul Kagan Associates, Inc., Carmel, CA, over 97% of U.S.
households have televisions and approximately 69% of those households subscribe
to cable television services. We do not believe that there is currently any
television service, widely available to consumers, providing individualized
programming. Historically, two factors have limited development of
individualized programming: (1) the shortage of channel capacity in a typical
cable system and (2) the lack of digital technology available to provide such
individualized services. However, advances in digital transmission and set-top
box technology have begun to eliminate these barriers to providing
individualized programming.
The development of compression technology and the digital transmission of
television signals allows for the transmission of a greater number of channels
with better audio and video quality. The resulting expansion of channel capacity
allows a cable or DBS broadcaster to offer a wider variety of programming
choices, including individualized programming. Traditional analog cable systems
typically offer a limited number of programming channels. Current digital
compression technology, however, allows the conversion of each analog channel
into as many as twelve digital channels of programming. Many major U.S. cable
operators are therefore converting significant portions of their systems from
analog to digital.
The technology necessary to provide individualized services will become
increasingly available as cable subscribers have increased access to digital
set-top boxes. Kagan estimates that nearly 5.1 million U.S. cable subscribers
will have digital set-top boxes by year-end 1999, growing to almost
28.6 million in 2003 and rising to 47.6 million in 2008. General Instrument has
announced orders to date for approximately 15 million digital set-top boxes, and
in the first half of 1999, shipped about 1.6 million of such set-top boxes, an
increase of 130% over the prior-year. In addition, we believe sales of digital
set-top boxes will increase rapidly as prices decrease. Forrester
Research, Inc. estimates that prices for digital set-top boxes will decline from
$400 to $200 by 2001 as chip vendors reduce the cost of the decoders and tuners
that are the main components of the set-top boxes.
DBS can also transmit digital television. We believe that in the future our
Individualized Television service may expand to DBS platforms. Currently,
according to Kagan, DBS had 11.8 million subscribers as of May 31, 1999, and
that number is expected to increase to 15.1 million subscribers in 2003, and
17.9 million subscribers in 2008.
Advertising represents a critical application of Individualized Television
programming. According to Veronis Suhler & Associates, advertisers spent
approximately $48.5 billion on television advertising in the United States in
1998. In addition, Kagan estimates that advertisers in the United States will
increase their sports-related broadcast and cable television advertising from
$5.4 billion in 1998 to $7.2 billion in 2003. Although traditional television
broadcasting, cable and DBS systems do not provide an integrated means for
viewers to respond to programs and advertisements, the Direct Marketing
27<PAGE>
Association, Inc. ("DMA") estimates that approximately $105.8 billion of goods
and services were purchased through direct response television programming and
advertising in 1999. The DMA predicts that this amount will grow to
approximately $159.8 billion in 2004. (Reprinted from Economic Impact: US Direct
& Interactive Marketing Today 1999 with permission from the Direct Marketing
Association, Inc.) Many advertisers are using television advertisements to
generate requests for product information, which in turn serve as sales leads
for their products and services. Today, most direct response television
purchases and requests for information require a telephone call, causing
advertisers to incur a significant cost per transaction. We believe that
television viewers, advertisers and merchants will respond favorably to a
simple, immediate, inexpensive and automated method enabling them to participate
in television commerce.
We believe that sports programming also represents a compelling application
of Individualized Television. Participatory and spectator sports are among the
leading pastimes in the United States, as evidenced by the popularity of sports
media and the amount of money consumers spend on sports events, products and
related services. Further, according to industry sources, sports television
programming in the United States consistently draws large audiences, with sports
broadcasts comprising five of the top ten most widely viewed broadcasts since
1960. According to Kagan, in 1998, broadcast network sports television
programming attracted $3.7 billion in advertising. In addition, the Sporting
Goods Manufacturers Association estimates that sales (wholesale value) in the
United States of sports equipment, athletic footwear and sports apparel reached
$45.6 billion in 1998. HYPERTV
The Internet has grown rapidly over the past several years and is now a
medium used by millions of people for entertainment, education, e-commerce and
multimedia content. Jupiter Communications projects that by 2001, the Internet
will pass 50 million U.S. households, and by 2002, the on-line population will
rival that of U.S. consumers of cable television and newspapers at 62 million.
In addition, The National Center for Education Statistics estimates that over
80% of public schools have access to the Internet. We believe such rapid growth
is attributable mainly to the increasing number of personal computers,
technological innovations providing easier, faster and cheaper access to the
Internet and the proliferation of content and services available on the
Internet. Growing use of the Internet and the World Wide Web has created
opportunities for television content providers and their advertising customers
to reach and interact with millions of Internet users.
The increasing popularity of the Internet and the established popularity of
television have led a growing number of home computer users to simultaneously
access Internet content while they watch television. Over half of all personal
computers, or 22.6 million, are in the same room as a television, and of those,
nearly all, or 21.8 million, use the television and personal computer
simultaneously at least some of the time, according to Media Metrix.
Due to its interactive nature, the Internet is an emerging medium that
competes with traditional television because of its ability to provide
customized, targeted programming and advertising to consumers and to generate
cost-effective results for certain advertisers. According to Jupiter
Communications, approximately 45% of Internet users maintain that they watch
less television because of time spent on-line. To combat this migration and gain
on-line market share, broadcasters and cable programmers have begun and are
expected to continue promoting companion on-line programming during shows and
using commercial airtime to drive viewers to far more lucrative on-line
programming. We believe we are well positioned to take advantage of this shift
in consumer media consumption and that the convergence of television and
Internet content promises significant opportunities for enhanced entertainment
programming.
We believe that the opportunities for television programmers to generate
additional advertising revenues are increasing due to the growing recognition by
advertisers of the potential advantages of Internet-based advertising over
advertising in traditional media. Unlike radio, television and print, the
28<PAGE>
Internet is highly interactive, creating enhanced opportunities for advertisers
to focus their marketing efforts on specific user groups to directly distribute
targeted information to consumers on an individualized basis and to receive
timely feedback from customers and potential customers. Forrester Research
estimates that the amount of Web advertising worldwide will grow from
$3.3 billion in 1999 to over $33.1 billion by the year 2003. Additionally, as
merchants take advantage of the Internet to deliver a guided selling experience
on-line, integrating intelligent product recommendations, real-time customer
service and simplified buying procedures, more consumers are expected to engage
in e-commerce. International Data Corporation estimates that the number of
consumers making purchases on the Web will grow from 30.8 million in 1998 to
182.6 million in 2003 and that the total value of consumer goods and services
purchased over the Web will increase from $14.9 billion to $177.7 billion over
the same five-year period. The combination of growth in on-line advertising and
e-commerce enhances the Internet's value as a commerce medium.
OUR BUSINESS STRATEGY INDIVIDUALIZED TELEVISION
One of our business objectives is to make Individualized Television a
leading application for digital television by achieving widespread use of
Individualized Television programming in all programming genres and advertising.
Our strategies for accomplishing this objective include:
- PROMOTE NATIONAL AWARENESS OF INDIVIDUALIZED TELEVISION THROUGH OUR
LIBERTY MEDIA AND VIEWER'S CHOICE JOINT VENTURES. LMC IATV Events LLC, our
joint venture with Liberty Media, plans to license and produce
individualized national or international marquee pay-per-view events,
including sports, musical, theatrical and news events. Through LMC IATV's
venture with Viewer's Choice, we expect to showcase Individualized
Television to a national audience leveraging Viewer's Choice's marketing
and distribution capabilities.
- DEVELOP TARGETED ADVERTISING SERVICES THROUGH DIGITAL ADCO. We believe
that advertisers are looking for more efficient ways to reach their
targeted audiences. We have created a company with General Instrument,
called Digital ADCO, Inc., to develop applications that will enable the
digital television industry to provide this efficiency to advertisers.
Specifically, the company will provide the means for television
distributers to insert advertisements into a digital programming stream
without noticeable interruption and deliver to their viewers targeted
commercial messages based on demographic or geographic information or on
the viewers' purchase behavior. Both we and General Instrument have
licensed certain of our intellectual property to the company, along with
contributed management and technical knowledge to launch the business. In
addition, General Instrument has made a $5 million capital commitment to
the company.
- FOCUS INITIALLY ON REGIONAL SPORTS PROGRAMMING. We believe the intensity
of sports programming, combined with features available through
Individualized Television such as a different view of the action,
highlight packages, statistics or instant replays will lead viewers to
associate Individualized Television with a distinctive experience and
result in rapid consumer acceptance of our service, products and
technology. In addition, focusing on sports programming is more
cost-efficient than a more diverse programming line-up, enabling us to
attain profitability in a region with a relatively smaller subscriber
base.
- GAIN BROAD DISTRIBUTION OF INDIVIDUALIZED TELEVISION. We intend to gain
broad distribution of Individualized Television through digital
distribution systems, including cable, DBS and eventually broadcast
television, by concentrating our efforts on the following activities:
/ / TARGETING CABLE OPERATORS WITH SIGNIFICANT DIGITAL SYSTEMS.
Initially, we plan to distribute our regional sports network through
cable systems in targeted regions of the United States where a
greater proportion of the cable systems currently offer, or have
indicated they will soon be offering, digital set-top boxes to their
subscribers. 29<PAGE>
/ / DEVELOPING SOFTWARE COMPATIBLE WITH DBS SET-TOP BOXES. To increase
the potential market for Individual Television subscribers, we
intend to expand the compatibility of our Individualized Television
software to the greatest number of digital set-top boxes, including
those deployed in DBS.
- EXPAND INDIVIDUALIZED TELEVISION PROGRAMMING INTO OTHER TYPES OF
TELEVISION PROGRAMMING. Once we have developed programming for marquee
events, advertising and regional sports, we intend to expand into other
types of individualized programming, such as music, game shows, news and
children's programming and into international markets. We may license
content from producers of such programming, either telecasting
individualized versions of this new programming across all of our existing
regional networks or creating networks tailored to such new programming.
Additionally, we may license our technology to programmers to allow them
to create individualized versions of their content. HYPERTV
One of our business objectives is to be a leading provider of software,
hosting and creative services for enhancing television programming with
information and interactivity available through the Internet. Our strategies for
accomplishing this objective include:
- DEVELOP EARLY AWARENESS AND ADOPTION OF HYPERTV PRODUCTS AND SERVICES. By
aggressively rolling out our HyperTV products and services, we intend to
establish a leading position in the existing market of U.S. households
that simultaneously use a television set and computer located in the same
room. We believe that our ability to address the existing convergent
market provides us with a unique opportunity to develop awareness and
adoption of HyperTV products and services, in contrast to some of our
competitors that are focused solely on the future market for
television/Internet convergence programming that can be received on a
single device. We expect to leverage the HyperTV brand, installed user
base and content we develop in the current market to the future
single-device market.
- OFFER TELEVISION CONTENT PROVIDERS A TURNKEY SOLUTION FOR
TELEVISION/INTERNET CONVERGENCE. We plan to offer television networks and
other television content providers a turnkey solution for television/
Internet convergence. We intend to supply television programmers with the
elements needed to enhance their television programming with
simultaneously delivered Web content, including user software, Web content
creation software and creative services, database management and analysis
and program hosting.
- FORM RELATIONSHIPS WITH CONTENT PROVIDERS TO CREATE HYPERTV-ENHANCED
TELECASTS. We intend to enter into joint ventures and license agreements
with television networks to jointly create and offer HyperTV programming
that enhances the networks' standard telecasts. These alliances will
enable the providers to extend their brand identity by synchronizing the
delivery of relevant Web material, Web-based advertising, messages,
e-commerce and chat in order to broaden the experience of the viewer and
generate new revenue streams.
- EXPAND OUR HYPERTV.COM WEBSITE. We intend to expand the HYPERTV.COM
website to serve as an Internet portal that will provide a guide and
connections to all available HyperTV programming and a central source for
downloading HyperTV software.
- ESTABLISH A DATA WAREHOUSE. We intend to establish a data warehouse to
compile, aggregate and analyze user information. We will make such data
available to our programming partners and advertisers as a fee-based
service. We expect this enhanced data to be of significant value to
HyperTV licensees and programming partners in gaining feedback on their
television viewing audience. This information will also provide us with a
unique measure of the market for enhanced television programming and may
help us to attract new licensees and programming partners.
30<PAGE>
- EXPAND HYPERTV INTO OTHER FORMS OF MEDIA. We intend to use our HyperTV
products and services to enhance other video delivery systems, including
video streamed over the Internet for broadband applications and video
delivered from DVDs or CD-ROMs. In addition, we will seek to form
relationships with radio stations and other providers of streamed audio on
the Internet to enhance their content using HyperTV.
With increases in digital broadband capacity and the deployment of the next
generation of digital set-top boxes, we expect that the market for the
integration of television programming and Internet content delivered to viewers
through a single device will begin to grow significantly. Our long-term
objective is to be a leader in this market by providing powerful programming
tools for television networks, advertisers, cable networks and DBS through the
integration of Individualized Television with HyperTV products and services.
INDIVIDUALIZED TELEVISION OVERVIEW
Individualized Television is a patented process for creating interactive and
instantly customized television content and advertising in response to viewer
remote control entries or to stored demographic information. Individualized
Television remembers a viewer's inputs throughout a program and can later
deliver tailored content to the viewer based on those inputs. We create
individualized programming by simultaneously sending the viewer multiple
television signals, related in time and content, and switching among those
signals without a visually perceptible delay. With Individualized Television,
the viewer experiences the video, audio and graphics of a single fluid
programming stream, while the programming on the other signals remains
transparent.
In addition, Individualized Television offers advertisers the opportunity to
convey more effectively their messages. Advertisers can use Individualized
Television to target viewers based on demographic information stored in digital
set-top boxes or on viewers' inputs in response to basic questions about
themselves or the products advertised. We expect Individualized Television to
generate revenues from subscriber fees, advertising sales and sales of software
and services related to targeted advertising.
We believe that Individualized Television is a core breakthrough for
television programming and advertising. For example
- the viewer of a national or international pay-per-view sporting event or a
regional sports telecast can select from features such as a different view
of the action, highlight packages, statistics or instant replays;
- a car commercial can ask viewers to identify the models that most interest
them and, based upon their answers, provide individualized information
about the identified models;
- neighbors watching the same television program can see entirely different
advertisements based upon demographic information stored in their
respective set-top boxes; and
- a child viewing a program can engage a favorite television character in
what seems to be a one-on-one dialogue. TECHNOLOGY
We create individualized programming by allowing the viewer to select from a
number of frame-synchronized video, graphics and/or audio signals delivered
simultaneously to their digital set-top box. The viewer sees and hears only one
of the signals at a given moment while the others remain transparent. Each
viewer interacts with the programming individually by making selections using
the standard cable remote control that comes with a digital set-top box. An
unlimited number of viewers can make selections simultaneously. In response to
the viewer's keyed inputs, the individualized programming seamlessly switches
from one signal to another, providing each viewer with programming appropriate
to the input. The individualized programming signal is not interrupted when a
viewer 31<PAGE>
switches between programming elements because, unlike channel switches on the
television, the switch occurs with frame accuracy and no perceptible delay. Our
Individualized Television software in the digital set-top box maintains a
"memory" of the viewer's choices and can automatically switch from one digital
video, audio and graphics stream to another based on the viewer's earlier input.
At appropriate points during an Individualized Television program, the set-top
box will make these automatic switches, recall information, create graphics
and/or implement other pre-programmed instructions. The viewer's individually
selected preferences, inputs, or information maintained in the set-top box's
memory determine the particular program seen by each viewer. CONTENT
We intend to develop applications of Individualized Television for both
national and regional markets. For national distribution of Individualized
Television, we formed a joint venture with Liberty Media, called LMC IATV
Events, LLC, to license and produce individualized marquee pay-per-view events,
including sports, musical, theatrical and news events national or international.
We have granted LMC IATV Events an exclusive license to produce and distribute
these pay-per-view events incorporating our individualized programming
enhancements. In exchange for granting this license, we received a one-third
equity interest in the joint venture and have no obligation to make capital
contributions.
Subsequently LMC IATV Events entered into a joint venture with Viewer's
Choice, LLC, to create a cable and satellite pay-per-view programming venture.
Through this venture, with Viewer's Choice's marketing and distribution
capabilities, we expect to showcase Individualized Television to a national
audience. Viewer's Choice, the nation's leading pay-per-view network, serves
over 1,700 affiliated systems with approximately 27 million addressable
households and 112 million channel subscribers nationwide. Its five shareholders
include AT&T/TCI Communications, Inc., Time Warner
Entertainment--Advance/Newhouse Partnership, Comcast Programming Ventures, Inc.,
MediaOne of Delaware, Inc. and Cox Communications Holdings, Inc. Viewer's Choice
will be renamed iN DEMAND on January 1, 2000. The joint venture is founded on a
long-term agreement between the parties, which plan to produce and distribute a
minimum of four marquee events each year, beginning in early 2000, depending on
the licensing of suitable initial events. The events will be available for
viewers to purchase and watch, as long as they have digital cable boxes or
satellite receivers that support our Individualized Television technology. The
pay-per-view events could include U.S. professional team championships and
all-star competitions, international sporting events and large-scale rock
concerts.
Advertisers can use Individualized Television in several ways to reach a
targeted audience. During an individualized program, we can ask viewers to
respond to basic questions about themselves or to choose among alternative
product models. Based on these responses or choices, we can send the most
appropriate advertisement to each viewer. For instance, an Individualized
Television enhanced car commercial could "ask" viewers to identify specific
models that most interest them and based on their answers, the car commercial
would "respond" with detailed information about that specific model. Viewers who
make no selection will receive an advertisement selected by the advertiser.
Viewers' responses are stored in their digital set-top box's memory. Based on
this information, the advertiser can subsequently provide appropriate follow-up
content such as premium offers, additional information or more targeted
commercial messages. Alternatively, relying on demographic information about the
digital television household stored in the set-top box, the advertiser can
deliver to each household, among a set of alternative advertisements, the
commercial that best targets its customers. In this case, what viewers see is
determined not by their selections or responses but by demographic information.
In November 1999, we formed a company with General Instrument called Digital
ADCO, Inc., to develop applications for the delivery of addressable advertising
to cable subscribers regardless of whether they have subscribed to
Individualized Television service. The applications developed through Digital
ADCO would permit advertisers to deliver targeted messages to individual viewers
based on 32<PAGE>
demographic information stored in their digital set-top boxes. The Digital ADCO
system would allow different advertisements to go to different households
watching the same television show.
Under the terms of our agreement with General Instrument, we have licensed
five of our patents to Digital ADCO in exchange for 51% of the common stock of
Digital ADCO, and General Instrument has licensed six of its patents plus made a
$5 million capital commitment for 49% of Digital ADCO's common stock. Any
capital contribution after General Instrument has fulfilled its initial
$5 million commitment will be made pro rata based on ownership interests. We
anticipate that Digital ADCO will generate revenues from three major sources:
subscription fees for software, advertisement handling fees and an advertisement
encoding fee for digital insertion, a process called "striping."
We have entered into a master license agreement that sets forth the
framework for negotiating with each of FOX Sports Net's 19 owned or affiliated
regional sports networks to provide content for our planned individualized
sports programming service. FOX Sports Net, which reaches more than 72 million
homes nationwide, features professional basketball, hockey and baseball games,
as well as college sports events. To date, we have entered into licensing
agreements with the following five regional sports networks FOX Sports Net
Southwest, FOX Sports Net West, FOX Sports Net Northwest, Sunshine Network and
FOX Sports Net Bay Area.
We expect to launch our first regional service in the area served by FOX
Sports Net Southwest, which distributes programming to more than 6 million
subscribers in Texas, Louisiana, Arkansas, Oklahoma and New Mexico. We have
produced over 100 individualized live sporting events and have tested
distributing the programs through AT&T Broadband & Internet Services (formerly
Tele-Communications, Inc.). We plan to systematically expand Individualized
Television into the other regions served by FOX Sports Net. We expect to launch
our second regional sports network in the area served by FOX Sports Net West,
which distributes programming to approximately 4.8 million subscribers in
Southern California.
Although we chose to focus our initial commercialization efforts on marquee
events, advertising and regional sports, we believe that our Individualized
Television system will have universal applications. It is our objective to
expand our Individualized Television to include many other genres of television
programming. We believe that Individualized Television can become a standard for
interactive digital television programming distributed through cable systems,
DBS, and digital broadcast television. PRODUCTION
The master license agreement that allows us to negotiate with FOX Sports
Net's regional networks provides that we must bear the incremental content,
transmission, delivery and master control costs incurred in connection with the
production and distribution of individualized programming for our regional
networks. Currently, we have a state-of-the-art master control facility in a
building we share with FOX Sports Net Southwest in Irving, Texas. Our master
control receives multiple video/audio feeds from FOX Sports Net Southwest via
fiber lines. We intend to construct or lease similar facilities for creating and
distributing individualized programming for each of our future regional sports
networks. We expect to lease a master control facility from National Digital
Television Center, a leading digital television creation facility, to produce
and distribute individualized programming for our planned regional network in
Southern California. The National Digital Television Center has production,
post-production, digital compression and network origination services and is the
largest production facility on Los Angeles' west side. This facility enables us
to work closely with Liberty Media's Liberty Digital division and with other
major entertainment and advertising content creators on the development of
Individualized Television programming. Our Los Angeles office is currently
located in this center. 33<PAGE>
DISTRIBUTION
We are initially targeting Individualized Television, which is
software-based, for distribution through digital cable systems. To offer
Individualized Television, a cable operator needs only to have our software
downloaded to the set-top boxes of its digital subscribers. All the cable
subscriber needs to receive our service is a digital set-top box with our
software download. We have agreements with the leading manufacturers of digital
set-top terminals--General Instrument, Scientific-Atlanta and Pioneer--to
achieve compatibility of our software with their equipment. General Instrument
and Scientific-Atlanta shipped 98.3% of the digital set-top boxes delivered in
1998 and are projected to ship 95.9% of the digital set-top boxes in 2000,
according to Kagan. All of General Instrument's digital terminals are compatible
with our software. By the time Scientific-Atlanta's digital set-top boxes are
deployed in the United States in any significant quantity, we expect that our
software will be compatible with these terminals as well.
The initial distribution of our regional sports programming will be provided
by cable operators that are currently upgrading their service from analog to
digital transmission and deploying digital set-top boxes. AT&T Broadband, the
largest distributor of FOX Sports Net Southwest programming, has the
non-exclusive right but not the obligation, to exhibit, distribute and authorize
the reception of Individualized Television on any or all of its systems. The
service may be carried part-time or full-time and may be carried as a single
service or in any tier or package of services. As of this date, neither the
final pricing nor launch date have been agreed upon. In addition, we are
discussing possible affiliate agreements with a number of other cable operators
to carry our southwest regional network on their systems.
To support Individualized T |
