Old article but very intersesting :
DIVIDE AND CONFUSE: WorldGate and WebTV are locking horns before either can claim a real share of the potential audience for Internet-enabled TV services.
By Alex Gove
The Red Herring magazine
December 1997
There's just nothing behind what he's talking about," says Steve Perlman, the CEO and president of Microsoft subsidiary WebTV Networks. "He slithers around," he adds on another occasion, later sneering, "He is simply a liar." Who has raised Mr. Perlman's ire? Hal Krisbergh, CEO and chairman of WorldGate Communications, which provides Internet access over cable networks.
On September 11, The New York Times ran a front-page story painting WorldGate as a major threat to WebTV. The article upstaged WebTV's announcement of WebTV Plus, a new Internet TV device that will retail for $299, plus roughly $20 per month for access charges.
Mr. Perlman casts WorldGate as all smoke and mirrors. He claims that WebTV could adopt WorldGate's business model but has chosen not to because it is untenable. Mr. Perlman, perhaps, can say little else. If WorldGate is right, then WebTV is in trouble: WorldGate is promising Internet access at a price that no one else in the market can match.
The facts
WorldGate's approach to Net access via the TV is substantially different from WebTV's scheme. WebTV offers a telephone modem adapted to the TV; WorldGate has developed a chip that adds Internet connectivity to cable set-top boxes. WorldGate is promising to deliver Internet access to cable viewers at speeds ranging from 128.8 kbps to 27 mbps for only $4.95 per month. And the company has clout: $12 million in investments from NextLevel Systems (formerly part of General Instrument), Scientific-Atlanta, Citicorp, and Motorola, as well as a number of cable system operators and major advertising agencies.
WorldGate subscribers need only a set-top cable converter box (which they receive as part of their premium service from their cable provider) and a remote control. In addition to getting email service and full Web access, subscribers will be able to link instantly to Web sites associated with the TV programs that they are watching by pushing a button on their remote controls. Although the service is still in trial, Mr. Krisbergh says it will soon roll out commercially in St. Louis.
WorldGate plans to deliver Web service and email access across the 80 to 110 vertical blanking intervals (VBIs) that separate cable channels in every analog cable system. Cable operators will decrypt and decompress Web pages at the "head end," or source, and then pass compressed and decoded bitmaps over the VBIs to the consumer. Mr. Krisbergh sees one big advantage to this arrangement. "All the horsepower is at the head end, so when we want to upgrade, we don't have to go to every single home, switch out a box, and throw it away."
But WorldGate's biggest advantage over WebTV could be its relationships with NextLevel and Scientific-Atlanta. WebTV requires that consumers purchase a dedicated device at a retail outlet and then install a telephone connection. The company projects an audience of 250,000 subscribers by the end of this year and 500,000 by the end of 1998. (It claims to have 150,000 subscribers currently.) WorldGate's audience is potentially much larger. There are 65 million U.S. households with cable, and 96 percent of American homes could have cable if they wanted it. Next year, according to Paul Kagan Associates, manufacturers will ship 10 million cable set-top converter boxes. And NextLevel and Scientific-Atlanta will supply 95 percent of them. NextLevel estimates that 90 percent of cable operators are using advanced analog set-top converter boxes, and according to Mr. Krisbergh, NextLevel and Scientific-Atlanta have already added Internet capability to most of their boxes at no extra cost to cable system operators.
Furthermore, Mr. Krisbergh says that the service will cost cable operators only 75 cents per customer per month, and that, apart from the cost of marketing the service and standard operations, the only real expense to cable operators is the cost of a T1 line at the head end. Mr. Krisbergh maintains that there will be as many as 5 million WorldGate-ready "Net top" boxes by the end of next year. Cable operators Charter Communications and Comcast have already signed up with WorldGate--although, given Microsoft's $1 billion investment, Comcast's long-term commitment is questionable.
The argument
Mr. Perlman asserts that WorldGate's system simply will not work. Only a small percentage of cable plants are two-way, he says, meaning that users would need a telephone line for upstream communications. The cost of this telephone line would raise WorldGate's monthly charge to WebTV's level. WorldGate also will have major capacity problems because of its reliance on the VBI, he says: "If you have 1,000 people using 50 VBIs, that is much lower bandwidth than 1,000 people using 1,000 phone lines."
Finally, Mr. Perlman complains that while NextLevel and Scientific-Atlanta may have a "vested interest" in WorldGate, cable operators will not adopt it because they are more interested in digital TV and digital set-top boxes, which (at least theoretically) will not require VBIs.
In response, Mr. Krisbergh, who was the president of General Instrument's communications division before becoming WorldGate's CEO, says that two-way cable is far more prevalent than Mr. Perlman would have us believe. He cites figures from Paul Kagan Associates showing that 25 to 30 percent of cable plants offer a two-way-impulse, pay-per-view data stream; this number, he says, is expected to grow to 80 percent within three years.
More fundamentally, Mr. Krisbergh asserts that Mr. Perlman is mistakenly predicting capacity shortages because he does not understand cable's nodal architecture. Most cable nodes pass approximately 1,000 homes, with only a very few nodes, in areas like New York City, passing 2,000 homes. Even assuming that there are 2,000 customers on a node, the typical 65 percent subscription rate will mean that 1,300 of these homes will be cable subscribers. Of this amount, at most 40 percent (or 520) will possess a cable set-top converter box because they subscribe to a premium service. Although WorldGate estimates a demand rate of 2.5 percent, Mr. Krisbergh says that the company has based its business on the assumption that as many as 4 percent of these 520 homes would conduct Internet sessions at the same time. In this scenario, there would be 21 active sessions on a node. Because WorldGate can handle 8 sessions per VBI, the cable operator would have to allocate three VBI channels to WorldGate--a small number, in his opinion. Moreover, given an extreme scenario where demand grew to 12 percent, Mr. Krisbergh says that operators could just use more VBI channels, tap into a 6-MHz video channel (which holds the equivalent of 32 VBI channels), or lay another fiber link to reduce the size of the node.
Although Mr. Krisbergh concedes that it is unlikely that WorldGate would offer its maximum bandwidth of 27 mbps, he indicates that it is possible because cable operators routinely serve up video content in MPEG-2, which demands this speed.
Of the move to digital cable, he says the hope among cable operators is that 30 to 40 percent of set-top converters will be digital within five years. He thinks that digital cable will snare only the high-end early adopters and that, even if the most optimistic projections came to pass, WorldGate's access to advanced analog Net-top boxes would ensure its control of the lion's share of the market. Regardless, he points out that digital TV does not necessarily preclude VBIs. WorldGate could broadcast over the bandwidth set aside for closed captions for the hearing impaired.
You talking to me?
Mr. Krisbergh is most annoyed about Mr. Perlman's seeming dismissal of his company. "Who's WebTV?" he demands. "We're not talking about an organization that's been around for 30 years and has 18 million subscribers. This is a startup with 100,000 subscribers." NextLevel and Scientific-Atlanta have a combined market value of $4.2 billion, he points out, adding, "This isn't just Hal Krisbergh at WorldGate talking."
Mr. Krisbergh calls WebTV "boxed in." He expects that WebTV's subscribers will face the same obsolescence issues as owners of PCs. For example, WebTV's first version, WebTV Classic, does not offer the same 3D and picture-in-picture capabilities as its second version, WebTV Plus.
Furthermore, he asserts that WebTV does not have a "cable solution." Although Mr. Perlman says WebTV has developed a new technology that will enable it to transmit data through cable and broadcast video signals, Mr. Krisbergh replies that operators can strip out any transmission from their signal that they have not approved--so WebTV has no way to ship data at cable modem speeds if it does not reach definitive agreements with cable operators that will allow the company to cram its data into the cable operators' signals. "Does WebTV have a closed loop through the cable plant to do this?" he asks. "The answer is no."
Mr. Krisbergh believes that because WebTV's devices were designed to work through a telephone infrastructure, they cannot perform interactive VBI decoding or upstream cable. Despite the fact that WebTV Plus has a built-in cable modem, it has no effective means of communicating with the cable infrastructure, he says. "A VCR has a cable tuner. Does that make it a 'cable solution'?" he asks mockingly.
WorldGate's success will depend to a large degree on how fast cable operators are willing to roll out its service. Although Mr. Krisbergh insists that his service will not cost operators a great deal of money, they will still have to spend cash marketing it.
Still, WorldGate's service is incremental: operators can roll it out and upgrade their capacity as they acquire customers. Most important, perhaps, the company's consumer proposition is hard to beat. Assuming (as Mr. Krisbergh does) that the service is implemented at plants that have two-way capability, the consumer would pay much less for WorldGate's service than for WebTV's.
Mr. Perlman is right to point out that WorldGate is unproved, but then, so is WebTV. With a potential audience far greater than what WebTV can claim, it is not surprising that WorldGate has attracted WebTV's attention.
WorldGate Communications at a glance
CEO Hal Krisbergh
Location Bensalem, Pennsylvania
Phone 215/633-5100
Web www.wgate.com
Ownership Private
Founded 1995
Employees 76
Product Internet-enabled cable set-top boxes
Partners Charter Communications, Comcast, Cablevision Systems, Supercable
Competitors WebTV, NetChannel
Financing $12 million
Investors NextLevel Systems, Scientific-Atlanta, Citicorp Technology Investments, Motorola, Advent International,
Needham, Alan Gerry |
