AOL, Excite@Home Gear Up for Next “Killer App”
iionline.com
Eliot Walsh (8/24/99)
In a rare opportunity to hear the latest digital diktats from two of the Internet's most influential and competitive players, America Online (NYSE: AOL - Quotes, News, Boards) president Bob Pittman and Excite@Home (NASDAQ: ATHM - Quotes, News, Boards) CEO Tom “T.J.” Jermoluk addressed media movers and shakers during two separate sessions of the Digital Household Summit II conference in New York last week.
Both speeches, given last Tuesday and Wednesday morning, respectively, focused on the convergence of television and computers via emerging Internet technology, and heralded the renewal of the companies' race to dominate what they see as the next “killer app.”
How killer, you ask? Paul Kagan Associates estimates that Americans will spend about $70 million on Internet TV in 1999. By 2008, the organization estimates that expenditure to be roughly $7.1 billion.
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The speeches coincided with announcements from both companies regarding their renewed thrust into the arena of interactive television. As they spoke, the differences between the two organizations' visions of interactive television became clearer.
Both embrace community features such as chat and instant messaging — now ubiquitous features of any web portal. And both incorporate other web research features into the television viewing experience. So while you chat on-screen with your out-of-state brother during the Big Game, you can also follow your stocks, read your email, and send pictures via e-mail while buying discount books online. If you really want to – that is.
Which is King? Convenience or Content?
But there are a couple of fundamental differences in the two services. AOL is geared towards providing the utmost convenience, while Excite@Home's focuses on providing the utmost content, although the two try to include a substantial modicum of both orientations.
America Online, which just announced that is has surpassed the 18 million-subscriber mark, announced last Tuesday an alliance and minority equity investment in interactive television pioneer TiVo, Inc. The new service, which will incorporate facets of AOL TV's interactive interface and will give consumers the ability to time-shift television shows as well as pause, rewind, instantly replay, and replay them in slow-motion.
The goal will be to have a totally customizable television experience. To that end, consumers presently must buy a personal TV receiver from TiVo, which currently costs between $499 and $999. The box digitally records either 14 hours or 30 hours (depending on the price) of pre-selected television shows for later viewing in customizable order. Clearly (for the moment at least) the device will only be attractive to “early adopters,” the type of consumer that buys new gadgets when they come out, before prices drop towards mass-market level.
Also last Tuesday, cable broadband Internet service provider Excite@Home announced its own interactive television initiatives for use in conjunction with cable-television set-top boxes. Among the new services will be a turnkey platform for providing broadband Internet Protocol (IP) connectivity and services to DOCSIS-enabled interactive devices.
In essence, these devices will enable consumers to plug their cable lines into a television set-top box and be perpetually connected -- via the TV and the computer -- to the Internet, at very high speeds. This is a very significant improvement over the current need for technicians to go to each customer's house for two hours to install a cable Internet connection.
In addition, the technology will allow Excite@Home to collect usage data for targeted, interactive ads; peer with other large ISPs; cache web content and third-party content regionally; and monitor network operation and management.
Perhaps most importantly, it will accelerate new customer connectivity along its 16,000 mile pre-existing cable network, which Jermoluk said was upgrading to two-way capability at a rate of roughly 20 million a year.
Despite Jermoluk's playing down the new AOL service to reporters as “a dial-up, IP-based, sort of dynamic TV Guide,” Pittman sees it as highly suitable to mass market consumer tastes. “Convenience is King,” he declared, comparing his vision of interactive television to the emergence of products such as the ATM, the microwave oven, and the VCR.
“They did not change consumers' preferences,” Pittman said. “They delivered on them.” The intuition behind the AOL TV platform is that consumers will be averse to doing too much “work” while they relax.
But Jermoluk sees a market for heavy interaction. Perhaps the most impressive feature of interactive television, from a revenue perspective at least, is its advertisement serving, targeting, reporting and analysis capability. “After all,” says Jermoluk, “we'll already know your name, credit card number, and address.”
In order to buy something, all the couch potato has to do is click on it on the TV screen. “And consumers are five times more likely to buy something by clicking on them than by calling an 800-number,” he adds. Pittman Tuesday had made essentially the same point.
Excite@Home says the technology to do all this, like the backbone required for it all, is ready to go, giving the project a low incremental cost and thereby increasing its attractiveness to cable companies.
Jermoluk anticipates rolling it out in 2000, adding that as Excite@Home services move toward an increasingly retail-based, user-installed distribution system, revenue should ramp up. The organization, he said expects to become profitable in the next quarter.
Pittman doesn't seem worried about Excite@Home's new product. “Consumers are brand buyers,” he said Tuesday. And AOL is arguably the most recognizable brand on the Net. According to Jermoluk, U.S. companies spent $255 billion on advertising in the last year, with $250 billion of that on television and $3 billion on the Internet.
America Online had adver-commerce revenue (revenue from advertising plus revenue from e-commerce) of $306 million in the last quarter alone, and has an ad revenue backlog totaling a whopping $1.5 billion.
With the AOL 5.0 software upgrade just around the corner, the company's subscriber growth, stickiness, and adver-commerce revenues should spike even more in the fall.
The two companies' renewed push into broadband interactive television represents one more piece of digital turf they must grapple over. But each has something the other could use. “Because we work with cable operators,” says Jermoluk, “we will have access to the full cable spectrum.” And AOL has 18 million customers who pay a premium for convenience.
In due time, though, both companies may find they have more to offer each other as teammates than rivals.
As Bob Pittman said last Tuesday in response to a question about the “open access” debate, “We all realize we're all going to be doing business together. I think we are trying to figure out on what terms, when and how. I'm very optimistic that economics always win and everyone always does the right thing.”
AOL closed Monday at $98.50. Excite@Home ended the session at $39.94.
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