AOL angles for TV viewers
By David Lieberman, USA TODAY
USA TODAY,
24 Feb 2000, 2:03 PM CST
NEW YORK -- When America Online announced its plan last month to buy Time Warner, everyone saw that joining the No. 1 Internet provider and No. 1 media and entertainment conglomerate would rock the Web.
But many executives and analysts are just now seeing how the deal could fundamentally reshape an emerging business that will touch more people in more ways than the computer-accessed Internet: interactive television.
AOL takes its first step toward this blending of TV and the Internet this year when it launches AOLTV.
The service, expected this summer, could be "profoundly important," says Merrill Lynch's Internet specialist Henry Blodget. If the service is a hit, the company's clout over interactive communications might become "analogous to Microsoft's control of the PC operating system."
"The more ways a subscriber interacts with AOL," Blodget says, "the less likely the subscriber will be to pull up stakes and go with a different provider -- especially when the entire family has programmed the service with individual buddy lists, calendars and e-mail accounts."
That prospect terrifies rivals that also want to be interactive TV powers, such as Microsoft, which owns WebTV, and Excite@Home, a cable high-speed Internet service. Their battle could split the cable industry.
"We're sitting on a fault line," says Worldgate Communications CEO Hal Krisbergh, whose company provides Internet access to cable TV viewers. "It clearly portends earthquakes."
AOL declined to discuss AOLTV, although it recently briefed Wall Street analysts and demonstrated the service at a consumer electronics trade show.
What wows observers is the proven appeal of the services AOLTV harnesses. AOL subscribers, now 21 million, wouldn't have to boot up their computers to access e-mail, instant messaging, chats, calendars and online shopping or investment services.
People could use them while watching, say, Who Wants to Be a Millionaire by pointing a remote or wireless keyboard at a set-top decoder that splits the screen to show online content and the TV show.
Initially, people wanting AOLTV would need a special set-top box to connect the TV to a phone line.
But the deal with Time Warner, the No. 1 cable operator with more than 13 million customers, opens the way for AOLTV to dominate interactive TV. It could become a seamless part of the cable TV package, eliminating the need for a separate set-top box and a phone line.
When AOL and Time Warner announced their merger, "we very quickly had a lot of dialogues with the AOL guys," says Jim McDonald, CEO of Scientific-Atlanta, Time Warner's chief supplier of decoder boxes and systems. "What we want to do now is to port their software into our system as quickly as we can."
They aren't alone.
"Nothing has so excited the (cable hardware) industry in the last year as the AOL-Time Warner deal," says Richard Doherty of The Envisioneering Group. "It's that big a buzz. ... AOL is out talking to everybody."
Cable operators, who have 66 million subscribers, are just starting to negotiate interactive TV deals. Tests will begin this summer on some systems. Commercial rollout will begin in earnest in 2001.
Key points in the talks include whose name is on the service, who controls the initial online screen users see, and where and how often data and ads appear.
AOL could meet resistance on branding. "AOL wants to be your start page," says Tim Bajarin, president of Creative Strategies. "That's one of the big reasons AOL went ahead with the Time Warner deal."
By contrast, Microsoft and Excite@Home are willing to do software and services and let the cable owner control the face shown to users.
"AOL is its own brand," says Excite@Home Vice President Paul Salzinger. "But in Philadelphia, Comcast is its own brand and it means a lot to them."
The stakes are enormous. Revenue from interactive TV -- subscriptions, advertising and electronic commerce -- could soar to $20 billion in 2004 from $700 million in 1999, Forrester Research says.
Forecasters are enthusiastic about interactive TV because the country is so addicted to the tube.
"The numbers are staggering," says CIBC World Markets' John Corcoran. "There are still 65 million homes not connected to the Internet, and TV is well-positioned to move into that connectivity gap."
What's more, the average adult spends 126 hours in front of a TV screen each month, while the typical AOL user is online for just 26 hours.
No wonder enthusiasts say cable operators could reap a windfall.
Consider one way it could work. An operator might charge advertisers 40 cents each time a subscriber used the remote control to go to the Web for more information on a product. If a customer clicked on two ads a day, just 1% of the 180 spots airing in a typical home, that subscriber would generate an additional $24 a month.
"That's more than an operator collects from basic cable subscriptions," says Krisbergh. "And that's not a hopeful number. It's a conservative number, and the largest growth opportunity facing the industry today."
Overhyped promise?
If it sounds like you've heard this tune before, well, you have. For decades, interactive TV has been one of cable's most over-hyped promises -- and embarrassing bombs.
That's why the Yankee Group's James Penhune is "amazed at the degree of attention AOL has gotten for -- I don't want to call it vaporware, but something that's pre-market."
Interactive TV could run aground again if viewers see a privacy threat. The tension is there because advertisers relish its potential for tailoring pitches to different viewers.
"We can actually send two different ads to two different TVs in the same house," says McDonald.
Cable operators could also monitor what programs you watch. "There are a few privacy issues there, but the answer is we can technically do that," he says.
Privacy laws may prove insufficient for interactive TV. Most were written for specific media and are ambiguous when applied to hybrids.
"It's problematic when the provisions are applied to old business models," says Dierdre Mulligan, counsel for the Center for Democracy and Technology.
Still, executives and analysts say that interactive TV is finally ready for prime time. People are more at ease with the Web and cable operators are completing long-term upgrades to two-way-capable systems.
To harness that power, they also are deploying more than 30,000 digital set-top decoders a week that can communicate over cable wires. The capacity for advanced services is "ubiquitous across the country pretty much now," says CEO Edward Breen of General Instrument, the leading maker of set-top decoders that is being bought by Motorola.
AOL salivated to reach the all-important cable market, but it was mostly out of reach until its deal for Time Warner. Operators resented AOL's role as leader of an effort to force cable systems to be open to competing high-speed Internet services.
In defense, AOL invested $1.5 billion last year in Hughes Electronics and got a deal to launch AOLTV on its DirecTv satellite service, using phone lines to connect with AOL through a set-top box. The deal to buy Time Warner put AOLTV on fast-forward. And it's a plus for Time Warner's cable systems.
"Beyond offering video on demand, Time Warner has no interactive TV strategy," says Paul Kagan Associates' Leslie Ellis.
Although the launch plans are still unclear, few expect AOL to offer AOLTV only on DirecTv.
"Obviously, Time Warner's going to try to put it up as soon as they can," says Scientific-Atlanta's McDonald. If the service catches on, then "most (operators) will see demand that they'll have to respond to."
Here's where the battle with other interactive TV companies -- particularly Microsoft -- is joined.
Interactive battleground
Microsoft says its experience with WebTV gives it a better insight into what consumers want from interactive TV.
"Initially we looked at a TV set as an available monitor," says WebTV marketing director Rob Schoeben. "But we realized that we missed a fundamental point. That monitor is a TV set and people want it to be a better TV, not an alternative to a PC."
That pitch will appeal to cable operators, many of whom already have financial ties to Microsoft.
Last year, Microsoft invested $5 billion in AT&T, which hopes to soon complete its deal to buy MediaOne, making AT&T the No. 1 cable operator. In 1997, Microsoft reawakened Wall Street's interest in all cable companies by investing $1 billion in Comcast, the No. 3 operator.
In addition, Microsoft co-founder Paul Allen has recently gone on a buying spree to make his Charter Communications the No. 4 operator. Microsoft also has a satellite alliance with EchoStar, which incorporates WebTV on some receivers.
Many large cable operators also are friends with Excite@Home, the high-speed Internet service that is controlled by AT&T. And Excite@Home may have some leverage by claiming that interactive TV is part of its multiyear deals to provide high-speed Internet services.
"The most important thing is, we are established today to deliver these services" via cable, says Excite@Home's Salzinger. "We are big promoters of the cable operators offering a service that ties across to the PC. It's all about convenience."
Microsoft and Excite@Home said in December that they're talking about a possible partnership. Those conversations are still under way.
Still, operators know that it would be dangerous to snub AOL and its huge subscriber base.
If they do, then AOLTV could encourage its customers to cut cable operators out of the interactive TV picture altogether. Use of AOLTV's set-top decoder would keep operators from controlling "many of the next-generation cable services that cable operators had expected to control, including e-mail, the program guide, chat and 'click-to-buy' e-commerce," says Sanford C. Bernstein analyst Tom Wolzien.
The set-top box also could be configured to handle high-speed phone lines -- and AOL is exploring accepting data from wireless providers.
Everyone is positioning for a fight that will revolutionize communications and entertainment. "Right now, there's a wall 3 feet thick between the TV and the Internet," says Krisbergh. "And the opportunity to marry the two is awesome."
Reported by USA Today, usatoday.com
14:03 CST
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