ANALYSTS PREDICT iTV AUDIENCE GROWTH IN 2002

Personal Video Recorders Challenge Marketers

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NEW YORK (AdAge.com) -- Widescale deployment of broadband service to the home is supposed to fuel the growth of interactive TV, high-speed data delivery and a whole array of services that have yet to surface.

Yet despite bullish forecasts over the last couple of years, broadband-service deployments failed to reach a critical mass this year. That's somewhat hampered the growth of iTV applications and, consequently, iTV advertising. But there are some signs of movement.

A Nov. 30 report on iTV by UBS Warburg analysts projects that after a "mediocre" deployment this year, a more accelerated rollout of iTV services spurred by broadband is likely in 2002. It is expected to be driven by cable operators' quest for new sources of revenue growth; increasing competition between cable and satellite operators; and upgrades to cable infrastructure that enable two-way communication.

Personal video recorders
UBS analysts

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maintain that of the various forms of iTV, personal video recorders (PVRs), such as those marketed by Philips Electronics and Sony Electronics with the TiVo Personal TV service, will help drive interactive advertising.

"We forecast that the interactive-applications industry, as characterized by VOD [video on demand], t-commerce [shopping], and interactive advertising will grow at a combined compound annual rate of approximately 100% between 2001 and 2004," the report said.

However, it acknowledges significant technology and economic obstacles: "The current economic slowdown will likely pose a significant challenge for some interactive advertising players."

It noted Wink Communications, which attracts national advertisers, saw a 20.5% sequential quarterly decline in total revenue in the third quarter. Gemstar-TV Guide International, the report said, is more insulated from the ad slump because of a local ad model and sales force.

Companies in the iTV space have seen their stocks slide with the market, reflecting some skepticism about prospects. Wink's market capitalization is just $45 million; TiVo's is less than $200 million. Sonicblue, which owns the rival ReplayTV technology, has a market cap of less than $300 million. Gemstar, in contrast, remains a potent force with a market cap of $12.5 billion.

Comercial skipping
PVRs, which allow consumers to pause, fast-forward, rewind and basically time-shift their TV viewing, are seen as drivers of iTV growth. But they also pose a huge problem for marketers looking to try ad programs because commercials can be skipped.

TiVo and other marketers of iTV applications are experimenting with a variety of solutions. The UBS report noted that TiVo, for example, is trying a picture-in-picture format to deliver ads that are reduced in size, but reside in the larger frame when consumers fast forward; text-over-video, where the marketer's brand, logo or copy is placed over the fast-forwarded image; and telescoping ads, which enable viewers to click onto a longer form of video, similar to an infomercial.

Jovio, a provider of iTV software, is also developing solutions to overcome ad-skipping. Consumers who purchase Jovio set-top boxes are hit with a minute of advertising for every 30 minutes of TV programming digitally stored.

Advertising's Holy Grail
What makes PVRs and other forms of iTV so attractive to advertisers is their potential to target potential customers more effectively. A one-to-one relationship with consumers, considered the Holy Grail of advertising, becomes increasingly possible via permission-based, opt-in and two-way interactions with consumers. Wink-enabled advertising is carried by both cable and satellite systems and is closing in on 6 million subscribers by year-end.

"The advertising is targetable by network, by individual household and by demographic profile," said John M. Gee, senior vice president of advertising at Wink.

TiVo will end the year with 300,000 subscribers to its Personal TV Service and will end 2001 with $20 million in revenue, which President Morgan Guenther projects will triple in 2002.

TiVo's much-ballyhooed charter advertiser program has materialized more slowly than planned, in part because of the challenge of selling programs to marketers interested in getting more reach than TiVo has currently. But TiVo's work with blue-chip marketers such as Toyota Motor Sales USA's Lexus, Procter & Gamble Co., Pfizer and Philip Morris Cos.' Miller Brewing Co., a distribution deal with AT&T Corp.'s AT&T Broadband and a tech licensing deal with Sony should help.

"We're shifting from consumer education and brand awareness to driving deployment through multiple channels," Mr. Guenther said. TiVo, he added, is in a research mode and wants to partner with others to deliver valuable consumer data. "We're like a big lab right now, experimenting."

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