BUILDING A NEW INDUSTRY THERE IS A BUSINESS, BUT DEFINING IT IS LIKE LASSOING JELL-O

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Interactive media. Skeptics call it the great zero-billion-dollar industry, full of pipe dreams and fancy schemes, overwhelming hype and underwhelming results.

That descriptor-while witty-misses the mark completely. There are already billions of dollars being made in new media. But pulling the various factions together to define one single interactive industry is like trying to lasso Jell-O; it's difficult, if not impossible, and it's also pretty messy.

According to Advertising Age research conducted for this special report, the various segments of the interactive industry racked up $11.1 billion in revenues in 1994. Videogames topped the market at $3.8 billion (wholesale), but even interactive TV rang in with $37 million in revenues. Logging in somewhere in between were home shopping and infomercials, CD-ROMs, commercial online services, interactive 800-numbers, the Internet, kiosks and virtual reality.

Whether it's fair to crowd such diverse industries under one umbrella is an entirely different issue.

Just ask Robert Broadwater, managing director in charge of interactive digital media at New York investment banker Veronis, Suhler & Associates, and author of Veronis' reports on the interactive media industry.

Last year, Veronis added up revenues in the online, software, videogame, home shopping and infomercial industries and estimated the size of the interactive media industry at $12.8 billion in 1993. Today, Mr. Broadwater is hesitant to see it that simply.

"We started [looking at] it as a vertical segment," like newspapers, magazines and books, Mr. Broadwater said. "It became pretty apparent pretty soon that that wasn't really the best way to look at it."

Instead, Mr. Broadwater now contends, "It's really a horizontal slice across just about all the media that we deal with."

Clearly, what exists today is an industry in search of its center. There are several large interactive "segments," ranging from online services to CD-ROMs to interactive TV to infomercials. Each is fighting for a share of the market, and the cacophony of voices is deafening.

"There are component parts which are now coalescing into what amounts to strategic business units," said new-media consultant Peter Sealey, former president of Interactive Network. "Everybody thought the answer was convergence. Everybody was going to buy everybody else. That's not the answer."

Indeed, analysts predict 1995 will be a year of shakeouts in the interactive industry.

The oversaturated CD-ROM market will shrink as smaller players are acquired or go out of business, and as compression and bandwidth technologies advance. More players will enter the commercial online services market, but they'll have to contend with potential industry behemoth Microsoft Corp., as well as the Internet and its fast-growing multimedia arm, the World Wide Web.

Interactive TV trials will finally get under way this year, but the number of them and the number of homes participating will be far fewer than the rosy predictions of a year ago.

Some companies will decide, as GTE Corp. and AT&T did recently in canceling their Manassas, Va., interactive TV trial, that it makes more sense to forego an expensive, prototypical test and spend money instead on marketing commercially viable services.

Today there is not an ad agency, package-goods company, publisher or computer marketer that does not wonder where interactive media fits into their business plan.

But ask any executive who follows interactive media and they'll tell you-if they're being honest-that they're more confused by the opportunities now than they were a year ago. With so many players jumping into the game, it's no wonder Procter & Gamble Co. decided it needed a lead agency to funnel all the ideas and projects that cross its doorstep.

If one thing can be said about the interactive industry, it's that it isn't one thing. It's not like the magazine industry, where revenues can be determined by counting up circulation numbers and ad sales, and it may never be that simple.

By the year 2000, "the definition of online services, the definition of computer, the definition of interactive TV is all going to be morphing," predicts Gene DeRose, president of consultancy Jupiter Communications Co., New York. Signs of that change already are apparent.

Videogames are nearly a $4 billion business. But new technologies are allowing players to compete against each other, even if they live in different states. Suddenly, videogames are interactive TV.

CD-ROMs are lashing their future to online services. More and more discs are shipping with modem connections enabling instant updates.

"What we believe very firmly is there's online, there's Internet, there's multimedia, there's transactions and interactive marketing. These are all coming together to create an interactive services industry," said Ted Leonsis, president of America Online Services Co. He adds: "We're so new into this that we need to have an industry .*. *. but our goal is to become enabling and part and parcel of everyday life."

Today, however, the companies that call themselves interactive are fighting tooth and nail for a piece of the market. Here's a look at where they stand and the challenges they face in the next year.

Online services/Internet

Two trends will reshape the commercial online services industry in the coming year: new competition and the continued rise of the global Internet, particularly the World Wide Web, which supports snazzy graphics, video and sound.

The $795 million industry today is dominated in the U.S. by three players: America Online, Prodigy and CompuServe. New challenges expected this year from Microsoft's Microsoft Network and AT&T's recently acquired Interchange Online Network will further splinter the market, however, leading some analysts to predict a shakeout in the near term.

Microsoft Network is scheduled to ship with Windows 95 in the third quarter and will provide easy Internet access. The company plans to offer content providers better revenue-sharing deals than the existing online services.

Before Microsoft can make good on these promises, it must first deal with an impending legal battle over its 1994 antitrust settlement.

Older players like Delphi Internet Services and Genie have lost members over the past year by not upgrading quickly enough, while Apple's nascent eWorld got off to a slow start. In the coming years, they run the most risk of being run over completely as the bigger players continue to enhance their services and boost their advantage even more.

Revenues in the industry are expected to reach $1.8 billion by 1997, according to Forrester Research, but after that point, the industry will experience a seismic shift.

"The proprietary online services will give way to Web-based services," predicted Mary Modahl, senior analyst at Cambridge, Mass.-based Forrester. "That will be a wrenching change for those companies .*.*. They need to take advantage of the near-term market while preparing themselves for the ascendance of the Web."

By 1998, Forrester predicts, there will be 11.2 million World Wide Web users, up from 2 million today. In contrast, proprietary online service subscribership, at nearly 6 million today, will peak at 10 million in 1997, falling off to 9.6 million in 1998.

A recent Goldman, Sachs & Co. report estimated the Internet industry-including access providers, software, content, service and expertise-at $366 million in 1994, growing to $3.7 billion by 1998. The business of providing access, a $135 million segment today, is expected to top $850 million in the same time frame.

Online services are in prime position to reap the benefits of the Internet access market, said Michael Parekh, VP-investment research at Goldman Sachs, New York.

"The Internet offers traditional online services a way to lower costs by deploying Internet-based networks that carry [their] services," Mr. Parekh said, pointing to America Online's recent acquisitions in the Internet realm. And following Prodigy's lead, all three major online services will offer their subscribers Web browsers in the first half of this year.

Once that happens, Web usership will rise dramatically as eager online service subscribers check out the hype. But there's just as much of a chance that they will log off as quickly as they log on, disillusioned by slow connection speeds and surprisingly little interactivity.

For marketers, the Web has swiftly emerged as a key new-media platform. By the end of last month, there were more than 2,500 commercial sites on the Web, many of them home to such mainstream brand names as MCI, Reebok, Volvo and Club Med. In the first two months of the year, Advertising Age ran more stories about the Web than it did in all of 1994.

Although some have called Web home pages a sort of "cyber 800-number," most experts say safe transactions are still at least a year away. Until then, marketers' Web sites are "an inexpensive way to offer information about themselves and their products," Mr. Parekh said. "I view the current rage of Web page deployment as being very much in an experimental phase."

CD-ROMs and multimedia

Expect a consolidation in the CD-ROM industry in the next few years as the crowded market weeds out unprofitable players.

"You've seen a tremendous number of players hit the market very, very swiftly," said Bruce Ryon, worldwide director of multimedia at Dataquest, San Jose, Calif. "We're probably entering the bankruptcy period. The market's oversaturated and it's going to come down to a handful of companies that will dominate the industry."

Still, a preliminary Dataquest forecast predicts wholesale revenues in the CD-ROM software market will rise nearly 250% between 1994 and 1998, to $1.8 billion. But revenues in the hardware market-CD-ROM drives, sound boards and semiconductors-will fall off slightly as technology components become less expensive.

On the content side, primary trends are toward education and games, Mr. Ryon said. "Hybrid" CD-ROMs such as Microsoft Baseball that combine static information with an online service will grow in popularity, paving the way eventually for cable-modem technology.

At that point, the future growth of CD-ROMs as an interactive medium is no longer assured. Some predict the shiny discs will become no more than a cheap way to store information that comes down a bigger pipe.

Interactive TV

Last year's hype has given way to stark reality: Interactive TV is expensive and difficult to do. That hasn't stopped most Baby Bells and cable TV companies from salivating over the possibilities, but it has put a damper on current tests.

Revenues in the $37 million market today come primarily from what Jupiter Communications' Gene DeRose calls "dumb versions of interactive TV"-low-tech companies like NTN Communications and Canada's Videoway that offer play-along games and videotext.

That will start to change as more advanced interactive TV tests begin later this year. Bell Atlantic's much-delayed Stargazer test is due to start in May in northern Virginia, and other Baby Bells like U S West and BellSouth have received Federal Communications Commission permission to conduct their own tests.

Time Warner, meanwhile, has admitted its Full Service Network will take longer to deploy and cost more than it had thought.

Revenues won't start to rise appreciably in the market until 1997, Mr. DeRose predicts, reaching $2 billion. But even that figure is disputed.

"Interactive TV's revenue stream is going to be a subset of the ad industry revenue stream, the video and movie revenue stream .*.*. and you can't measure it separately," contends Andrew Sernovitz, president of the Interactive Television Association.

As a result of all the uncertainty, ad spending on interactive TV will likely be far less this year than had been predicted. Bill Harvey, president of consultancy Next Century Media, New Paltz, N.Y., last year predicted marketers would put $50 million into interactive TV ads this year.

His revised figure? Half that amount. "It's hard to justify such a number based on the spirit of today's market," Mr. Harvey said.

Kiosks

Interactive kiosks that dispense information and coupons or conduct transactions are a popular but much maligned technology.

"Kiosks are still a niche market," said Tom Leonard, director of multimedia services at research company Inteco Corp., Norwalk, Conn.

"You'll never have that level of success or reach that you would have on an online service."

Still, companies that want to boost point-of-purchase appeal or site-based presence are keen on kiosks.

Witness the Potato Board's recent experiment dispensing recipe information and potato facts from an in-store kiosk, or Campbell Soup Co.'s upcoming test of POP kiosks that help sell consumers on the benefits of soup.

Similarly, Ackerley Airport Advertising plans to install information kiosks in airports and Best Buy is rolling a few hundred music-listening stations into stores.

Such interest is expected to fuel continued growth in the kiosk hardware and software market. By 1998, Inteco predicts the market will grow to $2.2 billion, compared with just $292 million today.

Further growth in the market could come from networked kiosks, which allow for national deployment and updatability from remote sites.

Videogames

Videogame marketers are at a crucial crossroads this year as the next generation of hardware platforms looms and new players dive into the market.

The aging 16-bit home videogame platform, ruled since 1989 by Sega of America and Nintendo of America, gives way this summer to much faster and more advanced 64-bit platforms that are predicted to shake up the market by the holiday season.

Heightening the competition will be Sony Corp., which this summer enters the videogame scene for the first time with its hotly anticipated 64-bit PlayStation.

Creating additional static: 3DO Co., whose 32-bit videogame systems introduced last year have gained a significant foothold in the advanced gaming market. After a slow start, 3DO now boasts 150 software titles.

Together with Atari Corp.'s 64-bit Jaguar system, the two advanced technology companies already claim approximately 10% of the videogame market.

Home shopping and infomercials

The home shopping market, popularized by Barry Diller, is experiencing a pullback. Catalog 1, the joint venture of Time Warner and Spiegel, no longer will try to market itself as a 24-hour cable channel, instead focusing on a two-hour Saturday morning block in specific markets and an expanded presence on the Internet.

Similarly, QVC last fall consolidated and OnQ, two upscale home shopping efforts, and Fingerhut Cos. abandoned plans to start up "S" The Shopping Channel.

Both QVC and Home Shopping Network have recently begun new initiatives that will take them into the online realm.

HSN acquired Internet Shopping Network, with plans to expand the service beyond its core computer hardware/software focus to a broader array of merchandise. HSN also opened an outlet on Prodigy. QVC, meanwhile, is gearing up to announce its own interactive strategy.

"I think QVC and HSN have learned a lot about the marketplace and broken a lot of new ground," said Larry Gerbrandt, senior analyst at Paul Kagan Associates, Carmel, Calif. "I think there's no question there's a business in the online world. Home shopping may ultimately be done not on the TV but on the computer."

Infomercials, meanwhile, continue to be very much a cottage industry, despite the entrance of ad agencies and major marketers into the business.

"One of the reasons it's a cottage industry .*.*. is that most infomercials are built around individual products rather than a series of products," Mr. Gerbrandt said. "The fact of the infomercial business is that most [infomercials] don't work."

Marketers that have tried the format recently include Sega of America, Toyota Motor Sales USA and Apple Computer.

Chiat/Day, meanwhile, is teaming up with QVC to acquire, market and distribute products via infomercials.

"Infomercials are getting much more sophisticated, but I don't see them moving into prime-time" until they can be accessed on demand, Mr. Gerbrandt said.

Virtual reality

Virtual reality is growing as an entertainment device, adding a new dimension to the videogame arcade market.

Market researcher Fourth Wave, Alexandria, Va., predicts VR technology will become increasingly consumer-driven, with 69% of the market devoted to consumers by 1998, compared with 57% today.

What will drive growth in the market are site-based VR entertainment arcades that let players compete against one another. Several planned theme parks from companies including Sega Enterprises and Sony Corp. will include such diversions.

Marketing applications for VR will grow but will remain a relatively small part of the overall market, according to Fourth Wave, accounting for 17% of the market by 1998, compared with 4% today.

Although marketers have been enamored of VR technology as a promotional tool, results so far have been mixed.

VR equipment is expensive, bulky and hard to transport, and, as Hiram Walker & Sons' Cutty Sark scotch has found at the halfway point of its Virtual Voyage nationwide tour, it hasn't yet been proven to help sales.

Other technologies

Despite the incursion of more sexy technologies, interactive 800-numbers are still a vital part of the interactive industry, with $425 million in revenues in 1994, according to Strategic Telemedia, a New York consultancy.

"It's getting to the point where it's rare to find any kind of print ad or TV [spot] without an 800-number, because advertisers are looking for more accountability and 800-numbers give them a very good way to measure actual response to advertising," said Laura A. Hanson, program director for Direct Response Corp., Glenview, Ill., which markets 800-number services to marketers.

Capturing that information via an interactive 800-number can be expensive, however; marketers may pay 50 cents per call or more.

Another technology, in-flight interactive media, may be ready to take off soon.

Carriers including British Airways and United Airlines this year plan to test systems that would allow passengers on long-haul flights to shop, play videogames and watch movies, all from their seat.

Some say, however, that it's difficult enough to make interactive TV work on the ground, let alone in planes. Northwest Airlines already tested and abandoned such a system, citing technical difficulties.

Kate Fitzgerald contributed to this story.

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