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plans to launch Stargazer in May. INTERACTIVE TV'S ROUGH ROAD CABLE, TELECOM COMPANIES INCHING TOWARD VIABLE SYSTEMS

By Published on .

Cable and telecommunications companies are the driving force behind interactive TV. The problem is, they're trapped in a concept vehicle with a back seat full of kids screaming, "Are we there yet?"

Are we there yet? The answer will likely remain "no" until the end of the millenium.

But that doesn't mean progress isn't being made. By yearend there should be enough tests up and running to produce useful, if not entirely definitive, data on consumer demand.

Perhaps the biggest sign of progress is that some interactive infrastructure builders are now opting to skip the trial phase and go straight into commercial rollouts.

"We've gone through a couple of years of an awful lot of promises and an awful lot of hype, and the one thing we've found is that the more you talk about this stuff, the less soon it gets to market," said Wilt Hildenbrand, VP-technology at Cablevision Systems. "I don't know how else to break this cycle except to go to market, or we'll still be talking about it this time next year."

Cablevision, the country's fifth-largest cable operator, this summer plans to start limited commercial deployment of enhanced pay-per-view services to about 20,000 customers in the Long Island, N.Y., area. The company will offer 15 to 20 movie titles starting at 15-minute intervals; plans are to upgrade that service to true video on demand by October, Mr. Hildenbrand said.

The results of this deployment will determine whether the company will expand the offering to more customers in 1996; other types of programming-home shopping, sports, videogames-are also being considered, but won't be added until next year at the earliest.

Others are planning even more ambitious rollouts.

GTE Corp. and AT&T called off their interactive trial for Manassas, Va., last month after both companies decided technology had progressed to the point that the test was no longer necessary. Pending Federal Communications Commission approval, GTE will begin building video dial-tone networks in Clearwater, Fla.; Ventura County, Calif.; and Honolulu later this year.

Pacific Telesis also has scotched plans to conduct a trial with AT&T in Milpitas, Calif., in favor of building a full-scale broadband network throughout its California territory.

Applications are pending with the FCC that would allow PacTel to reach 1.3 million customers in its first phase of construction.

Operating from a similar approach, Ameritech got approval from the FCC in December to commercially deploy its $4.4 billion broadband network. The network is slated to encompass 134 communities in and around metropolitan Chicago, Milwaukee, Indianapolis, Cleveland and Detroit.

Ameritech hopes to have the service up and running in some of those communities-the company declines to specify exactly where-by late 1995 or early 1996. Initially, subscribers will get a 70-channel cable package, with video on demand to follow.

Nynex last month got the regulatory go-ahead to begin construction of a network in eastern Massachusetts and Rhode Island that will pass a total of 390,000 households. Service is expected to be available to some of those customers in early 1996.

But while these networks get built, numerous unanswered questions remain about the other key components of the interactive TV equation: content and price.

There is also lingering skepticism over the speed at which this new age of TV could become a mass-market reality.

"People had expectations that this was all going to happen in no time, and I'm sure we contributed to that," said Thomas Feige, president of Time Warner's Full Service Network. "But the actual reality is that things are not progressing as rapidly as the initial hype and hope that the media put against it, but [are] progressing at a rate that makes it a very compelling business move at this time."

After a long-awaited start last December, FSN is on target to add 4,000 customers by the end of this year and new services like news on demand, a music mall, interactive music programming and health and education information by early next year.

"You've got to learn the lessons and climb the learning curve now," Mr. Feige said. "Otherwise, by the time this stuff goes mass market you're going to be left in the dust."

Time Warner isn't the only late starter. Bell Atlantic Corp.'s planned fall 1994 launch of a market test of video on demand won't begin until this spring due to regulatory delays; and U S West's market trial in Omaha, originally planned for the end of 1994, won't start until the second half of this year due to regulatory and technological holdups.

Others are quick to say the false starts and delays have poisoned attitudes about interactive TV's viability, particularly among content providers.

"We're running into the backlash," said William F. Reddersen, senior VP-broadband strategy at BellSouth Corp. Content providers "will tell us, `Yeah, you can have the movie, but we're not going to pay to digitize it'*" so it can be used for video-on-demand services.

What's still going on between content providers and interactive TV developers is an edgy balancing act of timing and reasonable risk. It's risky to pour billions into pipes you aren't sure how you're going to fill, and it's risky to invest in the facilities and technology to develop interactive content for a distribution system that hasn't fully evolved-and for which consumer demand is still a question mark.

At the heart of this impasse is money. Digitizing a two hour movie today can cost up to $3,000. And the hardware for interactive TV still isn't cheap.

BellSouth, for instance, estimates that with currently available technology it will cost approximately $1,000 for each of the 12,000 homes passed in its video dial-tone market trial scheduled for this summer in suburban Atlanta. That's why the Baby Bell hasn't announced any large-scale plans to upgrade its entire network.

"We don't perceive that now is the time to pour billions of dollars into the ground," said Mr. Reddersen. "The technology isn't there yet, and the content isn't there. It's going to be cheaper every month I wait."

Cheaper for the network provider will mean cheaper for the consumer, too, an all-important part of the equation. Consumers are too price-sensitive to pay high fees so cable companies or Baby Bells can recoup their front-end investment.

"For interactive TV to be deployed-and maybe the way to phrase that better is if it's ever going to be deployed-you have to have consumer willingness to pay for these products, and the economies of scale that would bring those costs down," said DeDe Moreland, marketing manager of Tele-Communications Inc.'s Viewer Controlled Television, which has been testing video-on-demand interactivity for nearly three years.

The results of TCI's test, conducted with 325 customers in the Denver area with partners AT&T and U S West, convinced the cable operator that "there is a long-term demand for this sort of product," said Ms. Moreland.

But what is the magic combination of services that customers will buy?

"We know that hit movies pass muster, but that's only a small fraction" of what will be needed to justify the network construction expense, Ms. Moreland said. And whatever other services are added have to generate enough incremental demand to cover what, at this point, can be steep incremental costs.

The problem is, no one seems to know what else will generate demand. The various interactive TV tests all include some form of video on demand, home shopping and, frequently, videogames. But questions still remain over whether consumers will use the services.

Thus, 1995 may be the year that the impasse starts to give way. The more technology that gets put into use, the faster the price points will come down and the faster the answers to all the other lingering questions will start to come in.

Among the other major tests and commercial rollouts of interactive TV slated to begin this year:

Bell Atlantic Corp.'s programming subsidiary, Bell Atlantic Video Services, will begin its long-awaited market trial of the Stargazer video-on-demand service this spring with 1,000 customers in Fairfax County, Va.

The six-month market test follows a technical trial of Stargazer begun two years ago in 300 homes.

Among Stargazer's offerings are about 700 video titles, including recent and classic movies; episodes of TV shows running the gamut from sitcoms to dramas to talk shows to news documentaries; and shows for kids, ranging from cartoons to educational programs.

The names of participating program providers are expected to be announced this month.

Unlike the technical trial, in which customers had to dial in from their telephones to start, pause or stop a video, market trial participants will be able to control video from their TV. Bell Atlantic said it will test a variety of price points, but offerings generally will be competitive with videotape rentals.

Bell Atlantic also got permission from the FCC in February to begin its commercial rollout of a video dial-tone and telephony network in Dover Township, N.J.

The first video information provider is West Conshohocken, Pa.-based FutureVision of America Corp., though Bell Atlantic has petitioned the FCC to allow Bell Atlantic Video Services to be a program provider as well.

In a switch from its earlier plans, FutureVision doesn't plan to offer interactive programming at first. Instead, the company will offer only a 75-channel traditional cable programming package priced 20% less than the prevailing cable service rate in the area.

"We're starting out with a traditional cable package because consumers of Dover Township have told us that's what they expect," said FutureVision President Robert Schena. "That's what they know. What we've been told by consumers is, don't overwhelm us with interactivity. Tiptoe us through it."

FutureVision will begin to introduce interactive applications "on a schedule that reflects the reality of the consumer," Mr. Schena says.

The initial applications will most likely be in the form of interactive marketing.

Consumers will be able to use their remote controls to respond to questions about products they would like more information about or to order coupons for goods and services at local businesses.

How such promotional marketing might work, Mr. Schena said, is that FutureVision's network could collect the names of those wanting coupons, and then fax those names to the businesses providing the discounts so customers just have to show up and identify themselves to take advantage of the offer.

"This de-risks interactivity for advertisers," Mr. Schena said. "This is a way to begin to accommodate interactive technology."

U S West Communications announced in late February a broad array of content providers for its interactive, on-demand service. U S West will package and sell the information under its TeleChoice brand as part of a broadband market trial in Omaha, now scheduled to begin a limited "friendly user" test with approximately 50 employees in March or April.

The yearlong market trial could be expanded to 45,000 to 50,000 homes by the latter half of 1995, depending on the success of the friendly user test. The network construction has already passed 40,000 homes, according to U S West.

Subscribers choosing the U S West TeleChoice programming service will get offerings from content providers including Metro Goldwyn Mayer, National Geographic, HIT Entertainment and Reuters NewMedia. Agreements in principle have also been reached with Sega of America (interactive videogames), Columbia TriStar International Television (current and classic films) and a distributor of Warner Bros. films.

U S West Marketing Resources will also contribute GOtv, an interactive entertainment information service designed to tell subscribers what there is to do and see in their area and let them buy movie tickets through their TVs. Among the companies participating on GOtv so far are Columbia Pictures, Fox, MCA, MGM, Paramount, TriStar, Warner Bros. and Visa International.

Another U S West subsidiary, Interactive Video Enterprises, will offer its interactive marketing and merchandising service, U S Avenue, which features such retailers as J.C. Penney Co. and Nordstrom.

Meredith Flynn, head of content strategy for U S West's multimedia marketing organization, said the RBOC is committed to interactive TV and is prepared to go straight into full-market rollout once the data from the market trial are in and analyzed.

Ms. Flynn, like her colleagues at other telecommunications and cable companies, worries that there isn't yet enough interactive content available. Marketers are a prime target, but right now those potential content providers are still playing hard-to-get.

"Time Warner's Full Service Network coming up lessened some of the hostility that this is not just all hype, and our network coming up will also help," Ms. Flynn said. "The talk has elevated to a new level. We are getting in the door with the marketing community and they are very willing to hear what we have to say. Unfortunately, I think it's maybe going to be a few months more before any agree to become content providers."

Advertising industry executives agree that agencies and their clients are starting to shed some of their cynicism about interactive TV as telecommunications companies are getting better at presenting more concrete plans.

"We're taking a harder look and starting to have substantive discussions," said Wes Dubin, senior VP-interactive media at DDB Needham Worldwide, Chicago. "We're talking about specific clients and specific client applications, though we haven't struck any significant deals.

"Vendors have gotten their act together and are careful to come back to you when they actually know what they have to offer," Mr. Dubin added. "The RBOCs are taking a more marketing approach and presenting legitimate marketing proposals, rather than sending out a bunch of technocrats, and that's helped to get the ball rolling."

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