Rites of Passage

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Almost since the first cable TV line hooked up the first home, TV's visionaries have been touting the wonders of interactivity. But despite repeated attempts, no one has been able to make it work in a large number of households or without spending a relative fortune.

Until now. Interactive television is about to enter its third and, industry executives hope, first truly successful stage: Widespread consumer acceptance of on-demand interactive and video services.

And this time, it's not just about ordering a pizza with a click of the remote.

Consider what Time Warner Cable is doing in Hawaii: The company launched its first full-fledged consumer video-on-demand service in December with 5,000 homes on Oahu. With the rest of the islands wired by the end of January, Time Warner's Ocean Cable now has 23,000 subscribers who each pay about $47 a month for services such as movies on demand, sorting and blocking of programs by various criteria and some e-commerce options.

Other features being readied for the new service include on-demand karaoke; high-speed Web browsing and e-mail service; high-definition decoding, which decompresses high-definition TV signals; and optional hard drives for digitally storing TV programs, similar to the type of technology used by Replay

Networks and TiVo.

Time Warner is expected to roll out similar services in Austin, Texas, and Tampa/St. Petersburg, Fla., later this year.

The digital set-top boxes Time Warner is using in Hawaii have come a long way from earlier digital cable boxes, which were designed primarily to handle a lot of cable channels. These new boxes, based on proprietary technology, come loaded with advanced interactive functions, more processing power, software and memory -- all the internal electronic goodies that make real-time two-way communication possible.

What makes Time Warner's interactive TV system different from earlier approaches -- including Warner Communications' Columbus, Ohio, Qube test in the 1970s and Time Warner's Full Service Network trials of the mid-1990s in Orlando, Fla. -- is that this time, cable operators believe they have the formula that will win over the heart, mind and fast-clicking remote control of the average American couch potato.

Part of that formula revolves around estimates that digital set-top boxes will be in 55% of U.S. homes by the end of 2005.

These boxes, says analyst Tom Rhinelander of Forrester Research, will enable interactivity and on-demand content, changing forever how consumers use TV.

And that has cable operators, telephone companies and advertisers all salivating. Cable and telephone companies are eager to tap into the new revenue potential, while advertisers are intrigued by the idea of reaching consumers who could buy their products while watching TV.

"It gives us an opportunity to engage the consumer further," says Alain Zutter, director of media services, Clorox Co. "It's a chance to build a relationship with that consumer."

But while operators and advertisers point to interactive TV's potential, the predictions still sound a lot like the medium's earliest promises.

Qube

Every couple of years, the alumni of Qube gather in Columbus to reminisce about the two-way television system that underwent trials in the late 1970s in that Ohio city.

"Almost all of us who participated in Qube have stayed in the business," says Ken Papagan, now senior VP-general manager of global practice/digital media and broadband solutions for iXL, Los Angeles, a digital marketing agency. "It was very intriguing. I grew up in a world of two-channel television. To come into a television system that was filled with 30 channels -- wow!"

Warner Communications launched Qube with great fanfare in 1977 as an interactive television system hailed as "a supermarket of electronic services" by Gustave Hauser, then chairman of the company's cable operations.

Eventually the system expanded to five other cities -- Cincinnati, Pittsburgh, Dallas, Houston and St. Louis -- and became a joint venture of Warner and American Express. When Qube folded, it was reaching 325,000 subscribers in the six cities.

"The concept was strong, but there were several factors that Warner didn't take fully into consideration," says Roger Wilkerson, founder of Wilko Communications, which links advertisers with radio stations via Web sites, and who developed programming for Qube.

"First, Qube happened at a time when people did more outside their homes -- attending concerts or other entertainment activities," Mr. Wilkerson says. "Second, cable TV, as we know it today, didn't exist. There simply weren't that many television channels from which to choose. And third, the Internet didn't exist."

"Think about it this way," says Bob Smith, who was executive director of the Videotex Association at the time and now is president of NetSmith Services, a technology association management company. "You had to have a special decoder that would work with your TV set, and those lines went all over the place -- to the TV, the decoder, the phone lines. No one was used to interacting with their TV in that way."

Still, says Mr. Papagan, Qube was anything but a failure. He reels off a list of industry executives who cut their digital teeth on Qube, with many heading off to develop such cable services as Nickelodeon, The Movie Channel and MTV.

"It was a tremendous spawning ground for cable," he says. "The whole idea of pay-per-view was born at Qube. The idea of two-way connectedness was just way, way before its time."

The Full Service Network

The next big interactive experiment came roughly 10 years later with the launch of Time Warner's Full Service Network. That project, which underwent an extended trial in the mid-1990s in Orlando, has been called the "world's most expensive pizza-ordering system" by RealNetworks CEO Rob Glaser.

While that may be a bit of an overstatement, Time Warner Cable, then the nation's second-largest cable company, did pour more than $100 million into the ambitious, highly publicized interactive TV project. Despite that investment, the system reached only 4,000 homes.

When Time Warner pulled the plug in 1997, the company said it had learned a lot from the experiment and was "moving on to a new program" that would offer movies-on-demand and other services to a much larger group of customers.

Actually, once again, it was too much too soon. The digital technology wasn't there. It cost millions of dollars to build the infrastructure, says Jim Barton, co-founder and chief technology officer of TiVo, who was the lead software engineer on the Full Service Network project. Just the set-top boxes, which connected TV sets to the network, cost $3,000 each to produce, he says.

"It was a really expensive and slow way to build a network, with set-ups and networking and servers having to be put into place for the first time," Mr. Barton says. "As the trial went on, we found that the things people were willing to do with this expensive system boiled down to ordering movies. Nobody bought anything."

The proprietary technology itself was expensive. While a video stream today costs less than $400, in the mid-1990s "it cost thousands of dollars," says Scott Wilcox, VP-technology, Prasara Technologies, a software company formed by executives from the Full Service Network. "There were no standards; everything had to be made up from the start with proprietary technology and equipment, and the technology cost curve is very high. It's too expensive to sustain."

While the Full Service Network was swinging into action, there were also seismic shifts in government regulations that put economic pressures on cable companies and distracted competitors, such as phone companies, from devoting resources to interactive TV.

Still, others announced their own projects. In late '94, Viacom proclaimed its future lay in interactive TV, while Bell Atlantic said it was also planning a system (which eventually was delayed, scaled down, then scrapped).

From the beginning, Mr. Barton says, it was clear that few consumers would be willing to pay enough for new services for Time Warner to recover start-up costs.

"We had to invent the product, put it in front of the consumer and keep our fingers crossed that the consumer knew what to do with it," says Robert Montgomery, president of Prasara, which now provides interactive TV software for Time Warner Cable. "From a research standpoint, it was a tremendous success. We reaped incredible amounts of data as to the types of services consumers would use and how they'd interface with a remote control. So there was a lot of learning, but it couldn't continue in that format."

Indeed, Time Warner is sitting on a mountain of marketing data, although the cable operator has revealed little about the results of the Orlando trial. Mr. Montgomery says some of that information was used to develop a less costly, video-on-demand system that could be rolled out nationally, starting with the Hawaii venture.

The Full Service Network interactive TV experiment, however, did convince Time Warner that consumers will "dump Blockbuster in favor of renting content that is fully controllable, like on a VCR, from cable." Still, there are plenty of competitors with similar plans. Other video-on-demand services include Diva Systems, Redwood City, Calif. and Intertainer, Culver City, Calif. Intertainer, which runs advertising, is available in Cincinnati and Philadelphia. The company declines comment on further expansion.

All hail the Internet

So what happened to push interactive TV forward now? The Internet. While Time Warner and other cable and telephone companies were busy building proprietary, closed-system electronic networks, the World Wide Web reached into millions of homes, offering many of the same services -- such as home banking and shopping -- on an open system anyone could dial into or advertise on.

The Internet, industry executives agree, has changed the interactive landscape forever. For one thing, consumers now are trained to point, click and interact with an electronic digital device.

"People now interact naturally with information and entertainment they're receiving over the Internet," says Roger Keating, founder and president of Zatso, an Internet start-up. "We're all getting used to the notion that it's OK to interact, to have a conversation, with a digital appliance. Just think how often you hear the word `click' today."

The first things consumers are likely to click on in this new world of interactive TV are interactive TV program guides. Using these guides, viewers click on an on-screen TV grid for more information or go directly to a channel. Forrester projects that these program guides will be the first widely accepted interactive TV format, reaching 55 million U.S. homes by 2005.

Cable TV companies have already upgraded their networks to offer services such as high-speed Internet access and telephone service. Interactive TV would require some new computer equipment, but the basic network is already in place.

Paul Kagan Associates estimates the number of interactive TV-capable homes at 7.6 million this year, jumping to 46.3 million by 2005 and 63.9 million by 2010.

"We expect the majority of new Internet users in the next three years to come online via some type of set-top box or broadband access," says Bruce Carlisle, president-CEO of SF Interactive, San Francisco.

Kagan estimates interactive TV ad revenues will pass the $5 billion mark by 2004, reaching that level in just four years, nearly as qickly as the Internet and much faster than cable or broadcast TV or radio.

The payoff for interactive ads, industry executives say, will be higher cost-per-thousand prices because interactive ads will be more effective and advertisers will pay more for that.

"Frankly, advertisers are embracing interactive TV faster than anyone else," says Richard Fisher, president of RespondTV, a provider of enhanced TV services. "We have 10 charter advertisers and, not to take away from the deals, they weren't that hard to get."

RespondTV has launched interactive campaigns for clients Chris-Craft Communications, Ford Motor Co.,

CDnow, 1-800-Flowers.com, HotJobs.com and Domino's Pizza. For Ford, RespondTV teamed with J. Walter Thompson USA, Detroit, to produce an enhanced Ford Focus spot during February's Grammy Awards broadcast.

"With enhanced advertising, we deliver a message that combines the emotional power of TV with the interactive capabilities of the Internet," says Jan Klug, Ford division marketing communications manager.

It is among younger consumers that interactive TV holds the most potential, industry executives say. "This is a demographic that is growing up with the Internet as a household appliance," says Allan Thygesen, exec VP-sales and business development, Wink Communications, an Alameda, Calif., interactive TV technology company.

Overcoming obstacles

Despite the advances made by interactive TV, there are still obstacles to overcome, like the struggle for standards for equipment and formats.

"There are plenty of contenders, but there are no clear winners in this space -- yet," says David Card, senior analyst, Jupiter Communications.

In addition, some programmers are concerned that viewers may click off into interactivity and not return to regularly scheduled programs.

"Until this point, there's been this wonderful relationship between advertiser and programmer because here's the program, here's the audience, here's the commercial pod, and it all flows seamlessly," says RespondTV's Mr. Fisher. "But now, everyone is scared the audience is going to be stolen away to a Web site and not return."

Indeed, agency executives believe many in the TV-viewing audience may get their first taste of the Web through basic interactive TV services like Web TV.

"One of the appeals of interactive TV is it's going to reach a much broader cross-section of America, people who aren't on the Web now," says Tom Bair, director of convergence technologies at SF Interactive.

This summer, America Online is expected to enter the interactive TV arena with AOL TV. "It's a small part of AOL now, but it has tremendous potential to open up the entire industry," says Brad Adgate, senior VP-director of research, Horizon Media, New York, a media strategy agency.

Many industry executives are convinced there will be more than 30 million set-top interactive devices deployed within the next few years, and, unlike previous incarnations, consumers immediately will know exactly what to do with that interaction.

"It's not a question of will it happen," says iXL's Mr. Papagan. "Now, it's how quickly we'll see the transformation. It's hard to believe, but after 20-some years, interactive TV is about to become an overnight sensation."

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