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Although the interactive age has suffered several setbacks in recent weeks, 1994 still will be the year we start to see the first glimmers of its potential.

Despite the failure of the historic Bell Atlantic/Tele-Communications Inc. merger and the delayed launch of Time Warner's Full Service Network, few doubt interactive TV will eventually become a viable business.

The question is when.

Most industry watchers agree it will be three to five years, and maybe longer, before interactivity achieves a significant viewer base.

But this year, much of the groundwork will be laid.

In this special edition, Interactive Media & Marketing takes a look at the major existing interactive trials from telephone and cable TV companies, and those planned for 1994, and talks to experts about consumer demand for such services.


GTE's Cerritos project

In 1989, GTE Corp. launched a test of voice, video and data services over coaxial and fiber networks to select customers in Cerritos, Calif. GTE had received a temporary waiver on rules that prohibit phone companies from providing video services in their territories.

Included in GTE's test are video on demand, video telephony, expanded pay per view, traditional cable services and an interactive service called Main Street, which offers shopping, banking, entertainment and other information services.

GTE has kept its test results close to the vest, which has prompted speculation about how successful the experiment truly has been.

"Cerritos has bombed," said Michael Noll, dean of the Annenberg School of Communications at the University of Southern California.

"There is no market need for the service," said Mr. Noll, adding that his information has come from people who have used the services.

But GTE says its critics don't understand the scope of the project.

"The people who say Cerritos was a failure clearly didn't understand what the test was all about," said Mike Morrison, manager of advanced operations testing for GTE's Cerritos project.

"This is a technical trial. It wasn't our objective to do product development or mass-market research," he said.

What GTE has learned, said Mr. Morrison, is how to put together the components of a network and understand what customers want.

"They like choice, convenience and service," he said.

The service that comes closest to true interactivity is video on demand, in which viewers can receive a movie moments after ordering it and have full videocassette recorder functionality including rewinding and pausing.

The technology involves tape players that are pre-loaded with movies and are triggered through electronic signals routed through a switch at GTE's central office.

But while it is a bit more advanced than the video-on-demand tests being conducted in Denver by Tele-Communications Inc., U S West and AT&T, the trial has a big drawback: It is available in only three homes.

"As the technology becomes more affordable and broadband switched technology becomes more developed, we'll be offering these services to more customers," Mr. Morrison said.

GTE is now planning a video dial-tone trial with AT&T in Manassas, Va., and if it gets approval from the Federal Communications Commission to construct a network, it could begin offering services to a handful of customers by yearend.

Viewer-Controlled Cable TV

In 1992, U S West, TCI and AT&T launched Viewer-Controlled Cable TV, a market trial of video on demand, to 300 homes in an affluent Denver suburb.

The technology-once described as "laughable" by TCI-involves hundreds of VCRs at a test center that are loaded with tapes, paused and restarted by employees in response to viewers' remote control commands.

But the companies have made clear they are not conducting a technology test in Denver; rather, they are trying to gauge consumer demand for true video on demand and the features customers find attractive.

One component, "Hits at Home," is an expanded pay-per-view service offering 24 channels of movies and educational programming with top titles beginning every 30 minutes.

The second service, "Take One," simulates video on demand, giving viewers near-VCR functionality with about 1,000 movie titles a month.

In November, the partners released the first test results from VCTV.

While not providing detailed information, the companies reported buy rates of 2.5 movies a month, or about 12 times the national pay-per-view buy rate average, and a 70% usage rate each month.

"We've learned a lot about the nuances of what people like, and not just in terms of liking 30 channels of pay per view or choosing from 1,500 movie titles," said Dede Moreland, marketing manager of VCTV.

"We've learned what people like in terms of how simple or complex the ordering screens need to be, how they like the user interfaces, and what types of movie titles they want to buy," Ms. Moreland said.

The companies are extending the trial, which was originally scheduled to run for 18 months, through June, and will add a new feature that will give viewers a 15-minute "intermission" on the expanded pay-per-view service, which will be achieved by starting movies every 15 minutes instead of every 30.

But it also means the viewer will have to change channels to pick up the movie again.

The feature is designed to test two variables, said Ms. Moreland: whether people really want to take a 15-minute break, and if buy rates increase with more frequent start times.

The companies will apply the test results to future rollouts of advanced networks.

TCI's first interactive technical test will be conducted with Microsoft Corp. during the fourth quarter in Seattle, expanding to a market test in Seattle and Denver next year.

U S West, meanwhile, is planning an interactive video test in Omaha this year, expanding to Denver; Minneapolis/St. Paul; Portland, Ore.; and Boise, Idaho, next year.

And AT&T, in addition to its partnership with GTE in Manassas, is developing an interactive trial with Viacom Cable in Castro Valley, Calif., and has joined with Pacific Bell for a video dial-tone test in Milpitas, Calif., later this year.


Time Warner's Full Service Network

Time Warner Cable's much-publicized interactive network in Orlando suffered a major public relations embarrassment recently when it was forced to postpone its launch date from April until the fourth quarter. Time Warner cited software and hardware delays by suppliers Silicon Graphics and Scientific-Atlanta.

"This is an extremely complicated technological process. It's the first time anybody has done any of this," said Tom Feige, president of Time Warner's Full Service Network.

However, "I don't think this delay signifies any long-term concern with working with interactive multimedia," he added.

"I think it's simply a recognition that what we would have brought to the market in April is not up to the standards that we think it should be."

Time Warner now plans to hook up its first "customer," which will actually be a test center, in early fall. The cable company will add a few dozen real customers after the systems are verified and will gear up to 4,000 by the end of the year.

The first services will include 50 to 100 channels of video on demand; home shopping services including a Warner Bros. Studio Store and an upscale catalog service; videogames; and TV Guide On Screen, an on-screen program guide.

Eventually, Time Warner will add a news on demand service, an auto mall, a grocery shopping service and other business and information services.

The company plans to divide the 4,000 homes into subgroups and test different pricing, packaging and promotional opportunities.

But Time Warner probably won't release any results this year, said Mr. Feige, pointing out that initial results usually vary from results compiled after a system has been in use for a while.

He acknowledged that TV viewers haven't embraced interactive technologies that have been presented in the past.

"I think it's our job to bridge the gap between existing passive consumer television behavior and interactive behavior," he said.

The way to do that, he said, is with a "simple, but fun" navigational system.

"The navigational system is the most important feature of the network," Mr. Feige said.

Time Warner will test two navigational tools, a spatially oriented system it is developing with Silicon Graphics and Colossal Pictures, and a menu-driven system being developed by Warner Bros.

The goal is to roll out the capability of full service networks to 85% of Time Warner's customer base by the end of 1998.

U S West's Omaha trial

U S West, which received Federal Communications Commission approval last December to build a video dial-tone network in Omaha, is in the process of completing a coaxial cable and fiber optic system on which it plans to launch interactive services later this year.

Under a two-year-old FCC rule, telephone companies may deliver video programming services in their service areas, but under the Cable Act of 1984 are not allowed to own the content.

U S West is challenging that law, but for now is in discussions with outside packagers and programmers. It has not announced any agreements yet.

However, the company says it will be ready to launch a technical trial by the second quarter of this year to as many as 375 homes, expanding to a market test this fall.

The multimedia network will pass 60,000 homes by yearend, and U S West is projecting a 15% penetration level over the course of the one-year trial.

The first services will include home shopping, movies on demand and interactive games, as well as a navigational system being developed by the U S West Marketing Resources Group.

While the technical trial is designed to make sure the system works, the market trial will test variables such as how much customers are willing to pay for interactive services, said Larry Levine, U S West VP-general manager of broadband and multimedia services.

"We'll look at how they're willing to pay, such as per game or per hour, and how they like the feel of the navigational system," Mr. Levine said.

He said advertising will be involved in the test, although the company isn't ready to announce details.

One challenge, Mr. Levine said, is making sure customers are comfortable with the service.

"If you push the interactive part, the customer is probably not ready. If you push the value and the benefits of the service, and make the interactive part an adjunct to that, then the customer probably is ready," he said.

He said video on demand will probably be the most popular application with consumers, but "once people understand what the application really is and how to access programming off the servers, you'll see a wide variety of programming."

U S West's goal is to add 20 cities to its superhighway list and have 100,000 homes passed by the end of the year, adding 500,000 homes annually beginning next year.

Bell Atlantic's multimedia networks

Bell Atlantic, which last month broke off merger talks with TCI after tough new cable rate rules were approved, is still moving aggressively forward with plans to build advanced video networks in its six-state region.

After winning a major court decision last year that overturned the cross-ownership provisions of the Cable Act of 1984, the phone company is the only regional Bell operating company that has been granted permission to own programming content in its service area, although that decision has been appealed by the National Cable Television Association.

Bell Atlantic launched a technical trial of video-on-demand services last year involving about 300 of its employees in northern Virginia, but it still must receive FCC approval before constructing video networks for a market test later this year.

The Baby Bell, which filed an application for approval last fall, hopes to begin construction this summer. The FCC approval process takes about six months.

Bell Atlantic says it expects to have some customers hooked up to networks in Alexandria, Arlington and Fairfax County, Va., by yearend, expanding the test to Montgomery County, Md., next year.

The initial services would include video on demand, home shopping, educational TV and informational services, using Bell Atlantic's Stargazer navigational system.

Bell Atlantic, like U S West, has not announced any programming deals, although it has reached an agreement with Oracle Corp. to jointly develop and market multimedia software and services.

Stuart Johnson, chairman of Bell Atlantic Video Services, says his company's test will have some significant differences from other video trials.

"What we at Bell Atlantic are doing with our tests is essentially to build from day one a commercially viable system, not to try to do the limited market tests that you see going on in other places such as Orlando," he said, pointing out that the Time Warner experiment involves very expensive equipment that equates to about a $7,000 set-top box.

"We won't have all the golly, gee-whiz kinds of things that a $7,000 set-top would provide, to start with," Mr. Johnson said. "We won't have all the facile graphics capabilities and other services that you may see on some other trials."

But he said that as costs come down, Bell Atlantic will upgrade its networks with the software and hardware to provide more sophisticated applications.

Its goal is to pass 9 million of its 11 million households by 2000.

Viacom/AT&T Castro Valley test

Viacom Cable, which last year launched a trial of near-video on demand on its cable system serving 13,000 subscribers in Castro Valley, Calif., this year will expand the test to include interactive services.

Viacom is working with AT&T to build an advanced fiber optic network in the San Francisco area. It plans to launch a technical trial to less than 100 customers this summer, rolling out a market test in up to 1,000 homes by the third quarter, said Bruce Kaplan, director of research and strategic development for Viacom Cable.

The initial services will include video on demand, a home shopping catalog service and an interactive program guide.

The video-on-demand service will use AT&T's file servers, switched network and set-top boxes to deliver movies almost instantaneously and give viewers full VCR functionality.

Pricing has yet to be determined.

Viacom will also test some interactive advertising, but has not announced any details.

"We feel ours is truly a market trial," said Mr. Kaplan, citing what he thinks differentiates the Castro Valley test from those being planned by Time Warner, U S West and others.

"We don't claim to know at all what the market demand for these types of services is," he said.

During the trial, which is scheduled to last through the end of next year, Viacom will test pricing, product branding, the effects on other types of TV behavior such as ordering pay-per-view or premium services, and the impact on other activities such as shopping.

"The main obstacle would be consumer resistance based on the fact that we might not do our job right, for example, by not building enough added value to the interactive services," Mr. Kaplan said.

"The services have to add value, either in convenience or entertainment value or price utility, for us to succeed," he said.

Viacom will use the test results to determine future applications for both its programming and operations businesses, Mr. Kaplan said.

"You could have an opportunity that looks great for one side but not the other," he said.


Although they haven't gotten as far as the preceding companies, other telephone and cable companies are planning interactive tests and network upgrades. They include:

Pacific Bell, which last year announced a $16 billion network upgrade in California. The Baby Bell plans to build its first networks in San Francisco, Los Angeles, Orange County and San Diego, in addition to its Milpitas project with AT&T, pending FCC approval.

Ameritech, which has filed applications with the FCC to build video networks in Chicago, Cleveland, Detroit, Indianapolis, Milwaukee and Columbus, Ohio, at an upgrade cost of $4.4 billion.

BellSouth Corp., which has challenged the cross-ownership rules in order to build a multimedia network in Brentwood, Tenn.

Nynex, which announced plans to build a $270 million broadband network in Rhode Island over the next two years.

Southwestern Bell, which plans to build an interactive network in Richardson, Texas, by the end of 1995.


Experts agree that while 1994 is an important year in terms of starting interactive tests, it will be some time before any consequential results will be seen.

"Interactive TV is clearly in its infancy," said Matthew Harrigan, cable analyst for Bear, Stearns & Co.

"These companies are taking an incremental approach. I think it will be difficult to assemble quantifiable data" this year, he said.

Mr. Harrigan said he thinks videogames will be the most significant business coming out of the interactive tests.

"You can immediately download them and actively play them two-way," he said.

However, he added, there's a potential obstacle to videogames.

"You have to worry about latency," or the delay time in seeing results. "Fourteen-year-old kids who are real game junkies won't take any latency. You need quite a sophisticated architecture in terms of the interface."

Howard Horowitz, president of Larchmont, N.Y., market research company Horowitz Associates, said the new cable rate rules shouldn't deter development of the information superhighway.

"The competitive pressures override the regulatory environment," said Mr. Horowitz, whose company conducted a study last year, together with Marshall Cohen Associates, that looked at consumer interest in new technologies, including interactive TV.

Although the companies declined to release specific results of the study, which was commissioned by cable operators and programmers, Mr. Horowitz said that in general, "consumers want the services they already have enhanced and made more user friendly."

That makes video on demand the most obvious application, he said, as opposed to existing pay-per-view services, followed by interactive programming guides and whole-house TV services, where all the TVs are hooked up to the network.

"The entree to the consumer is to get existing problems fixed, to get it user friendly and to get it to the home," Mr. Horowitz said.

"In answer to the question, `Will they come?', they won't come if they have to put up with any inconveniences, such as the restricted ability to watch HBO in bed or inconvenient price structures for additional hookups or remote controls."

Gary Arlen, president of Bethesda, Md., research company Arlen Communications, said telegambling, or betting over the TV, will be a killer application.

"Telegambling is an ideal mix of video-games and electronic funds transfer," said Mr. Arlen, whose company will conduct a study this year to determine the appetite of interactive services with target audiences.

"Call me crazy, but I think education will be one of the killer applications," he added.

Bernard Luskin, the new ceo of Jones Interactive Systems and former president-ceo of Philips Interactive Media of America, agrees.

"It's going to be a big business," he said.

Mr. Luskin, who is also vice chairman of Mind Extension University: The Education Network, a sister company of Jones Interactive, will spearhead the company's drive into interactive services by developing on-demand networks and software.

His first project will be developing an electronic bookstore, which Mr. Luskin says is "the next wave of home shopping."

"The knowledge society and early adopters are not inhibited about spending money," said Mr. Luskin, who developed the compact disk-interactive (CD-I) technology while at Philips.

He adds that education can be entertaining, too, which will help drive it into consumers' homes.

But while these and other new applications show promise, industry experts agree it will be a while before they are in a critical mass of homes.

"It will be into the 21st century before we will be at a time I would call the interactive age, which connotes the widespread utilization and availability of interactive multimedia," said Time Warner's Mr. Feige.

"I don't think it will be in every home in three years," said Mr. Levine of U S West. "I don't think it will be in every home in 10 years."

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