If you haven’t already noticed, the most pervasive and exciting home technology development since the mainstreaming of the Internet has finally arrived. It’s the transformation of TV from a passive, analog-based medium into a fully-interactive medium, in which content is delivered over digital networks, and it will have a catalyzing impact on the delivery of content to consumer devices within the home, home networking, and upon the use of personal computers.  Interactive TV represents a huge opportunity, for suppliers and service providers, and, for the consumer – who will have more home media choices than ever before.  If you are a participant in any of the industry segments involved in the delivery of interactive digital media to the home, or distribution of digital media content within it, interactive TV should have your attention.

The Situation

According to survey results released in November, 2001, by the National Cable and Telecommunications Association (NCTA), more than 1.5 million new digital cable video customers enrolled during the third quarter of the year, bringing the total penetration of digital cable in the US to 20 percent; about 13.7 million subscribers.  Since 1996, over $50 billion has been invested in the digital cable infrastructure upgrade.  In the US, TV and its delivery infrastructure must be fully digital by 2006, as per government mandate.

A similar digital transformation has been underway in the telecommunications world for more than a decade.  Starting at the network core, the extension of digital networks to the home was given a boost by consumers and businesses, as the Internet was adopted as an information and communications medium.  Telcos have been rolling out consumer and business DSL services for some years now, and with the demise of the CLECs, the major carriers have an opportunity to become a dominant supplier in most markets.

New technologies create new ROI opportunities

In order to recoup these gigantic investments, the cable television industry has undertaken an aggressive effort to identify, develop, trial and deploy new services to increase the revenue gained from each subscriber.  Similarly, as broadband Internet access has become a commodity service, for which the broadband carriers can no longer charge a premium price, Telcos feel added pressure to introduce new revenue-generating options to their subscribers.

Happily, a number of new and existing technologies have matured to a point where they can be combined to create new TV-based applications that can be introduced to subscribers in the form of new services.   These technologies include the availability of IP-based broadband access and backbone networks, high-availability/low-latency content servers, interactive TV applications and middleware, the availability of Web-based technologies to create interactive TV user interfaces, the maturation and miniturization of personal computer technologies, the existence of sophisticated database management systems, and more.  

Significantly, trials of new interactive applications by many of the cable carriers, based upon these technology platforms, have already exceeded subscriber take-rate and revenue expectations.  Interactive TV has moved past the “science project” phase, folks.

Baseline services

Today, the ability for any one carrier, be it cable, Telco, or satellite, to offer all of these traditional services is simply “table stakes”. 

• Cable carriers can now offer digital TV (high-quality MPEG-2-based video).  Typical subscriber fees are about $30 per month. 

• Telcos offer voice services for an average of a little less than $20 per month per telephone subscriber.  An additional analog line for data (modem) use is another twenty bucks.

• Cable and Telco operators (and some satellite networks, in partnership with Telcos) offer broadband data service for $30-$40 per month.

In  other words, unless the carrier offers all three, they will not be considered a viable option by an increasing number of subscribers.

New Opportunities for Service Providers

This is a listing of the most significant new revenue and service opportunities now available to most network operators:

• Video-on-Demand (VOD) – enabling subscribers to “rent” videos, when they want, without waiting for the next showing to “come around”, and, without making a trip to the video store to rent and another trip to return the video.  Unlike Pay-per-View, where the subscriber has to wait for the next showing, and the operator has to allocate multiple channels for multiple showings that are staggered in time.  Early indications are that subscribers will view 3-4 videos per month, yielding between $9 and $18 per month, per subscriber household, with as many as 30 percent of households taking the service.

• Subscription Video-on-Demand (SVOD) – Ability for a network operator to offer content on a subscription basis.  For example, subscribers can watch episodes of the HBO series The Sopranos whenever they want, if they subscribe to SVOD service and pay the monthly fee of $5 to $10, depending on the operator and the available programming.

• Personal Video Recording (PVR) – allowing subscribers to “time-shift” and otherwise control their viewing experience, similar to a VCR.  Content can be stored on a hard disk within the set-top box, or, with some new options just becoming available now, on servers based at the operator’s facilities.  Several suppliers offer PVR consumer electronics devices, for which monthly service is about $20.

• Personalization – made possible by local or server-based storage of viewing history, a service provider can offer reminders that a certain program will start in a few minutes, direct certain commercial messages to certain subscribers, cross-sell new services to subscribers that might be interested (while avoiding subscribers that would not be), and much more.  Personalization services do not capture direct revenue from subscribers, but they do appear to have a positive impact on the effectiveness of advertising and cross-selling efforts.

• Interactive Program Guides (IPG or EPG) – allowing subscribers to look ahead in time for program offerings, search program listings, block objectionable programming based upon the program rating, and more.  IPGs also do not capture direct revenue to the operator, but they offer on-screen real estate for advertising messages, similar in concept to Web banner advertising, for cross selling and third-party advertising.

These technologies are not just for cable and satellite network operators.  Coupled with the availability of DSL and fiber/Ethernet-to-the-home broadband IP networks, Telcos and alternate broadband carriers now have the ability to serve up fully “entertainment quality” TV’based services to residential subscribers, giving them the opportunity to recover their broadband investments.  It is not unreasonable to expect a doubling or tripling of revenue per subscriber.

Solutions for Telcos

Today, there are product options available to Telcos and broadband service providers to counter interactive TV offerings from cable television  operators.  One example is DTV Manager, from iMagicTV, one of a growing number of companies that’s creating the building-blocks of the new TV-over-broadband solution ecosystem. Attentive readers of Home Toys may recall the recent interview with Rob Begg of iMagicTV, describing the company’s TV-over-broadband product suite.  Theirs is a combined solution of server and client middleware, plus, a set of software applications which create an interactive TV experience for the subscribers of broadband network operators.  This product suite is sold to broadband network operators, such as telephone companies, public utility companies, operators of private residential developments, and others.

In fact, multiple product options are available toTelcos and broadband network operators, across the entire solution delivery ecosystem, allowing them to build and introduce interactive TV-based services, made from best-of-breed components, which are best-suited to their particular subscriber bases.

New Opportunities for Suppliers

As the number of RFPs from broadband carriers increases, many of the interactive TV technology suppliers have begun to realize that the delivery of TV over Telco broadband networks is more than a niche opportunity.  Outside the US, and increasingly within, this phenomenon is having a significant impact upon the broadband communications service providers that see the opportunity (and many of them won’t).

The delivery of interactive TV-based media services to the home has begun to affect the entire industry involved with the delivery of digital media to consumers.   TV-based services have already become a primary applications driver for suppliers of access network equipment, regardless of the nature of the network serving the fabled last mile to the home.   Every maker of DSL and fiber-to-the-home access network equipment now includes the delivery of TV in its product roadmap, if it’s not already in its available product lineup.

Makers of set-top boxes, home gateways and broadband network termination devices are already shipping Ethernet-based products that connect either directly to gigabit Ethernet from the public network, or, to DSL or other broadband facilities by way of a router.  One specific example is SonicBlue; with its recent acquisition of ReplayTV, it is in a position to offer multifunctional home communications terminals that include PVR and home networking capabilities in one box.

What’s the hold-up?

Telcos are the trusted provider of communications services, while cable and satellite operators are the trusted suppliers of entertainment services to the home.  The availability to provide entertainment services is a new world for the Telcos, while the ability to provide personal communications services is a new world for the cable carrier.  Culturally, it appears that the cable industry has been much more willing to push ahead with new, bundled, service packages that include voice and broadband data.  However, any Telco can meet or beat the cable industry at its own bundled services game if it makes up its mind to do so. 

What’s in it for Consumers?

Consumers will be the greatest beneficiaries of these new interactive services.  Almost everywhere, competing service packages will be available from multiple service providers.  Telcos, cable and satellite TV operators, even the public utility companies will all be vying for mind-share from the same consumers.  Ultimately, the consumer will determine the winner, by voting with his or her dollars.

Bundled services will make the overall package of entertainment, information and communications services more appealing, yet less costly overall. 

Will the Telcos respond?

According to the NCTA, the number of US cable modem customers is 6.4 million, already exceeding the number of DSL subscribers.  In addition, over 1.45 million subscribers enjoy cable telephone (voice) service, as of Q3, 2001.

The ability for cable television operators to provide broadband data, Internet and voice services is the biggest threat facing telephone service carriers today.  For many years, it has been common knowledge that bundled services are “sticky”, meaning that subscribers are less likely to change providers if they receive many services in a single bundle, on a single bill.  Because cable operators can now offer the whole communications and entertainment suite, US Telcos should be plenty worried (and not all of them perceive a threat, to their detriment).

In actuality, Telcos are already major players in the world of interactive TV.  TV-over-broadband services are commercially available to consumers in Canada, the UK, Australia, Singapore and in several countries on the European continent.  Not to mention that in Japan, China and Korea, numerous carriers are, or will be, delivering TV-based services over broadband networks. In comparison, US carriers are the laggards, and consumer expectations are such that they would not expect TV-based services from the Telcos.

In summary, the availability of new interactive technologies and service options, combined with their core strengths in delivering basic communications services, will make the Telcos a key player over the long term.

Steve Hawley is a consulting analyst and president of Advanced Media Strategies, focusing on enabling Telcos and broadband network operators to harness the revenue potential of their networks by providing bundled, TV-based services to their customers.  He is author of the comprehensive report, Delivering Interactive Media to the Home, published in October, 2001, by Parks Associates.  The report is a complete how-to guide for any operator considering whether to deliver TV-based services to subscribers, and is available now.

He can be reached via his Web site, http://www.tvstrategies.com