Boob Tube No More

The computer industry has seen the future, and it's sitting in your living room. Today, your television brings you The Simpsons and Murphy Brown. But in a few years, it will bring you on-line shopping, electronic banking, and electronic video mail.

Of course, all by itself, the low-tech TV won't suddenly become an on-ramp to the digital information highway. The brains will come from a new form of cable converter box--one souped up with the electronics of a sophisticated personal computer. Even without all the new information services, the new digital cable boxes will be needed just to surf through the 500 channels that cable companies promise, starting as soon as next year. Market researcher Paul Kagan Associates predicts that by 1996, the U.S. market for digital cable converters will reach 4.5 million units annually, as cable companies upgrade the 65 million converter boxes now in use. The new boxes will cost $200 to $300 apiece, about twice as much as current cable boxes.

NEW ALLIANCES. But winning the race to create the new set-top box will involve bigger rewards: Whoever controls the converter stands to gain a key role in determining the shape of the digital future. That's because the new set-top boxes likely will be the gatekeepers--or tollbooths--for the information highway.

That's why computer, cable-TV, home-electronics, software, and phone companies are racing to create such boxes. And because the risks are high, companies from chipmaker Intel Corp. to gamemaker Sega Enterprises Ltd. are teaming up with the cable industry in the hopes of building the universal set-top box for the age of interactive television. "The TV is the most prevalent information device in use today," says Nathan P. Myhrvold, Microsoft Corp.'s vice-president for advanced technology and business development. "When it becomes interactive, it will make a profound change in the way we live."

That is, if anybody can figure out what technology should go into the new boxes. This hybrid market is likely to stumble before it flies. Cable and phone companies, as well as information-services suppliers, are experimenting with interactive TV, which will allow, for example, viewers in different cities to play a video game together. But nobody

really knows what kinds of features customers are willing to pay for.

SHAKEOUT. The new devices also will require an unprecedented mix of technology from the cable, television, and computer industries. At the start, companies are proposing incompatible products and services--all but guaranteeing a shakeout. "There's a lot of money to be lost at the front end of this market," says Laurie J. Frick, marketing manager of Hewlett-Packard Co.'s interactive television appliances unit.

That hasn't stopped many from trying. Every week seems to bring a new alliance. The two leaders of the PC industry, Intel and Microsoft, on Apr. 27 announced an alliance with today's leading supplier of converters, General Instrument, to produce a next-generation converter box. Time Warner, the nation's second-largest cable operator, announced a similar alliance on May 10, with cable-box maker Scientific-Atlanta and Toshiba (table). Paul Kagan analyst Thomas J. Adams counts a dozen such announcements in the past month. "Nobody wants to read 10 years from now that they missed the boat," he says.

This mishmash of alliances may not be a bad thing, according to Bob Stanzione, a vice-president at American Telephone & Telegraph Co. "It's good for the industry for there to be a lot of cross-pollination of ideas in order to get this rolling," he says. AT&T, an unlikely contender, has entered the sweepstakes by winning a joint bid with General Instrument Corp. to provide boxes to Tele-Communications Inc., the nation's largest cable-television operator. AT&T also owns part of 3DO Co., a Silicon Valley startup that is building an interactive game machine it hopes could someday double as a cable box.

What makes all this possible is the coming of digital television transmission. Both the TV signals sent over the air and through cable will be changed from the current analog format to the ones and zeros of computer language. These digital signals can be compressed by computers into small packets so that cables can accommodate hundreds of channels. Those signals must be decompressed at the other end by a digital converter connected to, or built into, the TV.

"We realized that you're essentially talking about a computer," says Avram Miller, vice-president for business development at Intel. That gives PC makers, such as Apple Computer, and software makers, such as Microsoft, an edge. "The computer industry offers the ability to sort and search through large amounts of information," says James C. Kedersha, a Cowen & Co. analyst.

What kind of information will the new boxes bring? Backers are experimenting with many different forms of interactivity. Cable companies plan to offer thousands of movies on demand, which viewers could order through their set-top boxes in seconds. Parents might be able to send videos of children directly to the TVs of doting grandparents. MTV fans might order a compact disk after seeing a video they like, automatically charging it to their credit cards. Consumers might play along with game shows from home to win prizes.

There seem to be as many proposed ways to design controller boxes for these new computer-TVs as there are ideas for services. General Instrument, Intel, and Microsoft are designing a digital cable box from conventional PC components, including derivatives of Intel's PC microprocessors and Microsoft Corp.'s Windows operating system. General Instrument hopes that the thousands of software programmers familiar with these systems will create programs for the advanced TV boxes. The first boxes from the team are due in 1994.

DIGITAL RULES. Other PC players also are eyeing the cable-box market. Apple Computer Inc. is developing what Gaston A. Bastiaens, vice-president of the company's Personal Interactive Electronics Div., describes as "smart receivers." Apple has not yet announced any products, but Bastiaens says "we are talking to major players in the [television] industry." IBM also is believed to be pursuing alliances aimed at developing digital TV boxes.

Others think PCs are a poor starting point, since set-top boxes will need easier-to-use, more video-capable software than PCs offer today. Time Warner, for one, not only is developing boxes in partnership with Scientific-Atlanta and Japanese computer giant Toshiba, but is considering microprocessors and other technology from Silicon Graphics, whose workstations now create special effects for movies. Time Warner, in addition, has an investment in 3DO.

And there are two wild cards: video-game makers Nintendo Co. and Sega. Sega has taken the first tentative steps with The Sega Channel, a joint venture with Time Warner and TCI. The channel will allow subscribers to tap into any one of thousands of video games for use at home. Although Nintendo has not yet announced any products or ventures for interactive television, "we've got grooves in front of our building from people coming to talk to us," says C. Peter Eck, network plan director at Nintendo of America.

Further, it is difficult to design the set-top box if you're unsure what type of cable or other network it may tap into. There are, however, early signposts of what these interactive systems will look like, and several companies are experimenting with advanced systems. One prototype is under construction in Orlando by Time Warner. When service begins later this year, the system is expected to provide the first true two-way capabilities: A single program could be sent on command to just one home, much as a phone call is directed to just one house.

INFORMATION MORASS. Also unclear is how the new boxes will be sold. Should cable companies continue to buy them and exact a monthly fee for customer use? Or should the boxes be sold directly to consumers, like videocassette recorders and video-game machines? One factor is recently stepped-up cable-TV regulation, which is likely to play a role in how boxes are distributed. An argument for retail sales is to let consumer demands spur quicker innovation. The catch: Before you could buy a box at the local electronics store, there would have to be agreed-upon standards to ensure it would work with any cable system.

And such standards may not appear for years, though some companies are trying. When TCI announced plans last December to buy up to a million digital boxes from General Instrument and AT&T, it required both companies to license their box technology to others. The move seems to be an attempt to set a standard, though TCI says the real reason is that it doesn't want to be locked into just a handful of box suppliers. "I don't want to be in the position of not being able to buy whatever smart idea is out there," says Tom Elliot, TCI's vice-president for engineering and technology. Until there is a standard, some likely players are hanging back. "There's a very confused morass of information out there today," says Nintendo of America's Eck.

Standards aside, the race is on to build the next-generation cable box. The vision of tens of millions of homes needing PC-like cable boxes is practically irresistible. And as cable and phone companies spend billions this decade to build information highways, nobody wants to be stalled on a side road.