Interactive Tv: Turn On, Tune In, Interact

America Online thinks it can do a better job of Web-via-TV than its rivals. It may be right

The whole idea of interactive television got a bad rap in the past decade. In the mid-1990s, Time Warner Inc. poured millions into trying to deliver movies on demand in Orlando, Fla., but the technology proved too expensive. Cable giant Tele-Communications Inc. and Bell Atlantic Corp. announced plans to merge in 1993 to combine the promise of television, telecommunications, and computers--and the deal collapsed. Even Microsoft Corp. has stumbled in its efforts to deliver so-called I-TV. It bought startup WebTV in 1997 to let people surf the Web from their couches, but the company has a measly 1 million subscribers.

So give America Online Inc. credit for bravery, if nothing else. With huge fanfare, the media giant will launch its own interactive television service, called AOLTV, in early June. Using a new digital set-top box, AOL will deliver to TV sets across America its popular online service, complete with e-mail, chat, instant messaging, and interactive content. Think of it as information on demand. Soon, in the middle of a New York Yankees game, you could tap into a Web site to dig up Derek Jeter's high-school batting record. You could order a pizza from Domino's. Or you could chat online about Felicity's new boyfriend while watching her eponymous TV show. "This is the beginning of a fundamental change in television," says Barry M. Schuler, AOL's president of Interactive Services Group.

Why is AOL trying to make a go of it where others have flopped? It has a trump card nobody else had: 22 million subscribers who are accustomed to surfing the Net to check out the latest basketball scores, look up stock prices, and zap off instant messages. AOL figures many of its customers would like to do the same thing from their TVs--if they could use the same capabilities and features that they're already comfortable with. "These are the people the most primed to do interactive things on their TV," says Schuler.

MIXED MEDIA. The service also could prove to be an important weapon strategically. AOL has failed so far to convince major cable companies to offer its online services over speedy cable pipes. Instead, cable companies such as AT&T Corp. and Comcast Corp. prefer to sell their own brand of online service. Business Week has learned that AOL is in discussions to trade the AOLTV service for the ability to offer AOL services on the cable operators' systems.

Clearly, much more is at stake than AOLTV. With its pending $183 billion merger with Time Warner Inc., AOL is betting its future on the ability to combine the popular appeal of traditional media and the promise of the Internet. Beyond the AOLTV service, AOL is giving TV programmers a platform on which to write interactive content. For example, Time Warner's CNN Headline News will give AOLTV viewers the opportunity to click for more news behind the headlines. Time Warner's Cartoon Network will run interactive kiddie contests and chats during The Flintstones and other favorite toons. "It's a way to get viewers to be more loyal," says Steven J. Heyer, president of Time Warner's Turner Broadcasting System Inc. Ultimately, Time Warner's broadband cable pipes could distribute music, software, or even movies to customers around the country.

Despite AOL's grand vision, skeptics abound. Many experts think it simply doesn't make sense to combine the TV and the PC. That's because most people are happy using two different machines for watching TV shows and tapping into the Net--and they won't pay an extra fee to do both on one device. "The ability to surf the Web on your TV screen is solving a problem that people don't have," says analyst Josh Bernoff of Forrester Research Inc.

Still, the smart money is betting on AOL. Besides its huge, tech-savvy subscriber base, the company has a proven track record of making new technology so easy to use that it appeals to almost anyone. Merrill Lynch & Co. analyst Henry M. Blodget expects 10% of AOL's subscribers will sign up for I-TV within two years. He figures that will add $300 million in new subscription, ad, and e-commerce revenues. "AOLTV will be much more successful than any prior interactive-TV services," says Blodget.

AOL is hardly the only company championing interactive television these days. Innovative cable players such as AT&T, Cox, and Comcast plan to roll out similar services as soon as yearend. Through his Charter Communications, Microsoft co-founder Paul Allen plans an aggressive introduction of a new interactive-TV service in test markets later this year. And satellite-TV rival EchoStar Communications Corp. teamed up with WebTV last June to offer satellite TV with Net features. "The day of the Internet and TV is not tomorrow--it's here today," proclaims Hal Trevose (Pa.)-based startup WorldGate Communications, which provides 20,000 cable subscribers with Web access over cable TV.

With millions being invested in new technology, interactive TV is expected to take off. About 2.2 million U.S. households are projected to have the service by the end of this year, a threefold increase over last year, according to Forrester. That's expected to grow to 24.8 million households by 2003. Revenues from interactive TV are pegged to total $1.8 billion this year and soar to $18.8 billion in 2003. About one-half of the money this year will come from subscriptions, while the rest will be from advertising and e-commerce. In 2003, 90% of the revenues will be derived from ads and e-commerce.

UNOBTRUSIVE. AOL is laying plans to grab the lion's share of the loot. The first version of AOLTV will be delivered through a set-top box that works with any TV, whether the picture comes from over-the-air broadcast, cable, or satellite. Consumers will be able to buy the set-top box, made by Philips Electronics, at electronics retailers and plug it in themselves. Using a remote control or a wireless keyboard, viewers will get normal AOL services, such as e-mail, chat, instant messaging, and interactive content, on their TVs--in addition to their regular shows. While AOL won't disclose prices, analysts predict the box, keyboard, and remote will cost between $200 and $300 and AOL will charge $9 to $15 a month on top of its usual $21.95 monthly online subscription fee. The company is likely to run promotions offering boxes for free when customers sign up for subscriptions.

Despite all the bells and whistles, AOL isn't losing sight of the primary reason people plop down in front of the boob tube. The company has worked hard to make sure its services don't get in the way of watching TV shows. Instant message screens, for instance, are a translucent overlay over the show and fade away if unused. When AOL channels are called up, the TV show shrinks to a quarter-screen and AOL's content wraps around it. AOLTV is far from perfect, though. The resolution of Web pages isn't as sharp as on a PC display, and navigating through the interactive programming guide can feel like a trip through a maze.

Those problems should fade as AOL introduces new devices and services over the next year. By fall, it plans to launch a souped-up version of interactive television that will deliver both AOLTV and programming from satellite partner DirecTV. As early as next year, AOL may have a simpler and less expensive AOLTV box co-developed with partner OpenTV, a Mountain View (Calif.)-based TV software company. AOL could sell this box to more cost-conscious consumers. And AOL is expected to introduce yet another set-top box with partner TiVo Inc., a San Jose (Calif.)-based maker of digital video recorders. By combining TiVo's technology and AOLTV, consumers would be able to program the recorder to search out and record hours of TV shows, call up their own instant replays, and pause television shows while they are being broadcast.

BURNING RUBBER. Rivals aren't ceding AOL any ground in the nascent market. AT&T, the country's largest cable player, with access to 25 million U.S. homes, is counting on I-TV to help make its move into the cable business pay off. "This will be more than just a niche business," says Rich Fickle, senior vice-president of AT&T Broadband. "It's going to be a big growth business."

Then there's Microsoft Corp. The software giant is aggressively marketing WebTV and supplying software to AOL competitors, including AT&T. The software giant says AOL's approach to the market could be a big bomb. "Their challenge is to convince people who already have AOL to buy another box," says Rob Schoeben, senior marketing director at Microsoft's WebTV. For most consumers, he says, getting interactive-TV programs isn't enough to justify the purchase. Microsoft is focusing on another approach. Since December, the WebTV-Echostar service has been letting viewers make recordings of TV shows with instant replays, pauses, fast-forwarding, and rewinding. Some 100,000 subscribers have signed up for this "personal TV" service.

AOL executives acknowledge that there will be a lot of trial and error before it perfects its TV service. "In the next couple of years, it's all going to be about finding out what consumers want to do," says Schuler. "We're going into a heavy period of innovation like you've seen on the Internet in the last five years."

Indeed, AOL's aggressive approach to interactive TV is adding urgency to Time Warner's own plans. "AOL is highly motivated, and they're putting it on us," says John Billock, president of Time Warner's Home Box Office U.S. Networks Group. Originally, Time Warner wasn't going to launch I-TV until 2002 or 2003, preferring to focus on video-on-demand. But, says Time Warner Cable President Glenn Britt, "because of the merger, we may accelerate our plans." Britt is starting talks with AOL's Schuler on a possible new version of AOLTV to run on the digital set-top boxes that Time Warner is now using. Because of the boxes' limited processing power, Time Warner is likely to start late next year with a pared-down version of AOLTV with e-mail, chat, instant messaging, the electronic programming guide, and some interactive content, says Britt.

The race to transform America's televisions is just beginning, and the competitors are barely out of the gate. Still, AOL is off to a strong start. With its gobs of subscribers, consumer-friendly technology, and Time Warner's fast cable system, the online giant may have a crucial edge. Stay tuned: "You've got mail" is coming to a living room near you.

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