Europe's I Tv Advantage

Next-generation broadcasting combines the best of a computer and a television

It's race time at Vincennes just outside of Paris, and Fou Reveur is a 5-to-2 favorite for the featured Prix du Limousin. Although the filly falls behind early on, her chief competitor stumbles on the final turn. Fou Reveur finishes first. Winning gamblers scream with joy--not at the track, but in front of their television sets, snug in the comfort of their homes. More than 35,000 gamblers have accounts and place about $150,000 worth of bets each day on horse races throughout France on Canal+'s interactive-TV station. "You can gamble with your TV zapper and watch the race on the same screen," brags Bruno Delecour, chairman of CanalSatellite.

Settle in with your favorite snack for Europe's next technological revolution: interactive digital television. It offers online horse betting and dozens of other services, from ordering pizza to playing games. Just as the Continent has raced out in front of the U.S. in mobile phones, it has sprinted ahead in networking the television. More than 16 million European viewers now subscribe to interactive TV--more than twice the number last year. Almost a quarter of British and French households are wired for it and at least 90% of the customers regularly use interactive services. In contrast, fewer than five million American households--less than 5% of the population--can interact with their televisions. "Interactive TV already is a commercial reality in Europe, while it's still just a niche in the U.S.," says Noah Yasskin, chief analyst for market researcher Jupiter MMXI in London.

Delecour and other European execs are gambling that consumers around the world will find interactive TV less intimidating than nerdy personal computers. If large numbers of users do, the payoff from Europe's plunge into next-generation television could be huge. Rupert Murdoch's British Sky Broadcasting Group PLC (BSY) and Vivendi Universal's (VVDIY) Canal+ are investing billions of euros in the medium's hardware and in services. That means racking up short-term losses as they build an I-TV infrastructure.

The early players already have succeeded in turning some couch potatoes into cybershoppers. Canal+ makes twice as much on interactive customers as it does from plain old pay-TV types. And that's just the start. From only $84 million in online TV commerce revenue in Europe last year, Forrester Research predicts sales of goods over interactive TV will rise to $655 million this year and $2.1 billion next year. "This isn't going to be a sideshow," insists analyst Tim Grimdisch of Forrester.

For Europe, this is the main event. Sidelined in nearly every major technology market from PCs to shrink-wrapped software, European companies have the chance to dominate an area that could become a big gateway to the Web. Even though interactive TV has had a history of false starts and over-the-top market projections, retailers in Europe from Woolworths to Domino's Pizza are finding that they can sell more by TV than the typical Web site. In addition to Silicon Valley tech powerhouses, media giants--European, not Hollywood--could also end up driving oodles of e-commerce. "Europe is sitting on a gold mine," says Therese Torris of Forrester Research.

Already, Canal+'s owner Vivendi has exported its French model to the rest of Europe. Last year, it snapped up Seagram Co. (VO) to gain an American beachhead where it could leverage its I-TV experience. Meanwhile, Rupert Murdoch's BSkyB is such a success that the News Corp. (NWS) chief aims to export his vision of I-TV, first to Germany, then to his Star outfit in Asia, and potentially to the U.S. by buying DirecTV.

No one expects U.S. high-tech giants to just roll over. Nor will the PC be derailed as the primary on-ramp to the Web. But Europe's interactive-TV push could steal some of the tech crowd's thunder. So far, Microsoft Corp. (MSFT) and AOL Time Warner Inc. (AOL) have yet to build critical mass in I-TV. The problem with the U.S. approach, say Europeans, is that viewers want to be entertained--not surf the Web on their TVs. "The PC is sit-forward, while TV is lean-back," says Jon Florsheim, managing director of Open, BSkyB's interactive service. Florsheim says I-TV shopping is popular only when there is a direct link with a TV program. "Our model is you watch a football match and place the bet, you watch a cooking show and buy the chef's book," he explains.

What exactly is interactive TV? Next-generation broadcasting combines the best of a computer and a television. It sends digitized video signals and delivers them via satellite, cable, or ordinary rooftop antenna. In the home, a set-top box decodes the signals into hundreds of channels. And instead of just allowing one-way traffic, interactive systems let the viewer use a remote control or regular keyboard with an infrared connection to send instructions back to the broadcaster--either through a telephone line or through the cable. Already, viewers are customizing weather reports, altering camera angles on TV programs, ordering pay-per-view films, sending e-mail, and Web surfing.

Market skepticism. Turning a dumb TV into a smart machine isn't as easy as switching channels. It costs a bundle to roll out the service, and in this newfound era of market skepticism, weaker players already are having trouble raising the necessary cash. And without clear technical standards, no two interactive services are alike--or compatible. That means companies hawking their goods or services via interactive television have to construct individual Web sites for each I-TV system on the market. According to Forrester, broadcasters charge merchants up to $1.5 million annually just to get listed on an interactive service. Then expect to fork over as much as $1.5 million to build the I-TV site. No wonder some e-commerce companies have yet to embrace the technology and others are only beginning to adapt their sales pitch to the new medium.

It doesn't help that the U.S. has been slow to adopt interactive TV. During the mid-1990s, Time Warner poured millions into the first interactive-TV trials in Orlando to deliver movies on demand, games, and some shopping. But the technology never worked smoothly and cost much more than viewers were prepared to pay. Even Microsoft has stumbled. In 1997, it plunked down $425 million to buy WebTV to let people surf the Net from their couches. But WebTV has been stalled at about 1 million subscribers for a year because the software giant is in a Catch-22: TV programmers are not building applications since there aren't a lot of customers--and without a wide variety of programs, customers aren't biting.

Europe is different. For starters, the motivation for most Europeans to upgrade old-fashioned analog televisions into newfangled digital boxes is a greater choice of TV programming. Until recently viewers could only tune into a few stations, many state-owned airing bland fare. Private pay-TV operators, particularly BSkyB in Britain and Canal+ in France, have rushed to fill the gap with their digital offerings. Canal+ offers 230 channels, while BSkyB broadcasts more than 200.

Besides offering plenty of shows to watch, interactive TV is less expensive than the PC as a way of connecting to the Net. European Net surfers pay hefty per-minute telephone charges. Only about a quarter of all households enjoy Internet PC connections, vs. 43% of American homes, according to Jupiter MMXI.

Testing investors' patience. Simpler and cheaper methods to go online are needed, and what could be simpler and cheaper than the television, already in 99% of homes? "Although the PC won't go away, you need the ultimate trusted device to reach a real mass audience--the television," argues Tony Ball, BSkyB's CEO. BSkyB says more than 1.5 million of its viewers are using BSkyB e-mail addresses, and other broadcasters say online TV chat services are taking off. "We've only been going at it for four months and already we've had 500,000 messages sent," says Juan Peinado, director of engineering at Spain's Via Digital.

Still, the rollout of interactive TV is testing the patience of investors. Broadcasters are subsidizing the hardware by giving a $400 set-top box away for free to subscribers. On average, BSkyB racks up $250 in marketing costs just to win a new subscriber. That's why the losses are piling up. German interactive-TV operator Leo Kirch's Premiere World expects to lose a whopping $3 billion before turning a profit in 2003. Even much stronger Canal+ has operated in the red for the past four years, piling up $17 million in losses. "It's a giant financial gamble," worries Nicholas Gendre, an analyst who follows Canal+ at Credit Lyonnais in Paris. The stakes may be too high for also-rans: Both Dutch cable company UPC and Britain's NTL have seen their stocks battered and have been forced to delay their investments in interactive TV.

If companies can tough it out, I-TV promises to boost subscriber spending big-time. Before interactive services, subscribers paid Canal+ $20 a month. For the new services, they now pony up on average $43 a month. BSkyB reports that its digital subscribers spend 10% more than they did for the previous analog service on pay-TV films or programs, or about $450 a year. And that's not counting the money from companies that pay to be listed on the interactive service. "Our payback for each subscriber's set-top box is less than a year," claims BSkyB CEO Ball.

No wonder Ball is happy to give away the boxes. The British station's subscriber pool is rising faster than analysts expected, doubling last year from 2.5 million to almost 5 million. Best of all, its churn rate, the percentage of customers abandoning the service, has plummeted from 14% to less than 10% over the past year. Investors seem to believe the huge investment in interactive TV will pay off one day. BSkyB's stock has risen by about 40% in the past year.

In I-TV, scale matters. The two big players, Canal+ and BSkyB, are fast expanding outside their home bases. BSkyB has taken a 22% share of Germany's Premiere and Rupert Murdoch is planning to put all his digital-TV businesses into one company called Sky Global Networks Inc. Despite the tech downturn, Murdoch would like to raise $40 billion through an initial public offering this year which would rank as the largest in media history--if he pulls it off. Murdoch is reported to be on the verge of taking over America's largest digital-TV broadcaster, DirecTV Inc. In a recent interview, Murdoch said he might postpone the IPO and roll in all his digital assets under Directv. BSkyB's Ball won't comment.

Canal+'s parent company, Vivendi, is on its own mission to build mass. It already owns 23% of BSkyB. But when Vivendi merged with Seagram, regulators insisted it sell its BSkyB stake, which it's doing. Vivendi's acquisition of Seagram will accelerate its digital-TV offensive outside France. "The merger will reinforce our plans to allow viewers to download Seagram's music and films, and to spread these services throughout Europe," says Delecour. Within two years, he predicts that Spain and Italy, both with large Canal+ operations, will catch up to French levels of digital-TV penetration.

Competition between Canal+ and BSkyB will extend to the guts of new digital systems: operating system software. This software battle makes life difficult for content providers. Instead of being able to produce one interactive-TV site, they must produce separate ones for each broadcaster. Software reconfigures traditional Web pages when translated to the TV screen, forcing expensive adjustments.

Both BSkyB and Canal+ are convinced that a tightly-controlled Web service is the best way to speed the adoption of interactive features. They are trying to keep customers loyal by creating their own Web portals, only accessible through their I-TV systems. And these portals do not offer access to the larger Internet. That model is working just fine for Domino's Pizza. Domino's says TV sales on BSkyB in Britain are twice as high as its online ones, and have doubled in the past year to about $300,000 a month. "When people are watching a football game, they don't want to spend time in the kitchen, and they don't want to go to their study and start up their PC," says Chris Moore, Domino's British Sales and Marketing Director.

So far, interactive TV remains a work-in-progress, even in Europe. Indeed, the most entertaining thing to watch may be the companies battling to stay in the lead. In I-TV, anyone can still win.

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