Interactive TV: What's In The Cards?

It's electronics companies vs. the cable giants in a battle over digital services

Welcome to the latest battle for control of your TV. First it was the satellite companies against the cable guys in a war for subscribers. Then digital video recorders (DVRs) like TiVo (TIVO ) invaded the living room. Before long, telecom companies will jump in, threatening to snatch viewers away from both cable and satellite providers with new ways to deliver video and other content to the electronic hearth. As if that weren't enough, a battle is looming between cable operators and makers of TVs, video recorders, and other consumer gear.

The fight is over a seemingly innocuous, wafer-thin device called a CableCard that unscrambles digital video images. The cable industry worries that the technology will siphon off its new premium services such as video on demand. Indeed, big bucks are at stake: At its core, the fight over CableCards gets down to whose logo you will see when you turn on your TV and who you'll pay for programming you order up under that brand. Here's a primer:

How do CableCards work?

CableCards slip into a built-in slot on the newer digital TVs as well as on upcoming DVR models from TiVo Inc. (TIVO ) Hewlett-Packard (HPQ ) also has a similiar product in the works. With a CableCard, you can get rid of your cable box and plug your cable directly into your TV or recorder box.

How will CableCards change the way you view television?

Viewers will have more choices both in the way they view programming and the equipment they're able to hook up to their cable systems. Rather than get their on-screen programming guide from their cable company, the guide will come with the TV you buy or the recording device you plug into it. LG Electronics Inc., for instance, just unveiled a big-screen, cable-ready set with its own digital video recorder included. South Korea's Humax Co. also announced that it will soon begin selling a liquid-crystal-display TV with built-in TiVo service. The cable company would then simply provide the pipe that carries the video signal.

Other new devices may soon allow you to bypass the video-on-demand interactive services of the cable-TV companies and order downloads directly from the Internet. TiVo, for example, is about to launch a service allowing subscribers to download movies over the Internet from Netflix, the popular DVD-by-mail service.

Can anyone get a CableCard?

Yes. Under FCC regulations, all cable companies must provide CableCards to any consumer who wants one. That's because several years ago Congress decided that consumers should be able to buy equipment that delivers cable and satellite programming directly from retailers such as Best Buy (SHCAY ), and other consumer-electronics makers. They complain that the cable companies are simply trying to protect themselves from the loss of revenue that would occur if CableCard technology takes off.

But if cable companies will still provide the broadband pipe into the house, and if subscribers still must pay for that pipe, why are they worried?

True, customers would continue to pay for cable service. But the cable giants would lose additional revenue if a slew of upcoming interactive services are a hit with consumers. Indeed, most of the growth for cable companies is expected to come from video on demand and other interactive services such as downloading music and buying theater tickets. Rather than view programming through the filter of, say, a Time Warner (TWX ) or Comcast (CMCSK ) program guide, or order up pay-per-view movies from one of those providers, viewers could get their premium programming directly through a TiVo DVR or an HP media hub, both of which will soon let viewers download directly from the Net. To keep customers from switching, Comcast and others have been rolling out their own DVR services.

So just how much business is at stake?

Interactive services in the U.S. have mostly been limited to pay per view and digital video recording. But consumer-electronics think tank TDG Research, a division of Diffusion Group, estimates that content delivered over the Net will become a $17 billion annual global market by 2010, up from virtually nothing today.

With Verizon Communications (VZ ), SBC Communications (SBC ), and BellSouth (BLS ) all scheduled to roll out competing interactive services beginning this year, and the DirecTV satellite service launching its own advanced interactive play, cable companies now face threats that did not exist when the lawmakers set their rules. "Are we worried? Heck yes, we're worried," says Bob Blackburn, director of video engineering at Adelphia Communications Corp. (ADELQ ), the nation's sixth-largest cable provider. "But we intend to be prepared for them when they come."

Why is TiVo so central in this fight?

TiVo, struggling to survive, wants to become an alternative to cable boxes. The DVR company has seen robust growth in the past year, to nearly 3 million subscribers. But about two-thirds of its business has come from its deal with Rupert Murdoch's DirecTV Group Inc. (DTV ) to provide integrated digital DVRs and satellite boxes. The exclusive relationship is coming to an end this year, however, as a sister company to DirecTV begins deploying its own recorder boxes. Moreover, TiVo recently backed out of talks to do deals with cable providers to co-brand services, since company execs were reluctant to compromise on TiVo's rich offering of features. So TiVo's hopes now rely largely on striking deals with content providers, such as its agreement with Netflix Inc. (NFLX ).

When will this fight get resolved?

Electronics makers want cable operators to put CableCards in their leased boxes by 2006, as required by the FCC. They say if all sides include the technology, consumers would see even better services roll out more quickly, and equipment costs would fall sharply. Cable companies want to extend the deadline or be exempted from adding the card technology, arguing it would add unnecessary costs to change technology that already works. The FCC has said it will make a decision later this month about whether cable companies must stick to the July, 2006, deadline. A win for the cable companies would preserve the status quo a while longer and could sound the death knell of TiVo. A win for the consumer-electronics companies will be a blow to cable's growth prospects and may give TiVo a new lease on life. More important, it could speed a slew of cool new consumer-electronics gear to a store near you.

By Cliff Edwards in San Mateo, Calif., with Ronald Grover in Los Angeles and Catherine Yang in Washington

— With assistance by Ronald Grover, and Catherine Yang

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