iTV pauses, takes stock, changes course

Tue, 04/30/2002 - 8:00pm
Leslie Ellis, Technology Analyst

Once again, interactive TV seems to be on the brink of something.

Life or death is too draconian–for everyone familiar with its 30-year struggle knows that iTV never really dies. Circumstances intervene, and it goes back into hibernation. This time, perhaps aptly, the brink seems more digital in nature: On or off. One or zero. Deployment or dormancy.

Writer John Steinbeck could easily have been describing iTV when he transcendently wrote, in the novel Sweet Thursday: "Somehow they felt they were living in a moment when history pauses and takes stock and changes course."

iTV seems somewhere between taking stock and changing course.

iTV history paused...

For iTV suppliers, many of whom are now in semi-permanent hibernation, history started to pause in late 2000, and held still through 2001, as their potential customers–cable TV providers–didn't rush, or even really dawdle, to push advanced set-tops into homes.

For MSOs, the pause illustrated the equal-and-opposite phases of inertia. On its momentous edge, the top U.S. MSOs averaged 108,320 new basic digital video customers per week in 2001. Those boxes, at the time, enabled a viewer to receive more channels and an electronic program guide, but scant additional interactivity. On inertia's opposite edge, nothing inspired quite enough accelerative force to get advanced digital boxes, or interactive applications, moving.

That spelled slow business for those companies that built their business plans around iTV's adoption. That, in turn, made history pause to place milestone markers on a consolidation wave that almost certainly isn't over yet.

Consolidation made history of January's uber-box star, Moxi Digital, which Charter subsidiary Digeo bought last month for an undisclosed sum. Rumors had been thick, prior to the merger, that Moxi–which wasn't planning to manufacture boxes, but was full of detail on how much they'd cost–was having trouble securing additional financing to go it alone.

History also put a merger marker on Mixed Signals Technologies, purchased by Goldpocket in February. And as long as the pause continues, the struggle to endure intensifies for companies like Future TV, Commerce TV, Respond TV, Random/Order, and others.

Using the pause

Of course, one of the hardest things to do in life is to not squander a pause. And if there's one thing deep in the DNA of the cable industry–at least before the bigger MSOs merged themselves into five-times or more their previous size–it is the genome that squeezes every last drop out of intended and unintended resources.

Think back to that year-long wait for two-way plant activation, back when AT&T Broadband was still known as Tele-Communications Inc. On the surface, the wait looked like a frightening obstruction to cable modem deployments.

But, as Mediacom executive Joe Van Loan likes to say, cable operators sometimes look like ducks: Still, on the surface, paddling like crazy underneath. Such was the case with broadband Internet service in its infancy. While the modem deployments awaited a bidirectional signal path, TCI and other operators used the pause to straighten out back office interfaces to billing, customer care and field support systems.

There's mounting evidence that when it comes to iTV's latest pause, many cable operators are paddling like crazy underneath–even though they look like they are sitting still on the surface.

...Took stock...

Using a pause almost always begins with taking stock of a situation. Executives look around them and ask: What's really going on? What do I have? What do I need? For cable, that evaluation intensified in January, when cable CEOs visiting the annual Consumer Electronics Show in Las Vegas were unpleasantly broadsided by the volume and attractiveness of technologies developed for their collective nemesis–DBS providers EchoStar and DirecTV.

Post-CES, cable's top officers reconvened with their top technologists, seeking answers to how the industry can provide the same or better advancements to its customers. The answer, they found, starts with opening up headend conditional access and encryption systems, which attracts more set-top makers, which puts pressure on pricing and brings more potentially consumer-pleasing applications to the foreground.

But that, in turn, requires enormous technical and business challenges: Wresting licensing and certification activities away from incumbent manufacturers, culling talent to handle application certification, and re-formatting how business arrangements are handled with incumbent technology providers, so that new parties can enter without hobbling incumbents.

CableLabs, lacking buying power and subject to strict anti-trust rules, isn't equipped to move technical specifications into business negotiations. Still, though, CableLabs and the MSOs involved with its OpenCable Applications Platform (OCAP) specification used the 2001 pause to re-think the technical aspects of the project. Not seeing many combo set-top/DOCSIS modem boxes on the near horizon, CableLabs and its MSO constituents dropped the original plan to include an HTML-based (Hypertext Markup Language) presentation engine and a Java-based execution engine in OCAP. Without DOCSIS in the box, and given the relatively expansive memory and processing requirements necessary to run both HTML and Java, why do both, they wondered.

That re-evaluation led to the adoption of the European DVB-MHP (Digital Video Broadcast-Multimedia Home Platform) as the core of OCAP. Theoretically, the move subtracts time, rather than adding to the process of getting advanced, interoperable set-tops into the field.

Individual MSOs are clearly taking stock of their respective iTV situations, too. Charter is reportedly re-examining whether or not to move forward with Microsoft Corp.'s interactive television software, following AT&T Broadband's scuttling of a similar project last year.

Some of the MSO re-evaluation of iTV is productive. Canadian MSO Videotron is vetting responses to a request for middleware proposals issued earlier this year, indicating that its early work on interactive applications is poised for further growth.

Insight Communications continues to herald its interactive work with Liberate, saying that the average $20 per month in iTV subscription revenues it gets from its 25 percent penetrated digital base is equivalent to fending off an overall $5 rate hike. Plus, Insight executives say, digital interactive subscribers churn at one-third the rate of conventional digital churn.

The equity saga

But "taking stock" occurred most painfully in a literal sense: In the public stock markets. Over the course of the past year, iTV's six largest publicly traded suppliers lost nearly $20 billion in aggregate market capitalization, plummeting from $24 billion to $4.5 billion.

Gemstar bombed to a 52-week low of $8.88 on April 2, as investors fled once they found out about a Securities and Exchange Commission investigation into its accounting practices. A day later, Liberate fell to a new low of $4.98. The comparative drop of both company's stocks is blackest, though, when going back beyond a year. In the go-go stock boom of late 1999, the split-adjusted price of Gemstar ran into the low $70s. Liberate's stock sailed into the high $120s.

Holding steady through a drop that steep generally requires heavy doses of cleverness and guts. For Liberate, that means a new incentive plan to garner speedier North American deployments. In a late March briefing to financial analysts, coincident with its third fiscal quarter results, Liberate executives said they're actively refreshing some MSO contracts–they wouldn't say who, except to exclude Charter and Time Warner Cable–so as to offer licensing discounts and revised equity warrants, in exchange for quick deployment.

The conversations began as part of a proactive accounting project, related to the SEC's Emerging Issues Task Force (think Enron avoidance here), to detail warrants previously issued to some MSOs. Those talks opened the door to the incentive plan. The result, Liberate executives anticipate, is a doubling of its North American iTV deployments, from 500,000 to a million cable users, by the end of 2002.

Removing Gemstar from the aggregate iTV stock picture–it dwarfs the others in its category–shows a less brutal overall picture, but one that's just as pinched on a percentage basis. Without Gemstar, core iTV providers ACTV Inc., Liberate Technologies, OpenTV Corp., WorldGate Communications and Wink Communications lost $2.4 billion in aggregate equity capitalization since last spring, dropping an average 65.7 percent from $3.3 billion to $831 million.

Since their respective lows, iTV providers are rebounding, but in a bouncy, up-and-down sense that's not easily trended. If there were room to depict six-month stock charts for each of the iTV providers mentioned, most would show a downward slope that looks more like a cliff than a foothill.

....And changed course ...

Cable's iTV superset is already adjusting its course, both subtly and overtly. Subscription VOD services, viewed quizzically at best during 2000, received enough early enthusiasm from subscribers last summer to make the concept an overnight smash. HBO, Showtime and Starz! Encore are already deeply engaged in SVOD rollouts; other programmers will assuredly follow with on-demand services. The term "free on demand" is already seasoning industry discussions, as basic cable networks contemplate how to approach consumer convenience.

Simultaneously, MSO technologists and the iTV vendors that support (or want to support) them are actively examining what sorts of applications can run on the 15 million or so already-deployed digital boxes. Insight's work, for example, runs on the low-end of Motorola's digital box suite; all active middleware companies are cranking down applications to fit in the installed base of "thin" boxes.

In the middleware ranks, consolidation remains a plausible course change–for endurance more so than growth. (After all, cable's iTV sector hasn't really begun growing yet, as critical mass goes.) If everyone was "talking to each other" about marriage last year, this year, they're picking china patterns and silverware. Indeed, iTV suppliers quip, a white elephant marked "merger" stands obliquely in the corner of every meeting–by chance, at the airport check-in line, or intended, in the board room.

The question, of course, is who buys whom. Microsoft, apparently redoubling its efforts after continued dings to its cable presence–despite billions of dollars in direct investments–is quietly making the rounds, checkbook open.

Canal+ Technologies is still owned by Vivendi Universal, a media conglomerate with a $37 billion market capitalization–22 times bigger than Liberate's market cap, and 30 times larger than OpenTV's (at their respective 52-week highs).

Meanwhile, smaller and privately-held iTV companies, many of which secretly hoped to be bought out by the bigger, publicly-traded iTV firms, watch the ups-and-downs of their fantasy team owners with trepidation. Who, if anyone, will be left to initiate a roll-up? Suddenly, the second home in Tahoe looks to be even further away.

And the venture capital community, never slow to catch the whiff of distress-oriented change, is also on the alert, mulling the types of mergers that will encourage iTV growth after, or as a result of, the latest course correction. Rolling together production companies and providers of iTV content tools is one hot spot of activity; seeking ways to stitch together user-generated content with cable's sizeable bandwidth is another.

Another unstoppable force on iTV's course correction (although farther out strategically in the minds of cable providers) is the proliferation of digital consumer devices. Digital cameras and camcorders, as they march into consumer homes, hold the potential for huge amounts of user-generated content.

Couple that fact with new, affordable software tools to make that stilted home movie into a smoothly produced family flick. (These products are regular features in enthusiast magazines like "Home Theater.") The next step, of course, is to send the feature out to everyone in the family, which requires bandwidth.

Putting the two trends together–digital camera proliferation and software production tools for everyday people–probably crosses into the zone of DOCSIS 2.0 and the PC more so than OCAP and OpenCable, but, the fact remains that huge, bandwidth-slurping video files will assuredly be globbing up cable's slender, 5-40 MHz return path before very long.

The next chapter

There is one clear positive about iTV being on the brink of something: Competition. Digital customers, and would-be digital customers, aren't at all afraid to exercise their right to switch over to a dish from cable. If the old yarn is true–that cable providers don't get really aggressive, competitively, until their opponents poke sticks in their eyes–retinas are starting to get sore.

That, in turn, would appear to make for a lively iTV scene. Yet it's probably still too soon to interpret iTV's latest pause, re-evaluation and course-correction as a sure thing–course corrections have occurred too many times before that returned iTV to dormancy. Circumstances intervene, usually rooted in priorities. iTV, up until now, perennially ranked well behind other advanced services on operators' to-do lists, which sported things like broadband Internet, and even telephony, in some cases.

Until augmentation of the core video business takes number-one priority, then it's probably most realistic to evaluate iTV's next change of course with cautious optimism.

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