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Starlight-starbright?

Fri, 01/31/2003 - 7:00pm
Craig Kuhl, Contributing Editor

iTV’s ‘Big Bang’ revenue theory has yet
to translate into boom times for broadband

The Big Bang revenue theory once promised by interactive TV (iTV) has burst into a cluster of smaller stars and is being reduced to a bundle of little revenue pops, at best, as MSOs and the iTV vendor community re-think and re-engineer their interactive business models.

Virtual channels, interactive commerce, advertising, gaming, information services and other iTV applications yet to be discovered, are now considered by most experts to be merely a string of glimmering stars among many in the new revenue galaxy called iTV.

Most of the revenue potential for iTV services, though not exactly light years away, is in the distant future–perhaps 5 to 10 years out, experts predict–with most being relegated to value-added status or components in a suite of bundled services.

"Many of the services under iTV won't generate revenue from consumers," says Jim Brancheau, analyst for the Gartner Group, a media research firm. "They'll be part of a bundle of services. The [customers'] wallet share tells us it won't pay a la carte for a single iTV channel or service, and there hasn't yet emerged a single important application that operators can charge for."

The revenue potential of iTV, video-on-demand withstanding, is being explored. Yet many wonder if iTV can reach the level of predicted revenue stardom it once held in the early 1990s.

"The promise of iTV was appealing on paper," says Nick Griffiths, director of Global Practice for Strategy Analytics. "But consumers know what they want, and how do operators make money from iTV? We've been shown the technology; now we need the markets and the business models."

Both, however, are elusive–and for good reasons. iTV's development is very early and very misunderstood. Adds Griffiths: "Education is a huge part of iTV. It's not really being marketed, and consumers aren't aware of it. They've got to recognize the value in iTV."

Most haven't yet. According to Strategy Analytics, true interactive revenues (VOD not included) accounted for just $10 million in 2002, but should spike to $588 million in 2008. "VOD and SVOD are the big revenue generators. Nothing else gets them excited. Only two percent of the net revenue comes from the combined iTV services like gaming," Griffiths notes.

iTV's value may be on the upswing, however. MSOs such as Comcast Corp., Cox Communications, Insight Communications, Knology and others are showing interest in interactive services and applications, albeit cautiously and methodically. For example, Comcast and Cox recently invested the lion's share of a $21 million stake in MetaTV, a provider of software for iTV applications, services and content.

"We're looking at iTV for incremental revenue and customer retention," says John Hildebrand, vice president of multimedia technology for Cox Communications. "Our trials have shown it to be a 'sticky' application and customer retention tool. But we're still in the learning mode for the incremental revenue piece, and the advertising component isn't as appealing as it was two years ago, when there were more advertisers. They're interested, but until you can bring them eyeballs, they're just interested."

Cox is interested in iTV, but Hildebrand admits the moon and stars haven't exactly aligned for it to become a viable revenue source. "VOD is a good business model, but the other parts of iTV like commerce, advertising, weather, housing and those services–that's where the business model is unknown, and the only way to find out is through market trials. Interactive PVR (personal video recording) is first on our list, then VOD. Beyond that, it's hard to say."

Despite the great unknown business model for iTV, high profile players such as MSN-TV, AOLTV, Liberate Technologies and others are deepening their involvement in the sector, albeit in varying degrees. Venture capital companies are kicking the interactive tires as well.

"There's lots of potential, and cable operators have a level of ownership over their subscribers. The revenue is not an obviously huge plum and will be incremental. You can't project the different sources of revenue until there's a flexible platform to reduce churn and define the economics," explains Allen Beasley, partner with Redpoint Ventures, a California-based venture capital firm.

Redpoint, which recently forked over $2.5 million to help fund MetaTV, traditionally invests in earlier round financing, but found in the start-up a strong interest from Comcast and Cox.

"We wanted a higher percentage of the company and our interest is in true iTV, and Meta is heading there. Our focus now is in solving Comcast's and Cox's iTV issues. The revenue streams are too ill-defined, and it's far too early for true iTV to exist. But the potential is there," Beasley adds.

Potential or not, some still remain skeptical of the interactive sector's revenue-generating prowess. "We've looked at the iTV model extensively and feel it will be some sort of subset of models," says William Markey, a partner in RelevantC, a venture capital and investment firm. "We've been hearing of iTV's promise for 12 years, but people now know all about interactivity and cable is second to market with it. Hopefully, cable will be smart enough to borrow from that experience, but so far, most of the cable industry is in a pre-Internet mentality."

Markey, along with other industry experts, believes the future of interactive television lies within the bundle of services provided by cable operators. "When incremental revenues of smaller iTV applications are totaled, it's probably more than a Big Bang revenue source," Markey says. "Plus, operators don't have to create original content, so costs are lower. The market is giving cable operators the gift of being content distributors, not creators. iTV's success depends a lot on how cable accepts that gift."

Knology, a multi-service provider based in the Southeast, views iTV as exactly that: a gift. "We see additional revenue being driven by iTV from gaming to Web-browsing to e-mail and linking them to our regional and local markets," explains Knology CTO Rickey Luke. "And we believe there's a big future for regional advertising. But iTV is in its infancy, and we have to be sure to get our platform in place first."

And make it profitable, too. Insists Luke: "No one wants to step up and spend money when there are no customers [for iTV]. So, it will be a slow, gradual transition three to five years down the road, and profitability is the key."

Just where the profits lie with iTV is now being determined as MSOs, vendors, telcos and satellite providers scramble to find a profitable business model. iMagicTV Inc., a software development company for the telecommunications and broadband industries, is a cross-over company that provides interactive software to both spaces, and finds iTV's future a bit cloudy, but with much "potential."

"There's lots of experimentation, but there's still no conclusive evidence as to what the iTV landscape will look like. It will be a cable stake, but it's not clear who or what will generate revenue," predicts iMagic TV Inc. Executive Vice President and Co-Founder Marcel Lebrun.

The pressure won't stop at the business model, either, Lebrun warns. "Cable operators are order takers. They don't know what triggers a buy or customers' buying patterns. Giving the purchasing decisions to consumers [via iTV] will help operators immensely."

The revenue potential for individual applications such as interactive advertising and TV-commerce is expected to build in value as well, with 2004 being the take-off point. For instance, TV-commerce revenue is projected to reach $13 billion by 2005, up from $23 million in 2000. TV will handle nine percent of all e-commerce transactions and six percent of e-commerce dollars by 2005. In 2004, when digital platform deployment nears 50 percent, TV-commerce is expected to skyrocket, Gartner Group reports.

In addition, 4 million adult Americans used TV-commerce in 2001. That number is expected to climb to 35 million in 2005, with the average transaction being $58. Gaming is predicted to generate $2.3 billion in revenue from online consoles, while iTV advertising revenue was projected to finish at about $1 billion by the end of last year (including revenue from EPGs and platforms such as Wink), the report concludes.

The business model that will lead service providers to those numbers is out there somewhere, experts say. But where, and when will it appear? "In the iTV realm, we're not seeing a compelling business model. It will include a commerce and advertising component and must be a balanced approach. It will take time to change the viewing and buying habits of 105 million households," Brancheau acknowledges.

Irv Kralick
Kralick
Time, indeed, is the challenge for most in the iTV business. "All the MSOs are very deliberate, slow and methodical. They must be sure iTV is scalable to cable. iTV isn't just VOD. It's advertising, commerce and the concept of content-on-demand and is very experimental," admits Irv Kralick, president and CEO of MetaTV.

Kralick believes that a combination of a la carte applications and information services with graphics and data in video will comprise the likely iTV business model. "MSOs will be able to target applications to advertisers and deliver a wide range of applications to consumers. That's the potentially wonderful side of iTV. But it's still early," he says.

For iTV software and applications providers such as MetaTV and others, including Digeo Inc., which provides iTV services to the cable community, time and results are both presenting a challenge.

"Most MSOs are in a wait-and-see mode," says Steve Martino, general manager of Digeo Basic iTV.

"They need hard numbers for churn and operational cost reductions. And capital is under close scrutiny. They seem optimistic about iTV, so we must show them results."

Martino is convinced iTV applications can reduce operators' costs, while adding incremental revenue through interactive advertising or sponsorships and creating a more favorable customer relationship.

"Customers can turn on a channel and see the MSO thanking them. It provides a positive branding opportunity and an interactive method of on-demand information," he says.

Digeo is projected to be in 2 million homes this year, Martino points out, yet he has no illusions about the challenges ahead for interactive television. "The footprint changes the economic equation, and as it grows to multiple MSOs, iTV should become a revenue generator," he says. "But today, it's not an all-cash positive flow. It will take a combination of revenue-generated services and cost reductions to be successful."

And the MSOs are the lead dogs, experts maintain. Says Kralick: "We're not building iTV stuff before it's needed. We're following our customers' lead, and they're the MSOs."

For investors such as Redpoint, which is also invested in cable-technology companies such as BigBand Networks and Syndeo Corp., it's less about iTV and more about where MSOs want to go, and more importantly, where iTV has been. "Too many companies have failed by chasing the Big Bang notion in iTV and have been too presumptuous of subscribers. It must be taken in steps. That's where iTV went wrong. Now, MSOs have critical mass, and we think they're the right partners," Beasley concludes.

Maybe so, but past iTV failures, including previous interactive efforts at Excite@Home, are still top of mind for many. "There are lots of horror stories about iTV applications–from lack of marketing to lack of awareness. But true iTV is creeping up and the technology is great. Now it must explore new business models and get a little revenue here and a little there," says Griffiths.

The question for iTV is: how many "littles" will it take to make a big, or even decent, revenue stream? The answer, most agree, is in the numbers and the markets. Concludes Markey: "There are some very interesting applications, like gaming, PVR, on-screen e-mail and more. But unless cable figures out how to reach its markets and ways to offer the bundle of eight to 10 applications, it will be left behind."

The iTV revenue galaxy
iTV advertising $1 billion in 2002
TV-commerce $13 billion by 2005
Shopping channels $5 billion in goods and services sold worldwide last year
Video $8.7 billion spent on video rentals and $10.4 billion on video purchases
Gaming $2.3 billion in revenue for online console gaming by 2005
iTV households by 2006 Approximately 210 million
Sources: eMarketer and Strategy Analytics

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