Commerce.TV's diagram of its national network for interactive TV data processing. Called the C.O.R.E. Interactive Network (Connect Once, Route Everywhere), it links the digital set-tops in consumer homes to the application server in the MSO's headend, to a series of Oracle databases set up across the country, to the company's central data processing center, and to its business partners (MSOs, networks, merchants and advertisers). Note: Commerce.TV does not necessarily have partnerships with the companies represented in the circles—they are just examples of companies that fit each partner type.

Cable operators eyeing the staggering potential of e-commerce shouldn't count their change anytime soon, because getting to the point of being able to be a viable middleman between consumer and merchant is fraught with danger and expense.

You've seen the forecasts: the revenue potential of e-commerce (or t-commerce as some television-centric companies call it) worldwide is projected to be $3 trillion by 2004, and $10.7 billion in the U.S. for the sale of goods and services via interactive TV portals, according to the Gartner Group.

Those nearly unbelievable numbers are driving e-commerce network providers into the arms of the cable industry, whose access to more than 70 million homes (17.5 million of which will have access to TV portals by 2004, according to a recent Gartner Group study) is a tantalizing business proposition for the sprouting e-commerce industry.

Yet the fledgling business of cable-commerce is experiencing severe growing pains.

Disparate technologies and software, complicated back office logistical issues and virtually no business models to emulate are slowing the progress of commerce via interactive TV over cable networks.

Add to the mix the murky question of how revenues are split among a host of service providers, cable operators, programmers and retailers, and the business proposition becomes even cloudier.

"Technology issues are easily overcome, but determining the deals and who gets what percentage of what, and where the dollars flow are still up in the air," says Mark Snowden, senior research analyst for the Gartner Group, a media research and analyst group.

Few disagree that the money will flow with e-commerce, especially for advertising, in the near-term. Just how it flows, and to whom, are the pressing questions.

"Revenue splits will be critical and are a hurdle. Advertising on interactive TV portal services is the most attractive revenue stream near-term, but e-commerce will catch up. The percent of the transaction commission will always be smaller than ad revenues, however, but cable operators know it has to be a business (e-commerce)," Snowden says.

Yet building such a business is no easy task. Whole infrastructures must be designed and built to handle dynamic growth, scaleable order input capabilities, integrated back office systems and a network which must work seamlessly to handle huge influxes in orders during a short time period.

"Once operators realize what's needed to scale an e-commerce platform that's robust and resilient, they'll know it isn't easy to put together. The number of customers, range of services and back-end platforms are huge calculations," says Alec Livingstone, senior VP of engineering for Open TV.

It's the back office functions, he notes, that are the most complex to design. "The hardest issue for operators to get their heads around is that the back office is a big issue. Scheduling, service management and the hardware and software that help create and manage these areas are key pieces, especially if you want to grow the services significantly," Livingstone says.

Growing the services is precisely the goal, but also the problem. "We have the potential to make tens of millions of people respond simultaneously, and we'd better be ready for it," cautions Evan Saks, director of marketing for Commerce.TV.

Ready or not, most experts agree e-commerce is destined for cable TV, albeit over time. "It means all new back office applications are needed, and cable operators will need to share revenues with fulfillment transaction providers. But there's lots more in revenue," says Hal Krisbergh, chairman and CEO of WorldGate Communications Inc.

WorldGate, Krisbergh says, charges about 30 to 35 percent of the proceeds from transactions by cable operators. However, the "home run," Krisbergh insists, is cable's 70 percent penetration and eight hours of use each day, which affords cable operators a golden opportunity.

"Internet revenues come from PCs being on one hour a day in 35 percent of homes with access. Whatever you think of e-commerce, TV clearly becomes an explosive revenue opportunity in the house," he says.

The Gartner Group expects interactive TV portals to generate slightly more than $4 billion in revenue in 2004, which includes commissions paid from merchants to the system operators and not total retail sales.

PowerTV's Pizza-on-Demand.

As impressive as the revenue potential is, however, it has its limitations. "Some things won't be bought over TV. Pizzas and CDs are more impulsive buys and will be purchased over TV, which makes e-commerce a different business model. Everyone wants 12.5 percent of a transaction with margins being 5 to 20 percent, which are very thin, so the cable operator's e-commerce business model is very complex. It's a bizarre marketplace," says Richard Fisher, president of Respond TV.

The purchase of big ticket items such as cars, expensive clothing and items requiring at least some minimal research are expected to remain at the retail level, or in a growing number of cases, over the Internet, and not via an interactive TV transaction. Yet there is a point of diminishing returns for interactive TV purchases. Says Saks: "There is a minimum point at $12 to $15 where interactive TV transactions makes sense. That's the lowest range to make a viable business model."

Snowden concurs. "Pizza is a natural because you order it while watching TV. It's a great opportunity. For other products like cars, probably not."

Some are talking up other benefits to the e-commerce and t-commerce business model such as the direct marketing potential of e-commerce applications. Says Fisher: "If you're talking about large, aggregate audiences, lead generators are huge. The idea of targeting capabilities is the Holy Grail, and the idea of combining the emotive power of targeted offerings is awesome. It doesn't mean you don't sell stuff, just that the direct marketing opportunities are greater."

A piece of the Holy Grail may lie with retailers, however, and the relationships being developed within the cable industry, retail segment and with service providers could prove beneficial to the long-term growth of e-commerce.

Nurturing those relationships will be a challenge, however. Says Livingstone: "It was difficult to talk to U.K. retailers about interactive TV transactions and what they looked and felt like. This is a new relationship for retailers, and each has a different business model."

At the end of the day, however, it's the customer who'll control e-commerce's destiny. How they react to transactions via TV, and how confident they become in getting the right item at the promised time while protecting their credit card account numbers is crucial.

"Consumers must start thinking about TV as more than a passive device and develop a transactional mentality, and do something they've never done before with their TVs. Initially, they've been nervous about giving credit card information and uncomfortable doing transactions, and their buying patterns are still unproven," says Steve Necessary, CEO of Power TV Inc.

OpenTV, which launched one of the first successful e-commerce services in the U.K. when 10 percent of its customers placed an order within nine months of the launch, is familiar with the public's fickle buying behaviors.

James Ackerman

"We didn't sell the service as a technology they couldn't see, but as a very easy-to-use service that looked familiar and wasn't intimidating. We'll build on that U.K. experience with our U.S. strategy," says James Ackerman, president and COO of OpenTV.

The challenge, he admits, is constructing viable business models and putting a functional e-commerce system in place. "There's lots of focus on high-end solutions. In the meantime, there are 8–10 million lower-end set-tops in the market. Costs must be kept down, and we're working with U.S. cable operators to maximize their revenues through these lower-end boxes," Ackerman says.

Whichever end of the spectrum the gaggle of commerce providers end up using, and whatever revenue splits are negotiated, most experts agree the potential of commerce via interactive TV could be huge. How the business models, back offices and retail relationships are developed, and how the revenue dollars flow, and to whom, will dictate the speed at which e-commerce moves.

"OpenTV had 10 percent of its customers place orders within nine months of launch. If you draw a parallel with the Internet, it took three years to reach that level, so the potential is there, and interactive TV will take off much faster than the Internet did, while e-commerce will shift from PC Internet to TV," concludes Snowden.