Interactive Television

Although the concept of interactive television (ITV) has been around for more than two decades, the market is still emerging in fits and starts, with no clear business model in sight. The term ITV refers to a set of real and potential capabilities that are designed to improve the television viewing experience. But platform makers, application developers, content providers, and the major networks differ in their opinions of what capabilities will accomplish this.

Numerous entrants have appeared on the scene with offerings that incorporate a hodge-podge of different functions. Despite the feverish pace of innovation, a consensus seems to be forming that ITV, at a minimum, should include Internet-on-the-TV-set, video-on-demand services, interactive program guides, and a consumer electronic device that permits viewers to interact with their television sets. What remains to be seen is whether any particular enhancement or combination of potential ITV features will succeed in the marketplace.

To date, many attempts at ITV have failed either because of lack of consumer interest or limits of the technology. Nevertheless, there seems to be industry-wide interest in pursuing interactive TV, due in large part to technical advancements that make all things possible. And then there is the persistent conviction that consumers now have a greater interest and appreciation for interactive services in general, which equates to “pent-up demand.”

One of the largest players in the ITV market is Microsoft, which has garnered close to 1 million subscribers for its WebTV interactive service. WebTV provides consumers with an interactive electronic program guide, interactive content, Internet access, e-mail, chat, and Microsoft’s own instant messenger.

But after 5 years, WebTV’s growth has flattened out, indicating that something is wrong. The service was expected to have 1 million subscribers by year-end 1998 and eventually become as ubiquitous as the VCR. As of mid- 2001, WebTV still had about the same number of subscribers, despite several major upgrades.

Interactive Applications

There is already a level of “enhanced” television possible through the traditional set-top box. Viewers can order payper- view movies, read messages from their service provider, and search through the evening’s programming guide for their favorite sitcom. With the addition of another device and a subscription fee, viewers can access the Internet from their televisions, as with WebTV.

And with still another device and subscription fee, a VCR-like device searches and records television programs automatically for playback at a convenient time, as with TiVo’s offering. Moving from enhanced television to interactive television promises to offer more interesting applications. Among the possible ITV applications are home shopping, bank account access, e-mail, advertised product information, voting in viewer surveys, and playing along with game shows.

Another application for ITV is the delivery of enhanced content. While watching a sports program, for example, viewers can call up more information about the game, buy merchandise, or click on pop-up advertisements of interest. Telephone calls can be made through the television as well. Subscribers can use a television set-top box equipped with a speakerphone and voice over Internet Protocol (VoIP) software to make telephone calls through a graphical dial pad that appears on the screen.

Notification of incoming calls is displayed on the screen, and the viewer can decide to take the call or let it go to a voice mailbox. Online gaming in Europe and the United States is expected to fuel growth of the ITV industry. The apparent appeal of ITV games is that they allow television viewers to participate in contests linked to popular TV shows or a series they watch on a regular basis.

Revenues can be generated through advertisers or by charging users a nominal fee to enter these contests in the hope of winning prizes or participating in live shows. Advertisers are intrigued with the information-gathering potential of ITV technology, gleaned from testing television programs, hosts or trailers, and advertising spots. Aviewer panel would receive questions and provide answers directly onto their television screens.

A special set-top box connects the television via the Internet to a research database. This method allows for better representation, faster response and processing of results, and lowers the costs of collecting this kind of information. With the results, advertisers could target their messages more effectively.

Market Complexity

The complicated nature of the ITV market, in which different cable operators use different set-top boxes with different operating systems, has hindered market growth so far. In addition, cable carriers, advertisers, and the TV networks seem to be having difficulty figuring out how to make ITV pay off. This is reminiscent of the dot-com market a few years ago, where companies could not quite figure out how to make money on the services they put up on the Web.

Even the top players in the ITV market remain uncertain about it. This was illustrated in mid-2001, when AT&T scaled back its plans for the service. Microsoft had pumped $5 billion into AT&T’s cable operation in 1999 with the hope of creating an ITV service for about 10 million users.

Things never really progressed beyond the planning stage, as Microsoft experienced delays in getting the operating system ready for its ITV systems based on Motorola’s DCT5000 set-top box. Meanwhile, AT&T did additional research and concluded that the average consumer did not consider surfing the Web as a priority for ITV, which is Microsoft’s strong point.

Instead, consumers expressed the desire for video on demand (VoD) and personal video recorders that automatically save TV shows to a hard drive. AT&T then scaled back its service model and considered software from other vendors before launching its ITV service.

Potential Market Barriers

Apossible clue about the difficulties that await ITV comes from the lackluster performance of WebTV. Microsoft acquired the Internet-on-TV service in 1997, and since then, the number of subscribers to the service reportedly has reached a peak of about 1 million. Some of WebTV’s lack of success has been blamed on poor corporate vision. But the cost of innovation may have played a part as well.

Adding more functionality forces higher prices for equipment and service, which is not a good thing to do when market growth is on the decline and the economy is sputtering. One source of trouble for ITV companies has been how to keep costs low enough to be attractive. Industry surveys reveal that less than 3 percent of consumers would pay more than $300 for a set-top box that supports time-shifting and personalized TV services, as well as several other leading ITV applications.

Only 6 percent of all consumers would pay more than $9 per month to subscribe to a service that offers such capabilities. With this much consumer resistance, there is not much hope of ITV achieving widespread success anytime soon, and key players in the market will continue to struggle. Among the over-40 population, ITV comes under more severe scrutiny from the content perspective.

To this market segment, ITV does not appear to improve content—it is perceived merely as a way to throw more of the same low-quality stuff at viewers while asking them to pay more for it. There will be a limited number of venues where ITV will succeed. Interactive-friendly areas include sports, game shows, and news, but interactivity in drama and sitcom venues will be more difficult to penetrate.

If it turns out that ITV just offers more ways for advertisers to improve the targeting of their messages, however interactive, market penetration will be limited. This also raises the privacy issue, even among young people, who are more likely to be receptive to ITV. The ITV service providers will count on subscriber revenues as well as advertising dollars.

Privacy advocates are concerned that ITV combines the worst aspects of the Internet and mass media because the new systems are being designed to track not only every activity of users as they surf the Net but also the programs and commercials they watch. They fear that if ITV systems are to realize their promise as the “advertising nirvana” for marketers, privacy necessarily must collapse as ITV becomes a spy in the home, collecting information on age, discretionary income, and parental status, along with psychographic and demographic data, that will be analyzed and made available to marketers, advertisers, programmers, and others.

Even the more recent reports on the ITV market have not factored in the dismal state of the global economy and the consequent decline in discretionary income for new and novel forms of entertainment. The interactive TV industry is not immune to general economic conditions, and the computer and telecommunications markets have been hit the hardest throughout 2001 and 2002.

Consumer demand for ITV has proved to be too complex for any one product or service to appeal to everyone. The players in this market are realizing that certain consumer segments have very different preferences and attitudes toward ITV. The challenges for these companies is to understand how consumers differ, why these differences exist, and how they can determine the success of a given product or service.

Failure to do so will inhibit market growth, despite all the optimistic revenue projections and technologies that seemingly can fulfill any request for entertainment and information— passively or interactively.