AOL TIMEs it

The new millenium's digital home is witnessing an entirelynew range of products and services, thanks to the all-encompassing convergence.The foremost of them is "interactive TV" or intelligent TV, which somesimply call as "New TV". The digital technology, interactivecapabilities, and new navigation functions are transforming both the televisionset itself and the way consumers view and use it.

Now users will be able to choose the movies and watch it asand when they wish to i.e. Video on Demand (VoD). One will be able to attendlectures in other countries through the television i.e. Distance Learning. Onecan even do shopping through television. Interactive television–with link tothe Internet–will enable us to send e-mail, browse the Web and do things whichwere once only possible with a computer.

The Broadband Need

It is the recognition of this powerful technology that is oneof the major driving factors behind the current broadband strategies. Theplanned merger between the world's largest Internet service provider, AmericaOnline (AOL)and Time Warner–acquisition valued at about $ 125 billion approximately andone of the largest in US–is dictated not only by the convergence of Internetand content/entertainment, but also how to deliver broadband in the digital ageto the masses. Just like it did to the Internet, AOL is creating a model for thecable TV and Internet industry to deliver broadband applications. AOL which hasworld's largest Internet subscriber base of over 23 million and Time Warnerwhich brings one of the largest cable TV networks–including CNN and HBOchannels–want to race ahead in the broadband race too.

The new company after including Time Warner’s cable andmagazine subscribers is expected to have over 100 million paying subscribers.Both partners need to retain customers. The premise seems to be same as the onethat makes Microsoft, a company with 90 percent market share in PC operatingsystems, strive to have software running on cell phones to game players toset-top boxes.

The merger would enable distribution of AOL's interactive TVoffering i.e. AOLTV over Time Warner's cable system–the second largest in theUS. AOLTV is the online giant's effort to extend its interactive services, suchas high-speed Internet access, e-mail and instant messaging, to the TV screen.In the form of a set-top box manufactured by Philips and also a product shippedwith Hughes' DirecTV, it is to help AOL extend its brand, franchise and audiencein the online world to other devices at home. It will also help AOL's expanding relationship with cableoperators. It is expected to serve as a bargaining chip in delivering servicesover other cable TV systems. AOL would benefit from forming partnerships withlarge cable operators to manage the TV portal, which would leverage combinedAOL-Time Warner's strengths in content and services–as a "walled-gardenservice". Undoutedly, a strong market opportunity!

"AOL Anywhere": A Bandwidth Strategy

AOLTV is part of the company's "AOL Anywhere"strategy–an initiative to spread its services across a range of non-PCInternet devices such as cell phones, pagers, handheld computers and Webappliances. AOL has already taken steps into wireless devices and spread itspopular AOL Instant Messenger into these services. It has also signed analliance with PC-maker Gateway to develop Web-enabled appliances. Its testing ofa satellite service is another step in the online giant's efforts to offer itsservice through multiple pipelines and devices. It has also signed deals withseveral local phone companies to offer its members high-speed Digital SubscriberLine (DSL) service. Merger with cable operator Time Warner gave the company asignificant foothold in offering cable broadband service. Clearly, AOL'sstrategy aiming at impending broadband explosion sees the battle as one of"bandwidth" and not that of cable versus satellite versus wirelessversus telephony/DSL.

In fact, this is a strategy AOL has been pursuing for quitesometime now. On 14 June 2000, it forged a relationship with TiVo (accompaniedby a $200 million investment in TiVo by AOL) to incorporate its technology byearly 2001, i.e. its digital recording features, in AOLTV, which is directlypitted against Microsoft's WebTV. WebTV was acquired by Microsoft in 1997 and isthe current leader in the interactive TV segment with one million subscribersand partners like AT&T. It will enable customers to chat, check e-mail andsurf the Web via a wireless keyboard or a remote. The TV signal will remainonscreen even as the customer focusses on Internet services. AOL does haveadvantage in terms of a

large audience and the ability to leverage members' preferences in the

services it offers and advertising it

generates.

TiVo produces set-top boxes that record TV programmes using ahard disk instead of a traditional video cassette. TiVo technology lets TVviewers customize their programme lineups and allows viewers to not only recordtheir favourite shows, but also to skip commercials, shuffle their programminglineups, and repeat missed parts of shows. AOLTV partners include LiberateTechnologies, which provides its software platform.

With AOLTV, AOL could grab a big piece of the $9 billione-commerce and subscription revenues that the

interactive TV market is expected to generate by 2004, according to ForresterResearch. In addition, $3.2 billion in advertising that TV-based onlineadvertisements are expected to raise.

Brand Extension and Positioning

AOL's knack for sensing popular uses of the Internet formainstream customers will fare well for the new service. One can imaginecommunities of people chatting around popular shows. It means just brandextension for AOL as it does not have to explain AOL and its already popularservices, such as chat or instant messaging. One could be watching"Dawson's Creek" and simultaneously, chatting on another screen. Italso has the cash and resources to experiment, as well as an audience that hasresponded to its marketing.

Microsoft has been attempting to position its service as"enhanced television", as also reflected in recent launch of UltimateTV, a high-end digital video recorder and satellite TV receiver offered inpartnership with DirecTV, also an AOL ally.

Initially marketed as a low-end access to limited Webcontent, WebTV's early strategy was hit by dramatic price drops in computers andthe resulting increase in PC purchases. Internet over TV did not appear to be acompelling service. Microsoft also has dealswith cable providers such as AT&T to put its Windows CE-based interactive TVsoftware on upcoming digital cable set-top boxes as well as agreements withsatellite providers, including DirecTV and Echostar. In August 1999, THOMSONmultimedia announced its JV with Microsoft in creating TAK, to provideinteractive television services in Europe.

WebTV operation has become increasingly important toMicrosoft and it was recently reorganized to face new challenge. Eventually,both WebTV and AOLTV will offer broadband and high-speed Internet access, inaddition to more sophisticated e-commerce and interactive content features. Theywill face competition from upcoming and existing game consoles and from digitalcable set-top boxes.

Many other companies are trying to position in theinteractive TV market. National Semiconductor, has chip prototype designs readyfor all-in-one DVD and digital video recorders. And Sony has said it sees itsupcoming PlayStation 2 as a digital hub for its home entertainment and contentproducts. The key players will need to offer more than just broadband Internetaccess through television, which Microsoft and AOL will be able to do throughtheir relationships with AT&T and Time Warner, respectively. As AOL hasproven in the PC-based market, access must be married with compelling content todraw paying subscribers. Sony–with a movie studio and record label–too willbe in an enviable position to offer such a marriage, when it adds broadbandInternet access to the PlayStation 2.

Game console makers, including Microsoft, Sega and Nintendo,have said they will offer online access through TV game consoles. However, AOLis still likely to have an edge because of existing relationships withbroadcasters and content providers, and now Time Warner’s leadership incontent and its delivery.

The Regulator Asks

Replying to Federal Communications Commission’s (FCC)questions about the proposed merger, AOL and Time Warner said that the combinedcompanies' interactive TV services would not dominate the market, instead theywould spur innovation and growth. They asserted that AOLTV would be an"open platform", accessible to all programmers and broadcasters,unlike AOL's proprietary Internet system. According to them, AOLTV–based onopen standards–will allow other video programming services to create uniqueinteractive content that can flourish on AOLTV or competitive interactive TVplatforms. Liberate Technologies' open platform should attract and spurbroadcasters to develop interactive content.

So far, the interactive TV market has been like achicken-and-egg problem, as both interactive-hardware manufacturers andprogrammers have been waiting for the other to make the first move.

We do hope that this initiative will prompt other video programmers todevelop innovative and compelling interactive features, and the service is ableto make advanced communications technology more user-friendly raising even Ramdin Chacha’s comfort level with interactive television and thus, broadband applications.Hope, he can soon use them too and watch his favourite TV programmesand simultaneously yahoo along with his folks!

Niraj K Gupta

www.telecombyNirajGupta.com