by Theresa Foley

Interactive TV over satellite will be delivered to U.S. homes this year for the first time as Echostar and DirecTV race into the multimedia services arena and give interactive cable systems, which also are accelerating their long-awaited rollout in U.S. markets, a run for their money.

The satellite companies are hoping that the ability to roll out new services nationally will give them an edge over cable, which must compete on a market-by-market basis as terrestrial lines are upgraded.

Choices, Choices And More Choices

For the consumer who is ready to go out and buy a new direct-to-home (DTH) interactive system, the choice will not be simple. He or she will have to sort out more than a half dozen product and service offerings-many of which are mutually exclusive. The first choice the consumer must make is investing in Echostar or DirecTV. But then things get more complicated. The buyer will have to choose from options such as Web browsing, data enhanced programming, e-commerce over the TV and/or digital video recording. The high-end technophile who wants it all will have to buy several new set-top boxes and systems to find satisfaction.

"If you want everything, down the road, it will happen, but initially we will keep the products separate," says Gina Scalise, DirecTV spokesperson. "In early 2000, when the new products become available, instead of just a basic TV set-top box, a customer will have four or five boxes to choose from."

Analysts say interactive TV should fuel the next wave of growth in DTH. They believe the technology and the consumer market is finally ready to adopt the new services. Interactive TV was tried in the 1990s in a limited, terrestrial-based experiment in Orlando, FL, but failed to catch on with consumers. This time, things will be different, according to Jimmy Schaeffler, chairman/CEO of The Carmel Group, a consulting company in California. He says today’s attempt is much more viable because it is based on free enhancements to existing services and relies on existing infrastructure, more specifically the Internet.

"WebTV, AOL and Wink (partners to the DTH companies) are all tied to the Internet with an existing base of 40 million users. The community is there. It’s a big difference from what Time-Warner tried in Orlando," Schaeffler says. Introduction of interactive TV is far more economical now.

The Carmel Group predicts that by 2006, 70 percent of U.S. households, or 75.6 million, will have interactive TV, either delivered through a satellite receiver or cable modem, or as a standalone device. Carmel sees interactivity as becoming a standard feature on satellite TV and cable equipment in 2000. It expects that 65 percent of the DBS units sold this year will be interactive-capable, with that percentage increasing to 100 next year. By 2004, the strong majority of the U.S. DTH community should be interactive, with the exception of older boxes installed years earlier.

Much of the early interactivity will use satellite in one direction and a phone line in the other, as DirecPC does today. But two-way interactive services over DBS satellites should reach 1.04 million users worldwide by 2003, Carmel predicts. Costs will go down eventually, allowing the two-way DBS market to reach 7.2 million subscribers by year-end 2007, Carmel says. Steve Blum, president of Tellus Venture Associates, another consulting firm that studies DTH, agreed that satellite service weaknesses will hold growth down in the next five years until Ka-band systems arrive.

Internet Delivery Via Satellite, a report issued this spring from Tellus and Irwin Communications, predicted that by the end of 2003, more than 2 million U.S. homes will have PCs linked to DBS broadcast data sources. The bandwidth used by DBS for data services should reach 338 Mbps by then, compared to only 3 to 4 Mbps today, Blum predicts.

Product-Service Offerings

DirecTV was propelled into the front lines of the interactive TV campaign on June 21, when America Online Inc. (AOL) and Hughes Electronics Corp. announced an alliance to develop and market integrated digital entertainment and Internet services worldwide. Scalise said the AOL TV/DirecTV offering, which will combine Internet access with satellite TV, would be available in early 2000. DirecTV also is moving ahead with two other interactive TV offerings announced earlier this year.

One is a DirecTV set-top box with a Tivo personal TV system built in, and the other is a Wink-enabled DirecTV system that combines satellite TV with e-commerce and data-enhanced programs. DirecTV has more than 10 percent in Tivo and a 4 percent equity investment in Wink.

The Wink-enabled box is expected to hit the market first by the end of 1999. However, the software to run the system won’t be available until 2000 when it can be downloaded from the satellite, Scalise said. Wink will be a free service to those who buy the box; the Tivo and AOL TV/DirecTV services will be subscription based. Prices for hardware and service have not been determined, Scalise said.

Echostar appears ready to go head-to-head with offerings that compare on all these levels. The Dishplayer set-top box began selling in June. It is used to combine Web browsing and DBS in a single set-top unit. The DBS receiver portion works through the satellite, while the Web browser, created through an arrangement with Microsoft to offer its WebTV product, uses telephone lines to get to the Internet, with other on-demand news, weather and sports features to be delivered via satellite later in 1999. The box has an 8.6 gigabyte hard drive, which, by year-end, will be capable of recording and playing back full quality digital audio and video programming. The upgrade will be made by downloading the required software from the satellite to installed Dishplayer boxes. Dishplayer’s Web browser has a modem speed of 56 kbps, and the customer needs ISP service.

Dishplayer’s Web browsing appears to be similar to what DirecTV will offer with AOL, while the digital video recorder (DVR) capability would compare to DirecTV’s Tivo equipped set-top box and to standalone Tivo equipment sold by Tivo.

Next, Echostar will introduce a higher level of interactivity to its TV programs by helping the programmers deliver "data enhanced" content. This summer, on a limited number of data enhanced programs, Dishplayer owners saw a small icon appear in a corner of the screen. A click of the icon takes the viewer to a special Web page created for the TV program. A variety of information can be found on the page, which is accessed through a phone line rather than via satellite. The Weather Channel and MSNBC were the first to offer the icons, with additional programmers like the Discovery Channel planning to join the line up later this year.

A higher level of more advanced interactivity with an e-commerce component will be available on certain channels later in 1999. For example, a Web page could be downloaded to the hard drive on Dishplayer that lets the viewer choose from high-speed video options that can be viewed on demand. Bloomberg, for example, might list five news video segments on its page, and viewers can watch them at any time in any sequence desired, rather than tuning into the channel and waiting for the news to cycle around during a half hour. This service will have e-commerce implications, where, for example, a Web page associated with a sports program would allow the viewer to order a team jersey, or a page associated with a music program would enable the viewer to order concert tickets or a CD. Echostar plans to sign up more than 300 content providers to offer these specialized Web pages.

Fourth, and completely apart from Dishplayer, is Echostar’s Open TV service, in which viewers can access data and advertising that is tied to the program they are watching. Open TV is a separate, ongoing interactive TV service that is delivered to about 3 million viewers in Europe via cable and satellite but is only now making its way into larger numbers of U.S. households through Echostar. Customers with the Open TV system can, for example, call up team statistics as they watch a football game, and then buy products connected to the game or its sponsors. But the viewer will have to buy Echostar’s Open TV set-top box (model 3822 or model 4720), a different product than the Dishplayer.

Marketing Is Key

Until the AOL announcement, Echostar appeared to have the jump on DirecTV when it came to interactive services. Echostar still will be first to market with an interactive offering.

"We should be out of the starting gate before DirecTV on many of these interactive products. We are already worlds above cable, because 100 percent of our channels are digital. And high-speed, interactive Web-like channels are much more alluring than semi-high-speed cable modems," says Marc Lumpkin, Echostar spokesperson.

Blum expects Echostar to have several advantages, with WebTV’s involvement a strong one for Internet access and Web browsing over a TV. "WebTV has been doing this a long time, and they know how to manage an Internet service that displays on a TV screen," he says. "That said, over the long run, you have to give AOL respect. Its customer base is more than ten times the size." Blum says he again expects Echostar to have the advantage in data-enhanced programming based on the capabilities the company has claimed prior to introduction. "But the key thing is that no killer application exists for TV-centric multimedia. Why do you want to mix TV and data? No one has figured that out," he said.

Doug McGrary, Echostar’s data products manager and the man behind the Dishplayer product, responds that the killer app will come along as the service becomes available: "The first will be instant local weather. As a satellite company, we have a hard time delivering local weather, but it will be on demand….We won’t know the killer app until we launch it, but for us, it’s a business model that makes a profit and provides value for customers."

Schaeffler says today’s plans for DirecTV’s Internet product and Echostar’s offerings are similar enough so that many subscribers won’t really decide based upon any differences. "That’s not where the victory will take place," he comments. "Marketing muscle and pricing are where the differences are. One-point-five billion dollars for PR, marketing and subsidies [which DirecTV is getting from the AOL deal] is a huge advantage." The money and the marketing clout behind the DirecTV-AOL partnership will put Echostar at a disadvantage once AOL TV/DirecTV gets rolling, unless Echostar can find a similar partnership.

AOL TV/DirecTV plan to market the AOL TV/DirecTV service to a combined base of 24 million subscribers. The service will provide AOL content in addition to satellite TV programming in one platform. The deal also boosts the broadband ambitions of both companies. Hughes’ planned $1.4 billion Spaceway geostationary broadband satellite system will benefit by being able to tap into this customer base well before the satellites are built. AOL also is said to be considering additional investment in Spaceway.

AOL’s DirecTV investment-in the form of $1.5 billion placed in an interest-bearing GM security that is convertible into GM Class H common stock in three years-will be used for marketing, public relations and to subsidize entry into the new services. These services will be sold under several brand names: DirecTV, DirecPC, AOL TV and AOL-Plus high-speed Internet service.

The marketing expenditures planned for the venture are in the neighborhood of $1.6 billion. This amount includes $500 million to market AOL-Plus through DirecPC; up to $500 million for DirecTV marketing, including $100 million to market to AOL members; $400 million for combined AOL TV/DirecTV services, and $100 million for DirectDuo, a single dish for both TV and Internet access.

Brad Beale, DirecTV’s vice president of advanced products, says interactive services fit his company’s strategic aims: "With the introduction of our interactive services, we’re taking television entertainment to the next level by bringing varying levels of interactivity to a consumer’s television viewing experience."

Dishplayer was first out of the gate in June when it began shipping to retailers, but by mid-summer, Echostar would not provide any sales figures for the $199 unit. Bear Stearns analyst Vijay Jayant reported in May that the company would ship 10,000 units to its 20,000 suppliers in June, and reach a production rate of 10,000 Dishplayers a week by fall. Jayant said Echostar expects ARPU (average revenue per unit) to rise when the interactive services are in full swing. ARPU was $41.25 in the first quarter 1999, Jayant said, an 8 percent improvement from 1998.

Echostar’s Allies

Although DirecTV may have scored a coup when it landed AOL as a partner, Echostar has its own impressive list of telecom companies, software suppliers, equipment manufacturers and content providers to build its business. News Corp. and MCI Worldcom paid $1.2 billion for a less than 10 percent stake in Echostar in 1999, and with no voting control. In exchange, Echostar gained an uplink center, a license for a 28-frequency DBS slot, two satellites and a purchase agreement of 500,000 set-top boxes from a News Corp. affiliate, plus programming from News Corp.’s Fox Network.

Echostar then acquired Media4, which since has been renamed Echostar Data Networks Corp., in 1999 to help it expand into the data and interactive data business. Mediastream, the company’s main product, is a DVB-compatible satellite uplink system for video distribution, distance learning, remote caching and broadband Internet access.

OpenTV, an Internet-television software and technology company, has a partnership with Echostar to help in the e-mail, Internet and e-commerce areas. OpenTV provides interactive television software for the digital receiver.

Skystream supplies Echostar with data broadcast equipment and technology for the Dish network. The Skystream products will enable new DBS services that include Internet Web caching, interactive TV, enhanced TV and high-speed data file transfer for corporate clients. Skystream products allow data to be inserted into the broadcast stream via packets that ride along with the video channel on unused bandwidth.

Broadlogic Inc., a leading manufacturer of broadband networking for multimedia broadcast and interactive services, makes the PCI Interface cards for the Dishlink TV satellite receiver circuit boards. Echostar’s arrangement with PC-maker Gateway to collaborate on an integrated satellite receiver for Gateway’s convergence line of PCs has been cancelled, after Gateway terminated the Destination product that would have included an integrated satellite receiver, Dishlink. Echostar is currently working with other consumer platforms to launch Dishlink and is currently offering its use for business television applications.

On the content side, Echostar has a long list of partners who will participate in the interactive TV business via the Dishplayer. They include Intellicast.com, MBT International, Sailingnews.com, SimplyTV, Women.com Networks, Rollingstone.com, Launch, Bloomberg Financial Markets, The Weather Channel, MediaX, Pseudo Programs, Tech Talk, EMNetwork, Salon Magazine, Supermarkets Online and E! Online.

Throw Away Your Old Set-Top Box?

Echostar is credited by Blum as being more aggressive than DirecTV in introducing new products. Echostar moves faster and with apparent disregard for the fact that consumers may resent being asked to buy new receivers and throw away a two- or three-year-old purchase.

"The consumer electronics business is converging with computers in terms of life cycle," Blum says. "In computers, it’s taken for granted that what you buy today will be obsolete in six months….Echostar has been more aggressive in embracing that model; it has been willing to dead-end product lines.

"DirecTV is more conservative and follows the old-line consumer electronics philosophy (that equipment purchased should work for 10 years). They try not to upset or disenfranchise the consumer, and to follow a gradual, deliberate upgrade path to keep the consumer happy," Blum says. DirecTV did not respond to phone calls regarding this statement.

Revenues

The revenue picture from interactive will take some time to become clear. Some offerings will be free to customers, while others will be subscription-based premium offerings. The operators plan to earn revenues from the subscription fees, from new subscribers who buy DBS because they like the interactivity, and by revenue-sharing with content providers and advertisers. To date, Echostar has not earned advertising dollars, but is beginning to now, McGrary says. They will come both from the advertisers directly and from sharing ad money with content providers, McGrary said. Already, Echostar managers see the new digital video recorder technology eating into mainstream broadcast advertising revenues, since viewers are going to be able to program their TVs to skip the ads by fast-forwarding over them. "We need new interactive models of revenue to step in to take their place," he says "We want to make sure the ad revenue is preserved.

"Over the long term, it may change the way we do business," McGrary says, adding as a cautionary note, "it’s all brand new stuff."

Preliminary data on Internet-related advertising is starting to roll in. This summer, in one of the first-ever media streaming surveys, Arbitron New Media found that 70 percent of people listening to or watching Web audio or video on the Internet were clicking on links to get more information, and 59 percent were clicking on the ads. The survey of 1,527 Internet users was interpreted as a sign that interest in interactivity among Web users is strong, and although the study had nothing to do with DTH, there may be some parallels between Web buying patterns and interactive TV commerce. Arbitron found that 49 percent of the respondents said they buy products advertised during the Webcasts.

McGrary describes a scenario in which a viewer comes home after work, turns on the tube before deciding whether to cook dinner or eat out. On comes a Pizza Hut interactive ad. The hungry viewer clicks a few screen icons and a half hour later his pizza is delivered. "You capitalize on the impulse. The rich media ad fosters the impulse buy," he said.

Although the business case for interactive TV is still open to much interpretation, the technology behind it is sound and interest is high among the major multimedia players. And with DBS giants Echostar and DirecTV in the thick of things, satellites are sure to play a pivotal role in the TV’s evolution.

Theresa Foley is Via Satellite’s Senior Contributing Editor.

Cable Interactive

Cable is moving ahead with its interactive TV plans, posing strong competition to the DTH services. AT&T purchased cable giant Mediaone in May for $60 billion as part of the telco’s broadband strategy, and should have access to more than 25 million cable households. AT&T controls a broadband cable network, Excite@Home, that will be able to access cable homes served by Mediaone. By mid-1999, the network had an estimated 500,000 subscribers for its Internet service. Microsoft also was involved, agreeing to invest $5 billion in AT&T in exchange for rights to provide software, its Windows CE (Consumer Electronics) version, for 5 million AT&T cable set-top boxes.

Interactive TV technology is being marketed on numerous fronts independent of the delivery system. Personal TV, which is a technology that allows consumers to search for over-the-air TV programs instead of just watching whatever happens to be on and then record the programs for viewing later, also is debuting this year. Two companies, Tivo and Replay Networks, are selling the hardware, which resembles a VCR. The boxes were to sell in the $300 to $700 range. The Carmel Group predicted that in 1999, the Personal TV subscriber count would be 270,000, with $380 million in hardware revenues. By 2002, an estimated 3.2 million would subscribe to Personal TV. Three "platforms" will be used to receive the TV programs: cable, satellite and over-the-air. The DBS sector was to have the smallest share, with 400,000 subscribers for Personal TV projected by 2002.

But not everything being promoted is going to succeed. Already, one advanced TV product has failed in the marketplace. Although the Divx, or Digital Video Express, player had no satellite tie-in, it is a good example of a technology that sounds great but failed to appeal to consumers.

The Divx death knell sounded when Circuit City Stores discontinued the venture to sell pay-per-view digital video discs, taking a $114 million after tax write off. The venture was known as Digital Video Express L.P., or Divx. The digital video discs would cost less than buying a video, increasing in price up to a ceiling based on the number of times a viewer watched a movie. Circuit City brought it to market but could not get studios and retailers to support it. A regular DVD disc costs $15 to $30 for unlimited use, while the Divx DVDs charged about $4 to start, with another $1.50 to $4 being charged each time the movie was played after the first 48 hours, until the $20 to $30 limit was reached. The Divx players cost about $100 more than a regular DVD player. Approximately 100,000 to 200,000 customers had signed up when the venture was terminated.

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