Now more than ever, be mindful of how you proceed

The first public speculation about Tele-Communications Inc., Time Warner and Microsoft’s joint venture, called Cablesoft, was a nasty wakeup call for those in cable, content or software who thought interactive TV was their chance to break the stranglehold of the status quo.

As we went to press on June 14, no formal announcement had been made about the proposed TCI-TW-Microsoft joint venture to develop a standard interactive TV system, though the companies did confirm they were “talking.” So unless for some reason they’re stopped by the government from proceeding or the deal falls apart, the world’s three largest companies in their respective fields could potentially spearhead the movement of ITV services into millions of American homes.

The numbers. For a bit of perspective, here’s the most recent published industry statistics, courtesy of the National Cable Television Association (NCTA) in Washington, DC: In the U.S. today, 92 million households have televisions. Almost 89 million households have access to cable services, but only about 57 million of them, or 61 percent, actually subscribe. NCTA says TCI and Time Warner together control about 17 million, or roughly a third, of all cable subscribers. The next largest operator is Continental Cablevision, which has less than half the subscriber base of Time Warner Cable.

However, do not make the mistake that we used to make when looking at these percentages. In any other industry, you would say that controlling a third of a market isn’t really all that much. With the cable industry, the salient detail is not that they control a third or so of all cable homes. What’s important about a cable provider, which is the same kind of regulated monopoly as a local phone company, is that it controls 100 percent of its service area.

As one cable watcher put it, “Where they are, they’re it.” You don’t win or lose customers in onesies or twosies. If one cable company provides better service than its neighbor, whole cities or counties of business can be won or lost when cable provider licenses come up for renewal.

Companies like Time Warner and TCI, which are deeply invested in and connected to the programming world in addition to the cable systems they control, are able to keep growing because their size, connections and investments in cable give them influence over entertainment properties they don’t own or control, and their ownership of entertainment properties give them influence over cable systems they don’t own or control.

Even if AT&T doesn’t decide to hop into the action (a longtime rumor), to say that Cablesoft has clout will be the understatement of the decade.

Whatever you say. One of the funniest lines in the New York Times, which broke the story on Sunday, June 13, was an unnamed executive saying the partners didn’t want the alliance to be seen as threatening to other companies. Right! If true, it would be the first time in recorded history that any of these companies didn’t want to be seen as a threat.

In fact, we think you could have sold tickets to any of the meetings between TCI’s John Malone and Microsoft’s Bill Gates — two of the toughest deal makers on the planet — as Cablesoft was being formed. Any executive would have paid big money to watch the masters at work.

A CYNICAL PRE-EMPTIVE MOVE

If it comes to pass, the venture has the potential to accomplish something everyone says they want: a de facto technology standard for the delivery of interactive TV and information services. Unfortunately, it may do so before there is even a system to base a standard on.

We continue to believe (as we stated in last month’s ITV piece) that it is a mistake to allow market clout — such as that yielded by TCI, Time Warner and Microsoft — to set standards for the communications infrastructure of the next century.

Such a pre-emptive move in a new, highly volatile market, without consulting with others who are doing good work in the area (and who are begging all three of these companies to collaborate with them), is a display of brute cynicism. In addition, it is unmindful of history, which has proven over and over that the best ideas are not formed in boardrooms of major corporations, but in the minds of creative entrepreneurs who do not perceive the future in terms of preserving the status quo.

It’s too early to say whether Cablesoft might be good news or bad for developers of interactive programming and services. If the venture develops a truly open architecture — i.e., if licensing the operating system is virtually free or if companies other than Cablesoft can provide it as well, and if there are no hidden upstream costs such as expensive developer tools or tolls for getting programming and services onto the network, then we may see the industry move forward rather quickly. But frankly, the chances of a Cablesoft system meeting those criteria are rather slim.

SATISFACTION IS JUST A PHONE CALL AWAY

The other, equally critical “if” is the quality of the system, and it is a question that will be asked of any ITV architecture. Consumers do not have the patience of business computer users, who have historically forced themselves to put up with flaws and bugs because they couldn’t do their work any other way, and they’ve already shown they aren’t any more fond of cable systems that cost a fortune and don’t deliver much.

So we pity any company working on these systems that attempts to take short cuts through this particular mine field. Consumers do not yet (if ever) need interactive TV. Precious few consumers will put up with the nonsense that computer users tolerate every day, with system crashes, viruses, bad applications software, incompatibilities and more. If they don’t like something, anything about it — the settop box, how the screen looks, its responsiveness to their commands, how reliable the system is and how well it works, the kinds of programming they get — they’ll just call up their local cable company and say, “Get this thing out of my living room.”

LET’S GET ON WITH THE WORK AT HAND

Short term, Cablesoft certainly has the potential to obviate or at least slow the momentum of cooperative ventures developing interactive TV architectures, such as First Cities or Kaleida Labs, or even other Time Warner ventures such as the one just announced with Silicon Graphics to deliver the digital core to its full service network in Orlando.

However, it would be a mistake to treat any of these alliances — Cablesoft included — as anything but very early stage tests. Even John Malone himself can’t make subscribers like a 500-channel interactive cable service, and if they don’t like it, they won’t buy it.

Instead of the industry spinning its wheels spooling out Cablesoft scenarios, it should instead refocus on the various critical issues that must be solved to create a national public network that enables interactive TV — as well as other digital consumer services — to be not only financially viable but of the most utility to the public at large (and we use the word “utility” advisedly).

Since many ITV pilots may undergo some internal changes, we’ll leave them out, even though we promised in Part I that we’d discuss them here. Some of them — Time Warner’s Orlando test and Viacom’s in Castro Valley — will be discussed at this week’s Digital World conference, and we will report them in the next issue. We will continue to explore more issues, such as community access and public policy, over the coming months as the battle lines continue to be redrawn. These subjects are worthy of closer, individual examination.

This month’s installment will focus on the issues — interactive programming, advertising, privacy and security — that are most critical to examine as we move forward even more quickly than we’d imagined into the age of interactive TV.

SHATTERING SOME MYTHS ABOUT INTERACTIVE’S BENEFITS

The concept of interactive TV is almost synonymous with video-on-demand (VOD), interactive games, home shopping and customized advertising. Though VOD and games are fairly straightforward and are likely to be pretty much as popular as people claim they’ll be, home shopping and custom advertising have become part of a mythology about interactive services that is in need of serious examination.

It’s not hard to see why people believe that home shopping via interactive TV is the wave of the future. Unless you dig below the surface, it’s a perfect 1-to-1 map with the existing catalog sales market: instead of spending money designing and printing glossy mailers full of merchandise, stick the merchandise in front of a camera and let the person sell it who designed it, or carved it, or who dug the crystals out of a hillside in Sedona.

With a catalog, we pick up the phone, engage in a transaction with another human being, and merchandise appears at the door. With two-way interactive TV, our transaction is a point and click, and the merchandise appears. It is the ultimate in eliminating the middleman.

Yes, but. There are a large number of qualifiers that we should all be thinking about before we decide that TV-based shopping will provide the revenue base needed to move on to less venal pursuits for interactive home systems such as adult education and news delivery.

Although the catalog-to-TV map looks like a natural, we need to question whether or not the metaphor will be sustained over the long haul. Today’s home shopper is someone who, not surprisingly, spends a lot of time at home with credit cards. As the preponderance of material sold on home shopping channels today is junk, it is safe to assume that there is some sand running through the hourglass in terms of how long Visa et al. can support the compulsive spending habits of the housebound.

However, it is clear from the catalog shopping business — which racks up a whopping $60 billion per year, according to a commonly cited statistic — that there is a big market for the convenience provided by not going to a store to shop. What, then, is the difference between delivering product information via a paper catalog and seeing it on TV?

NTSC, the great equalizer. The answer is “screen resolution.” One of the oddest stories about high-definition TV — yet most obvious when you think about it — is that people love it for nature programs, but hate it for game shows and sitcoms because you can really see the cheesy materials and poor set construction.

We’re accustomed to seeing our illusions presented in NTSC, which turns all texture into blur. With NTSC, the North American standard for broadcast TV transmission, there is no perceivable difference between burlap and linen. It’s the great equalizer. And equally disturbing in the context of home shopping is the problem of NTSC color, which seems impossible to match from minute to minute on the same set, let alone from one to another.

This will not do. Because today’s upscale catalog shoppers can see a very high resolution, high-quality photograph that’s as close a representation to the real item as the seller can make it, they feel less threatened spending $300 for a silk suit they can’t try on. If it’s a bad photo, the seller will be flooded with returns (“It wasn’t anything like the picture”), which is more costly than not selling it in the first place.

Because of TV’s low resolution, this level of detail simply cannot be provided for merchandise ordered from NTSC TV. Unless they’re already familiar with the exact product, TV shoppers today really have to take it on faith that what they order will arrive looking even vaguely like it does on television.

There are good short- and long-term ways to work around this problem, but until something is done about the bad quality of NTSC video, serious shopping via TV — i.e., the kind that generates return customers — will not live up to its promise.

SHOPPING FOR STAPLES HAS A LOT OF POTENTIAL

There are people like me, driven to the wall with work and family pressures, who would kill to find something useful to buy on TV, be it interactive or otherwise.

But the 10-pound box of Tide Unscented, trash bags or toilet paper made from recycled stuff, a nice white Egyptian cotton shirt — in other words, staple products in the lives of professionals who can’t afford live-in help — just aren’t available, or if they are, they aren’t available in the time slots in which we watch TV. Certainly we won’t sit through a half-hour of retail histrionics to get to them, even if we are perversely fascinated with the Caruso Molecular Hairsetter.

And even if we did happen to see and order them, when would the goods be delivered? While we’re at work, so we have to spend Saturday picking them up at the post office or UPS? Would they be delivered to the office? Is that where professionals really want their laundry detergent delivered?

We don’t think so. What we would want is to have our order delivered when we need it to be — say, between 7 and 10 pm — to our homes. If we need to return things, we want someone to come pick them up when it is convenient for us, at no extra charge. If shopping channels are going to make millions and millions of dollars on our need for convenience, then they’re going to have to provide real convenience — by our definition, not theirs.

These points may seem beside the point in a discussion about interactive TV. But if these services — cornerstones for discussion about the financial viability of interactive TV — are to move beyond the housebound to people who have both urgent need for convenience in their lives and enough cash to satisfy it, then these are just some of the questions that have to be addressed before we even get to the interactive stuff. That’s just enabling technology, and the biggest questions about it have to do with privacy and security, which we address on page 6. These services could be money makers now, using the telephone or an online service — both of which use that “other” interactive network.

MASS MEDIA ADVERTISING IS DEAD

Television advertising. Now there’s an unlucky business to be in these days. Who watches ads on TV anymore? Channel surfing was born of ad hatred. Isn’t it odd, then, that advertising executives are often quoted saying that interactive TV is the catalyst that will revitalize this flagging industry?

Truth is that the advent of interactive technology sounds the death knell for mass media advertising. We are not privy to any secret information here. Let’s just look at the facts.

The myth of custom broadcast. One of the most popular misconceptions is that interactive TV will somehow deliver to advertisers, on a silver platter, you. You who will then be thrilled to be barraged with product information that appears to know everything from when you bought your last pregnancy test kit to your preferred flavor of Crystal Light.

They’ll know when you’ve been sleeping. They’ll know when you’re awake. They’ll be able to insert luxury car ads specifically targeted to you, even if you’re watching Studs — not exactly your upscale-type program demographic — because they’ll know that you’re out there, watching.

Fat chance. This may seem like a dream come true for advertisers, but it is a nightmare of vast proportion for real people. Be sure to read the accompanying story about Hewlett-Packard’s interactive TV market research on page 10. The number-one concern that early adopters have about interactive TV is personal privacy. Consumers absolutely will not stand for advertisers knowing who they are. They will require any service provider to prove that their personal information remains private.

Second, let’s just say that maybe for some reason — a kickback from the TV channel, or some other financial incentive — you’ve decided to go ahead and make your TVs (you have two) known on the system. It knows that you’re married and you have three kids — two teenagers (boy and girl) and a 6-year-old.

WHO IS TONIGHT’S ADVERTISING TARGET?

Who should the evening’s advertising menu target, and on which TV? The professional man? The professional woman/mother who does most of the shopping (not a stereotype, just true)? Who is sitting in the room with Mom and/or Dad? The teenagers, who have bigger allowances than their grandparents’ mortgage payment 30 years ago? How about that spoiled rotten baby of the family?

There’s absolutely no way to know unless they’re “logged in,” and considering the level of paranoia out there about personal privacy, that’s not likely. The fact is that interactive TV advertising, even if the “narrowcast” approach above was feasible, will not work.

It ignores the reason that people would choose interactive TV in the first place: control. The idea is to put you in front of the TV and make you feel like you can see, do or be anything you want. If you want to shop, you’ll shop. If you want to watch a movie or play a video game, you want to be left in peace. The last thing you want to see is an ad, especially not one “targeted” for you.

The intelligent agent. But we do need to buy things, and anyone with a busy life, which is most working folk these days, wishes they could hire a really smart person to work for them, someone who understands the value of a dollar, knows what has to be done and does it.

Any Level II (video on demand/multimedia) or Level III (on-demand information services) should be able to do the same thing. If I want to invest in a small camcorder, I should be able to select that product category on my shopping channel and my electronic slave should (and will) be able to search the network and find out what company listed on the network has the best price, features and service policy, deliver the information to me for a “yes” or “no,” and then buy it.

Desperate for customers. Manufacturers are desperate to get good products into the hands of customers and they’ll be the first to admit advertising isn’t pulling them in. An interactive network offers new solutions, but it will require a radical change in the way that both manufacturers and advertisers approach their customers.

A likely solution is the development of shopping areas on the network where manufacturers can rent “space,” so to speak, for online multimedia kiosks that provide detailed information about products. If I want to buy a miniature camcorder, I should be able to get all the product specs, reviews from consumer publications that I trust, and a list of authorized dealers of many brands of camcorder that have stores within five miles of my house. Such kiosks are among the few multimedia applications that has actually been successful outside the research labs.

Incentives to go out. Another variation on the theme would allow immediate online purchase and delivery. Another might give you a rebate for coming to the store instead of buying online — a way to get people into the retail outlets, looking at things they don’t necessarily want or need.

This still does not solve the problem of how you inspire brand loyalty over a network that “shops” for you based solely on price and features, but we have to leave a few topics for advertising executives to chew on in their spare time.

THE DOUBLE BIND: ADVERTISING VS. PROGRAM COST

A more fundamental problem in the long term is how the existing model of advertiser-supported programming is being ground up in the crush of new technology. Television programming has long been supported by mass media advertising, which in turn provided networks with enough revenue to cover TV’s high production costs.

As TV advertising gradually becomes a less potent force in the mass merchandising of products, manufacturers are taking their ad dollars away from TV, thus reducing the amount of money available to networks for program creation. (This has been most noticeable in the downsizing of network news departments, where production values are small and the returns are traditionally high; news just isn’t attractive to advertisers.)

Less money for more programs. So the dilemma is that there is less money available for the creation of TV programming — most of which is still generated by the major broadcast networks and repackaged or sold for retransmission on cable — at the same time that cable is gearing up to provide 500 channels of the stuff.

Assuming that 490 of them are not likely to be pay-per-view movies, how and what will fill all that channel capacity, if the production of programming is not being underwritten by advertising? George Lucas says that he can produce TV programs for one-tenth their former cost using digital media technology, but we don’t think these kinds of savings, which tend to lend themselves both to certain kinds of programs and to Lucasfilm’s particular computer expertise, will be the rule for a few years.

This fundamental discontinuity between channel capacity and capability to support it financially is not being addressed. In fact, at the recent National Cable Show in San Francisco, there seemed to be more niche, narrowcast programming than ever. The Golf Channel. Comedy Central. The Sunshine Network for regional sports. Black Entertainment Television. The Nashville Network. The Military Channel. The Russian-American Broadcasting Co.

NICHE PROGRAMMING AND THE DEATH OF SERENDIPITY

Who pays for this programming? In some ways, it seems that narrowcast could solve some of the problems of demographics — you’d probably have a fairly high rate of response for flannel shirt and army boot ads on the Grunge Channel, for example — but you still wouldn’t change the larger trend away from mass media, toward specialized interests and splintered audiences.

Narrowcasting begs the larger question, of course — the social implications of the death of serendipity in mass media. Those who watch the NeoNazi Channel (just wait, it’ll come) won’t search out, and aren’t likely to stumble across, the New Age Channel. Though it’s rare to change a certain type of person’s mind, occasionally a chance encounter can change for the better the way people respond to others in the world around them.

We’ll miss mass media. With so little tolerance for our fellow citizens remaining, it seems almost ironic that we’ve hated the “blandification” of cultures and lifestyles that has typified mass media for the past 40 years. By the turn of the century, we may actually mourn the passing of mass media’s representation of diverse points of view, even if they were skewed toward the status quo.

Aside from whatever problems we’ll have to iron out technically, a custom interactive network of the scope that’s being planned will indeed fundamentally change the way we live our lives and relate to each other. If the medium is the message, what is the message in a world of niche programming and special interests? How do we make people unlike ourselves care about our wants and needs, and vice versa, if we won’t change our own channel? Sticky questions, no good answers. But what’s hopeful is that it’s all brand new and we’re the ones who’ll get to decide. Let’s keep raising the level of discussion.

Denise Caruso