Rumored Time Warner-IBM deal is not as it appears

Ever since The Associated Press broke the story, business pages have been rife with speculation about the quintessential digital media marriage: a possible deal between IBM and Time Warner. Beneath the smoke, there is a fire: both companies are indeed actively courting prospective partners — including, but not limited to, each other. But not for the reasons presupposed by early reports.

There are, in fact, two entirely separate sets of discussions taking place: one spearheaded by IBM vice president Lucie Fjeldstad, the other by an independent company that plans to use IBM equipment.

THE NEXT CENTURY MEDIA SITUATION

Many people falsely believe that IBM has been pitching major movie studios to digitize their film libraries using IBM technology. In fact, it has not been IBM, but an independent developer called Next Century Media.

Next Century Media, with offices in both New York and California, has been trying to develop a digital archive and playback system that will store video at the resolution of 35mm film or better. The heart of this system is to be technology in which film can be digitized and then brought back to film with no perceivable differences. Kodak demonstrated such a system at a recent SMPTE show, using Sun Sparcstations, but it was intended primarily for special effects and film touch-up. Bill Harvey, president of Next Century Media, has much more ambitious goals.

As a starting point, the system could be used for archiving and preserving huge vaults of deteriorating celluloid-based movies. Such a system would have many benefits. First, it would allow studios to move their archives off a medium that decays. Second, once digitized, they could transfer archives to other media at will. Third, they can also manipulate what’s in digital form.

But, this is just the beginning. Harvey believes that the same technology can move into the distribution channel for transmitting movies to either the home or to movie theaters (when theaters are capable of projecting digital video, that is). Harvey wants to create a global digital repository that would contain digital masters of films that could be transmitted, on-demand, to theaters or to cable operators. Transmissions destined for theatrical viewing would be sent at the full 35mm resolution. Transmissions intended for TV viewing would be down-sampled and sent at NTSC, PAL or digital HDTV resolutions.

To do this, Next Century would need to create a formidable real-time digital data server. This, Harvey says, would be based primarily on IBM technology. It would have to be a massive system, we said to him. “Yes,” he said, “it will occupy 80,000 square feet.”(!)

‘Investors are interested.’ While unwilling to discuss specific conversations, Harvey says that he has been in discussions with major MSOs (the cable industry’s code for “multiple system operators”), consumer electronics and entertainment companies, movie studios and networks. Some, he claims, have also expressed interest in investing in the technology.

The problem is that Harvey cannot yet demonstrate the technology. He anticipates a full demonstration in March of 1993; until then, nobody will take significant action.

The compression misconception. Because the Next Century people were talking to studios as a developer using IBM equipment and technology, it seems that studio representatives thought they were actually dealing with IBM itself about compression and archiving technologies. As a result, when information was leaked to the press from the studio side, it appeared that IBM’s interest and involvement were misrepresented. In fact, the Next Century effort is quite distinct from IBM’s more general interest in digital network technology.

IBM’s Fjeldstad said she’s had no personal contact with Next Century Media, and did not know what Next Century was up to. Harvey confirmed that he has had no contact with Fjeldstad, and says that he does not know what she is up to. Fjeldstad also said that IBM does not really care what digital compression schemes are used. It will support whatever standards the industry chooses.

IBM WANTS THE TRANSMISSION FRANCHISE

What IBM really wants is to be a major player in the transmission of high-bandwidth digital data — and especially interactive transmission of information and entertainment to the home. This could be a new franchise as important to IBM’s future as was its initial move into the computer industry in the 1950s.

IBM has what it believes are key technologies, experience and capabilities that can give it a unique position in the digital world.

Fiber optic rates over coax. The first of these unique positions is packet technology that makes it possible to transmit digital data at fiber-optic (gigabit) rates over the coaxial cable. This would make it possible for cable operators to install fiber-optic backbones to carry the “superhighway” traffic, but continue to use the coaxial cable already installed for the local run to individual homes and businesses.

IBM is about to test this technology in Toronto in conjunction with Rogers Communications, Canada’s largest cable operator. It is also working with BellSouth on similar testbed operations.

Digital switching and routers. The second part of the puzzle is the packet switching and routing gear to direct interactive data over the network and to bridge fiber-optic superhighways and coax local loops. IBM believes that it has particular expertise, technology and products in this area as well.

Information servers. Movies on-demand, interactive TV and other new services are going to require prodigious “head end” systems with high-speed data servers capable of storing all that digital data and retrieving and transmitting huge globs of data when, where and as needed.

This will require all of IBM’s processor hardware, data storage and operating system experience. We believe that IBM is working on systems based on its RS/6000 RISC technology, massive solid-state data storage and high-level, object-oriented operating system software.

Chips for the home. Finally, we will need intelligent devices in the home to receive and process all this in-coming digital data, to provide interaction with the “head end” systems, and to support new generations of peripherals and interfaces (joysticks, data gloves, virtual reality goggles, body suits — who knows?).

This intelligence may be imbedded into new-generation cable boxes, into TV sets, or into some new kind of computer/TV device. We doubt that IBM expects to make these devices itself. It has no experience as a consumer electronics manufacturer. However, we believe that it would like to supply technology (processor chips, operating system software, etc.) to those who have this expertise, and that it has had conversations with both consumer electronics companies (Japanese) and cable decoder box companies (U.S.).

The key players. The kind of interactivity IBM envisages can only be delivered over fiber optic and/or coax cables. Satellite transmission involves a time lag (which wreaks havoc with interactivity), and twisted-pair phone lines just do not carry enough data. This means that the natural partners for what IBM would like to accomplish are the cable operators (who already have coax and are installing fiber) and the phone companies (who will be installing fiber).

IBM could simply develop hardware and try to sell it to these companies, but it wants to do much more. It wants to work with them to develop the market, and it wants to share the revenue stream generated by the traffic that flows over the network.

To accomplish this, IBM must build alliances with the people who own and operate cable and fiber-optic telephone networks. Time Warner is clearly one of the companies IBM should be — and is — talking with.

SO WHAT’S THE DEAL WITH TIME WARNER, THEN?

Time Warner is practiced at leaking news of discussions in progress, so it seems clear that, just as CEO Steven Ross had promised, Time Warner is actively engaged in discussions with additional technology partners.

The merger of Time Inc. and Warner Communications left the new Time Warner saddled with a crushing $11.2 billion of debt — subsequently reduced to $8.7 billion via a controversial “shareholders rights” stock offering. It also left the company with a strange, two-headed, two-cultured leadership: the Time Inc. “old boys” in New York wedded to master deal maker Steven Ross in Hollywood.

It has since become clear, at least on the financial side, that Time Warner is Ross’s company. And Ross is using the desperation of hardware companies — some of whom believe (absolutely wrongly) that they need to own content — to solve Time Warner’s debt problem. In an industry where the deal is an art form, it’s important to understand that Ross is using vendor paranoia and the content-hardware “synergy” rap as a carrot for investment.

Such a deal you won’t believe. In this vein, his master stroke to date was the complex Toshiba/C. Itoh deal (see Digital Media, Vol. 1, No. 6, p. 19). Ross spun Time Warner’s cable, movie and television companies —and $7 billion of its debt — into a Time Warner Entertainment subsidiary, sold 12.5 percent of it to the Japanese for $1 billion, kept control of the venture for Time Warner, got preferential profit payments for Time Warner and increased the paper value of the parent company by many billions of dollars.

At the time, Ross announced that he would offer shares of Time Warner Entertainment to European companies on the same terms. For $500 million, you too can own 6.25 percent of Time Warner Entertainment. Time Warner insiders are suggesting that Philips and/or Alcatel may decide to do just that.

IBM may, too — not because it feels compelled to own part of a content company but because this could be part of a deal that gives IBM what it really wants, which is partnership with the Time Warner cable operations.

IS THE ‘SYNERGY’ WORTH THE PRICE?

Alliances and joint projects between technology companies (computer companies, telcos, cable operators, consumer electronics companies, etc.) make increasing sense. This is what appears to be motivating IBM.

However, the “synergy” in mega, cross-industry mergers that involve content companies (Time Warner, Sony-Columbia Pictures, Matsushita-MCA, Time Warner-TW Entertainment-Toshiba-C. Itoh) is suspect at best. The company cultures involved are very different and there is no evidence yet that any of them will be able to provide the critical mass necessary to get a new technology off the ground.

Unfortunately, once the Sony-Columbia deal was made, the die was probably cast. It appears that the other consumer electronics companies — and possibly even a computer company or two — fear that they, too, need a content deal just in case this turns out to be crucial for success. Fear of this sort is neither a sufficient nor a worthy motive.

Jonathan Seybold, David Baron 

‘INTERACTIVE’ THAT PAYS ITS WAY TODAY
Does the telephone add new life to one-way media, or slow progress?

Interactive systems that can be accessed without desktop computers or conventional computer terminals are crying out to be used by businesses, governments and other organizations, according to presenters at the Interactive Network conference, held in Chicago last month by Virgo Publishing.

Their idea of interactive systems is based on mature computer technologies that are no longer at the cutting edge in terms of technical innovation, and the systems can usually be accessed through the ubiquitous telephone network.

Future not worth the wait. Conference organizers seem to believe that broadband networks allowing users to interact with digital media — full-motion video, voice, audio and text, and more — aren’t worth the wait. At this gathering, selling juicers via “infomercials” and 800 numbers or running a 900-number psychic hotline are considered money-making uses for interactive systems. Voice mail and fax-back systems, 800 and 900 telephone numbers and television “infomercials,” they believe, are “interactive networks” that are here today and commercially viable.

Many of the speakers were consultants, service bureaus or telephone companies eager to sell their services. Their overall message was that ingenious and intelligent use of existing “interactive” technologies could add new life to one-way media like TV and newspapers, and could take advantage of such universal “personal” media as cellular and standard telephones, fax machines and VCRs.

ELIMINATE THE CHICKEN AND EGG

Using devices with almost universal penetration, such as television and telephone and even VCR and fax, has the obvious advantage of solving the “installed base” problem, and eliminating the chicken-and-egg dilemmas presented by new, higher tech solutions. They also avoid the price barriers, complexities, consumer reluctance and user-support problems inherent in using personal computers as information access and communications terminals.

Adding interactive components now to existing one-way media is motivated by these marketplace realities. In the case of television, the interactivity of interest at the conference was no more than the opportunity for viewers to respond as directly as possible to the content of a program or commercial message — by expressing an opinion, placing an order, answering a game show question, contributing money, or requesting sales literature or a pay-per-view cable event.

A limited vision. The concept is not quite what the interactive multimediators have in mind; here, interactivity means the viewer responds to the content rather than having the content respond to the viewer. It is an extension of the central role of advertising in commercial broadcasting — not designed to make television into a random access multimedia library, but rather to break down barriers between advertisers and customers.

In the case of newspapers, adding interactive components is motivated by the desire to stem the loss of readers and advertisers that is being widely experienced by American papers, according to the conference presenters, as well as by the desire to create additional sources of revenue.

Providing interactive services accessed by phone or fax that are piggybacked on print features is proposed as one way that newspapers can hope to compete with the immediacy and sight-and-sound power of the electronic media as those media become ever more compelling. The ordinary touchtone telephone does seem like a somewhat-limited device to throw against both the Cable News Network and personal computers connected to information services such as CompuServe, however.

‘TRANSACTION TV’ SELLS SNAKE OIL, 1992-STYLE

For direct marketing via TV, the prime “interactive” technique is using 800 or 900 numbers in conjunction with a television “infomercial” to take orders and requests for information concerning products such as home exercise equipment, woks, cosmetics, car polish, self-improvement tapes, etc.

The infomercial, a group of transaction TV panelists admitted, is modeled after the old snake oil salesman who entertained the audience with his extended sales pitch but didn’t hesitate to ask for the order. The format is really not any different from the late-night Veg-o-Matic commercials of the 1950s. As Tim Hawthorne of Hawthorne Communications, an infomercials specialist in Fairfield, IA, put it, “The more you tell, the more you sell.”

The infomercial’s renaissance can be traced to four factors: 1) Reagan-era deregulation, which legalized a full half-hour of all-commercial programming; 2) TV channel-changing habits and remote control devices, popular since the advent of cable, which allow viewers to tune in by chance and “get hooked”; 3) the availability of relatively inexpensive time on some cable channels; and 4) the availability of national 800 numbers.

Spectacular revenues. Services such as the Home Shopping Network are, in effect, dedicated to the infomercial and transaction television. A highly successful infomercial, such as a Tony Robbins self-improvement series, can generate revenues of $10 million to $80 million in the first year for a single product, according to Hawthorne.

According to direct-response specialists Jeffrey Glickman of First Class Marketing in Carlsbad, CA, and Steve Pittendrigh of InfoCision Managment Corporation of Montrose, OH, these amounts don’t include the “back-end” or “aftermarket” follow-up sales that are the heart of effective exploitation of the infomercial format.

“Back-end follow-up” means mining the customer base for additional sales of items often but not always related in some way to what the customer has already bought. Usually contacted through direct mail or by telemarketers, sometimes enrolled in “clubs” such as record or book clubs for continuing purchases, existing customers are approached using these same techniques by religious broadcasters, charitable organizations and political fundraisers.

FROM VEG-O-MATIC TO VOLVO

The next stage in the evolution of infomercials will be their use by Fortune 500 companies for image advertising and lead generation, according to Hawthorne. Car companies, he says, will present infomercials on their products with an invitation to dial an 800 number to receive a product brochure.

Transaction TV can be used to sell programming as well as products. For a cable TV company selling pay-per-view events, such as extended Olympics coverage this summer or a championship boxing match, automatic order processing is a cost-efficient “interactive” option.

Such a system might incorporate a voice response order processing system that automatically takes and confirms orders for pay-per-view events, verifies telephone numbers via automatic number identification (ANI), and schedules the caller’s access to the channel carrying the event. One consequence of this technology will be the greater availability of programming on demand from the premium channels such as HBO, rather than as a subscription service, Larry Bradner of Telecorp Systems predicted. Telecorp, located in Roswell, GA, manufactures and markets inbound and outbound call management systems for the cable TV industry.

A future nontelephone-based interactive television system was represented at the conference. TV Answer will allow those who purchase a TV Answer box to respond to programming through an air-and-satellite network rather than via the phone (see Digital Media, Vol. 1, No. 9, p. 17). With TV Answer the viewer responds to a poll or game show question or orders a product right on the TV screen, through a remote point-and-shoot device.

The company claims that responses are rapidly collected and aggregated, supposedly without the bottleneck created when millions of people dial the phone at the same time. The dedicated computer that is the TV Answer home attachment also manages home banking, catalog shopping and similar services.

For home grocery shopping, ordering from catalogs, and bill-paying an alternative to TV Answer and online services accessed from personal computers was described by U.S. Order’s ScanFone, which combines a bar code reader, a dedicated computer, modem and a credit card magnetic stripe reader, with a phone (see photo).

‘TALKING NEWSPAPERS’ GENERATE RESPONSE

Newspapers are “going interactive” by offering 24-hour interactive audiotext (voice) and fax-on-demand services to attract readers and advertisers, or to generate revenue directly via 900 numbers. In audiotext and fax-on-demand, the telephone is used as a terminal, with touchtone buttons communicating the user’s requests for information. Services include weather, news, sports score updates, stock quotes, voice personals, horoscopes, reader feedback, questions for the editor and soap opera updates. Some services, like crossword clues and “dial-a-psychic,” are often offered on a pay-per-call 900 number basis.

According to one conference panel, newspapers are also experimenting with sponsoring library research lines, providing product samples on request, bulletin boards and special interest groups for readers who want to communicate with one another, and voice services for non-English speakers. Other interactive offerings include voice mail boxes for responses to classified ads and for expanded information on specific ads, such as “voice tours” of properties advertised in the classified section. Free-to-caller messages from local financial institutions provide mortgage rate information and the like.

Cellular phone companies are also getting into the loop by offering voice mail, audiotext and audio clipping services, as well as call routing (see related story, “Spring has sprung,” p. 10). A cellular-based alarm system that dials you if your car is stolen is another cellular data enhancement to look forward to.

POLITICAL FUNDRAISING

Former California governor Jerry Brown and Texas billionaire H. Ross Perot, both hopefuls for the U.S. presidency, have heated up interest in toll-free 800 numbers in political campaigns. The 800 number has become a symbol of reviving grass roots interest and involvement in politics, and some believe it has potential to reduce the political influence of large contributions. The goal (at least for candidates like Brown who are not self-financed) is to generate both cash and databases of names of potential supporters who can be further courted for money and votes. Generally such efforts work best with smaller donations, according to the experts, so that Brown’s $100 contribution cap is well-matched to the 800 number medium.

Stealing direct mail’s thunder. It seems that 800 numbers are stealing some of direct mail’s thunder. In fact, one conference presenter, Sidney Galanty, will go down in history as being the man who suggested to Brown that he use the 800 number to raise campaign funds.

According to Galanty, Brown was reluctant at first, but when $21,000 was raised by merely printing the 800 number on a banner behind Brown during a C-SPAN telecast at 3:00 a.m., the case was made. Galanty was also involved in producing Brown’s “documercial,” three six-minute video segments separated by two-minute commercials urging people to use the 800 number.

The 800 and 900 numbers can also be used for opinion polling, and for informing voters about a candidate’s positions on issues. Perot’s brand of “teledemocracy” or national town meeting would probably use 800 numbers to poll citizen responses to televised speeches or debates. A poll following George Bush’s most recent State of the Union message supposedly generated 24 million attempts to register an opinion, according to Timothy Higgins of West Interactive Corp., an interactive voice processing service bureau in Omaha, NE.

Complex Federal Election Commission regulations about campaign contributions have stymied the use of 800 and 900 numbers for political campaigns, since the required reporting is often beyond the capabilities of telephone company billing systems. For national campaigns, it has proven difficult to staff the phone banks needed for a nonautomated 800 number effort.

According to Galanty, for example, Brown’s story does not have an entirely happy ending. Brown’s phone banks were consistently understaffed and under-trained, which may have led to millions of dollars not being pledged and to the gaffe in which an operator instructed a caller how to get around the $100 limit.

Constraints on 800 and 900 numbers. There are important constraints, too, on using the 800 and 900 number format in campaigns. With 800 numbers, pledges may be hard to collect, while 900 numbers provide a mechanism for billing and collecting. This advantage is somewhat reduced by restrictions on credit extended by corporate sources, as these are potential “corporate contributions” if the contribution stream suddenly dries up, as in the Gary Hart campaign of 1988.

For money collected via 900 numbers, however, federal law does not provide matching funds to presidential candidates. Danny Adams, a Washington, DC, attorney specializing in telecommunications, provided an overview of the procedures that would have to be followed to keep 800 or 900 number campaign fundraising legal, and it is a somewhat daunting list.

Apparently the 900 pay-per-call numbers still suffer from association with the sleazier initial uses of the pay-per-call services, such as phone sex, and their use in so-called “legitimate” operations such as political fundraising is still considered daring. One benefit to 900 numbers, however, is that they can easily be automated for political fundraising, since the commitment to contribute is implicit in the act of calling. According to political fundraising expert Karl Corbett of the Lebanon, OH-based Sasha Corporation, a standard answering machine announcement followed by voice capture works better than trying to capture data through voice mail.

Government gets into the interactive act. Without waiting for national town meetings and “teledemocracy” to appear, governments are getting into the interactive services act by offering access to telephone voice response or fax response. Telephone queries can now produce information including lottery results, event announcements, transportation schedules, or copies of vital documents such as birth certificates. Government-managed interactive services also process requests for information such as tourist brochures, or reports on the status of an individual’s tax refund. More than information is provided, too, in transaction processing services that allow electronic tax return filing or lottery ticket purchasing.

ADVICE TO FUTURISTS: LOOK AROUND YOU

To those designing the multimedia systems and “personal digital assistants” of the future, the message from the Interactive Network conference is: Look around you. Information may already be at your fingertips, with nothing more than a telephone and a TV set and a fax machine as your desktop interactive multimedia devices.

Reject the PC? Horrors!>> For many “interactive multimedia” applications, including some discussed at the Interactive Network conference, adding interactivity to existing media and communications networks and combining them in new ways, rather than waiting until fully digital methods are available, would seem to make sense, even to the “extreme” of rejecting the use of the protean personal computer as the access terminal of choice.

Evaluating the appropriateness of current versus future interactive technologies for any given application would seem to involve at the very least looking at:

1) The information richness or bandwidth required in each direction of the interaction, which depends on the specific data types required (text, images, sound, color, motion video, etc.).
2) The importance of real-time versus stored elements.
3) The kinds of responses required at each end of the interaction. Is a phone key press sufficient? Will a recorded voice message do? Can a “canned” linear videotape presentation be used, or must what the viewer sees and hears be contingent on a previous response? Are ASCII characters or computer graphics sufficient to convey the information, or will only a live human do?

INEVITABLE, AND MAYBE A LITTLE ANNOYING

Until the telephone, television, personal computer, fax machine, cable tuner, slide projector, book, newspaper, magazine, satellite receiver, video recorder and audio recorder all merge into one digital consumer appliance, supported by appropriate digital networks providing random access to all media, it seems inevitable that combinations of existing technologies will be tried in an effort to enhance the value of services provided through any one medium.

Some of these “interactive” hybrids will be downright annoying to use and fail to provide enough added value to be profitable. Do people really want to deal with layers of audiotext menus in order to retrieve a weather forecast? Do consumers really want to record classified ads with their VCRs and display them on their TV screens? Do human resource managers really want to screen voice resumes? Do consumers really think infomercials for car wax are high art?

Others of these new interactive combinations may succeed on an interim basis, only to be replaced by technologies with more bandwidth or more responsiveness. Some of these strange inventions may endure. Would anyone like to bet against the persistence of the infomercial, or voice personal classified ads, or the 900 dial-a-psychic hotline into the 22nd century?

Bernard Banet