Analysis: Consumers have yet to buy into interactive TV

From...

by Lydia Lee

(IDG) -- It's every TV viewer's fantasy: the chance to pause live TV, zap through commercials, tape programs painlessly and set up custom channels. TiVo and ReplayTV, leaders in the new breed of interactive TV with their personal video recorders, are poised to reap huge rewards by bringing that fantasy to life.

"Before using Replay, people said that they found only 10 percent of TV was appealing," says Replay CEO Kim LeMasters, who spent 13 years at CBS, including a stint as president of CBS Entertainment. "After [using Replay] they said 74 percent was appealing." That difference, he argues, means that people are eager to watch TV, but they're also "desperately searching for something good on it."

But as cool as the technology is, profits are a long way off. Just explaining the concept is tough; developing a market for the technology could be even tougher. TiVo's CEO, Michael Ramsay, has said the Alviso, Calif., company expects to lose $300 million to $400 million before turning the corner. Replay's LeMasters estimates it will be three years before his company generates profits.

With old-economy values infiltrating the new economy, that timeline isn't reassuring to the public markets. Replay, based in Mountain View, Calif., recently withdrew its filing for a public offering. And TiVo, which went public last September at $16 a share before reaching a $78 high in early January, now is trading around $18 a share.

What's the problem? Getting consumers to buy in. While more than 100 million U.S. households have a TV, only 100,000 have a digital video recorder. That equals 0.1 percent of the audience -- not exactly a breakthrough figure. Expect to see a blitzkrieg of advertising this Christmas as the companies try to convince more consumers that interactive TV is possible -- whatever that means.

"The hard thing is that you can't explain the product in 30 seconds or 60 seconds or even 90 seconds," says LeMasters. "We tried and people would say, 'It's like a VCR?' and we'd be, 'Errrrgh -- no, that's not it.' So we're trying commercials that are less direct, to intrigue people. We've got a promotion with McDonald's; we've got rebates. We're pushing all the levers, but we're really hoping for word-of-mouth to drive sales."

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Both Replay and TiVo have designed a box with a hard drive that can record television from any source. The difference between the two, for the most part, lies in the user interface that they've each created for finding and recording programs -- Tivo will recommend new programs based on what you say you like and dislike, while Replay creates categories of programs (comedy, for instance) for browsing.

The companies are subsidizing the boxes, made by Philips and Sony for TiVo, and Panasonic and Sharp for Replay, and are losing money on every box shipped. Even so, the boxes are not cheap. Replay's costs $599.99, while TiVo's is $399 with the option to pay a $199 flat subscription fee or $9.95 a month. At the moment, both are priced for the gadget fanatic.

Just about everyone with a stake in TV has been eager to support the rise of the new technology -- cable operators, TV networks and media conglomerates have put money into TiVo, Replay or both -- NBC and Disney, for example, have investments in each. Since its start in 1997, Replay has raised $152 million. TiVo has an even bigger war chest from its IPO and backing from America Online: In mid-September, AOL invested $200 million, taking a 30 percent stake in the company.

Mike Ramsay and Jim Barton, TiVo's co-founders, were part of the first wave of interactive TV when they worked on a Silicon Graphics -Time Warner trial installation in the early '90s. With interactive TV, consumers were going to get video-on-demand, where movies were delivered through fast networks to their TV sets.

Interactive TV assumed that two-way broadband pipes were a prerequisite, which makes it a much more expensive proposition. But by adding a hard drive to the TV, broadcast programs can be stored until users want to view them -- essentially a poor man's video-on-demand. In fact, Time Warner and Comcast are offering Replay boxes to subscribers in part to see if pay-per-view use increases.

To get the technology to a wider audience, the companies are trying to hook into set-top and satellite boxes, and perhaps even DVD players and televisions.

One way these companies can make money is through subscription fees from cable and satellite operators, in the same way HBO gets a cut for every subscriber. Already some new products that combine video recording with other services are available. TiVo has developed a product with DirecTV, which costs $399 for the whole shebang -- satellite receiver plus TiVo hardware (viewers pay an extra monthly fee for the TiVo service). But analysts are asking if two of TiVo's and Replay's biggest selling points -- easy-to-use recording and the ability to zip through commercials -- will become common on every TV service and therefore lose their allure.

Meanwhile, the competition isn't waiting for TiVo and Replay to figure out their strategies. Microsoft, which spent $425 million buying WebTV to get into U.S. living rooms, already has basic personal video-recording features. Sometime between Thanksgiving and Christmas, WebTV will be reincarnated as UltimateTV, with TiVo-Replay-like services, combined with e-mail and Web access. (AOL is developing a competitive product with TiVo, but the new AOLTV-TiVo box won't come out until next year.)

Now that TiVo and Replay have caught everyone's attention, set-top box manufacturers and smaller software companies like Metabyte Networks are trying to muscle in on the market. It's going to get crowded fast.

If Replay and TiVo can build up a customer base before others steal the show, their business plans could work. Both are looking at premium services and advertising to bring in the real money, and the long-term plan starts to sound more like Yahoo or AOL -- start out with one service and see what else you can sell on top of it. "There are services, like getting music tracks or sharing photographs," says Brodie Keast, TiVo's VP of marketing and sales, "which might work better on the television."

Advertising in a world where people can skip commercials sounds problematic, but LeMasters is convinced he can sell advertisers on targeted ads, since the service is able to track what people watch. "When we first pitched the idea, people said, 'You're insane,'" LeMasters says. "But consumers are already using their remotes to skip commercials that don't interest them. We know people will watch commercials they like."

Television ads just might look different. "I think we're going to have to be more creative," says Mart Martin, a spokesman for Coca-Cola. Replay is pitching everything from sponsorships to trivia contests to targeted banner ads; and Coke and Universal Studios have decided to dip their toes in the water, signing up for prime placements on Replay's program guide.

But before developing these revenue streams, there's one last marketing challenge. "We're trying to change human behavior," says TiVo's Keast. "There's nothing more ingrained than how people watch TV."

Picture clears for interactive TV
September 27, 2000
New graphics card mimics VCR
September 20, 2000
Replay TV gets movie deal
August 31, 2000

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