News

MSOs Turn Backs on Revenue Splits

12/05/1999 7:00 PM Eastern

When interactive-television vendors began hawking their
products to cable operators a few years ago, most offered turnkey solutions in exchange
for giving MSOs a cut of the revenue generated from the services.

Some operators looking to get interactive products to
market without having to worry about handling the operations side of services went for the
revenue splits, letting companies such as WorldGate Communications Inc. sell
interactive-television services to subscribers using their own proprietary technologies
and brands.

But now, some top MSOs -- including Cox Communications Inc.
and AT&T Broadband & Internet Services -- are shunning deals that entail revenue
splits. Since they expect interactive television to be a key revenue driver for the
future, Cox and AT&T Broadband executives said they'd prefer to buy the hardware
and software and decide the pricing and branding themselves, and not share revenue with
the vendor.

"The idea of a company like WorldGate telling us what
the pricing would be is not something that we're that excited about," Cox
interactive-services product manager Braxton Jarratt said. "We want to set the
prices. We want to brand the services. We don't want to have a content offering
that's cookie-cutter, off-the-shelf. There are so many things that have to change for
many of these services to be rolled out."

AT&T Broadband wants to buy the interactive-television
hardware and software and pay vendors flat fees for their services, similar to how the MSO
pays cable networks license fees, said Laurie Priddy, president of AT&T
Broadband's interactive-services group.

"I just prefer to buy the technology, and I think that
some companies are starting to recognize that this is a very typical cable-industry
model," Priddy said.

Indeed, while not everyone is dropping the revenue-split
model, interactive-television vendors from Wink Communications Inc. to ICTV Inc. said they
are their revamping their business models to make their products more attractive to cable
operators.

Wink still seeks to strike deals involving revenue splits,
offering to share 4 percent to 10 percent of revenue generated from its service with the
operator, "based on the level of commitment to Wink," president and CEO Maggie
Wilderotter said.

But while Wink initially planned to charge MSOs monthly
license fees, working out to roughly $3,000 per 100,000 households, those license fees
have been waived, Wilderotter said.

"That's how we position it today," she
added. "There are no upfront fees. We're really counting on the back-end
transactional revenue to be the difference for how everyone makes money in this
business."

Wink offers subscribers enhanced-television services that
allow them to view statistics or control camera angles during Wink-enhanced programming.
Wink's service also offers subscribers electronic-commerce options, and it allows
advertisers to deliver targeted advertising to subscribers, which, Wilderotter said, will
be the company's core business.

The company gets about $3.50 per transaction from products
bought through Wink, and it shares that revenue with the operator, she added.

Wink said it reaches 100,000 households through deployments
on Charter Communications, Time Warner Cable, Cox, Comcast Corp. and InterMedia Partners
systems.

As of November, all Wink deployments were through
advanced-analog set-tops. Wilderotter said Wink deployments will be split 50-50 by the end
of the year between advanced-analog and digital set-tops, and she expects advanced analog
to comprise only 5 percent of Wink deployments by the second quarter of 2000.

The company, which launched in 1996, expects to turn a
profit in 2002, she added.

Source Media Inc. offers MSOs revenue splits for deploying
its Interactive Channel Internet service -- the operator keeps 65 percent and Source keeps
35 percent. But IC president Tom Oliver said he's willing to change that model if
it's economical for both IC and the operator.

"There needs to be a successful profit for each party.
There are piles of ways of structuring it so that happens, whether it's a revenue
split or a fixed license fee," he added.

IC's only deployments to date are with Insight
Communications Co. Inc., which formed a joint venture with Source in November.

Source contributed its "VirtualModem 2.5"
software, IC's navigator, the "SourceGuide" electronic programming guide
and its "LocalSource" content, and Insight invested $13 million for a 50 percent
stake in the venture. Insight also bought 6 percent of Source stock for $12 million.

Oliver said he's open to selling equity stakes in the
company to other MSOs in exchange for carriage. "We would consider that if it was a
good way for an operator to build the business and get a return," he added.

IC has about 3,000 subscribers on Insight's Rockford,
Ill., system. The service will be rolled out to Insight's remaining systems next
year, Oliver said

ICTV said it has radically changed its strategy to meet
demands from cable operators. The company, originally a gaming vendor, launched a service
last year that offers Internet access through the television to cable systems using analog
set-tops.

But only two cable operators went for the analog product,
which requires them to set aside three 6-megahertz channels. So in September, ICTV
chairman Robert Clasen said the company switched gears to focus on selling a digital
product to MSOs, which would require them to set aside one 6-MHz channel for the service.

"We would be happy to sell the analog product, but the
whole cable industry has gone with a complete digital focus, which is fine," Clasen
said.

ICTV is targeting all MSOs upgrading to digital --
especially MSOs that have rolled out or plan to roll out low-end digital set-tops like
General Instrument Corp.'s "DCT-1000." Part of the company's pitch,
Clasen said, is that it's more economical to deploy Internet access through ICTV than
it is through expensive digital set-tops like GI's "DCT-5000" or
Scientific-Atlanta Inc.'s "Explorer 5000."

ICTV offered a revenue-share model similar to
WorldGate's for the analog product, "but that won't work for digital,"
Clasen said.

The company's plan is to sell racks of PCs to
operators, which would install them at system headends to run the service. What's the
catch? One PC can accommodate only one ICTV subscriber using the service at a time.

"We have more than enough capacity," Clasen
insisted, explaining that not every subscriber with access to ICTV would use the service
simultaneously. He noted that only 6 percent of America Online Inc. subscribers use AOL
simultaneously during peak-usage periods.

Installation costs -- which mostly entail locating racks of
PCs at headends -- would average $80 per subscriber, he added.

"You have two choices," Clasen said, explaining
his strategy. "You can have a rack of [PCs] built for the Internet, or you can have
millions of boxes built on Motorola [Inc.] chips with proprietary middleware."

ICTV said it's also flexible with operators, basically
giving them the option to package and price the service any way they see fit, including
charging subscribers $5 per month for the service, or even giving it away free-of-charge.

"One of the things you can do is simply give out the
product, maybe give away five hours [per month] and e-mail for free … or you can let
them surf the Net with [time] restrictions," Clasen said.

ICTV has had talks with the top seven MSOs, but it
hasn't struck any deals for its digital product. "Unfortunately, there's no
champion for this among cable operators yet, but we're going to convince a couple of
them," Clasen said.

While Microsoft Corp.'s WebTV Networks unit's
800,000-subscriber count leads all companies selling Internet access through the
television, WorldGate's 13,000 subscribers top the list of companies selling
broadband Internet access to the television.

WorldGate's latest push is the $100
"SURFview" analog set-top it developed with GI, and a similar box it is working
on with S-A. The SURFview box, which can offer WorldGate's Internet-access service,
is set to roll out during the first quarter.

"Now you can attack the 75 percent of cable homes that
don't have a box," WorldGate chairman Hal Krisbergh said.

The SURFview set-top can also be deployed in homes with
digital set-tops, he added, pointing to research that says 70 percent of digital-cable
subscribers have two set-tops.

Charging subscriber $5 per month for WorldGate, cable
operators could amortize the cost of the set-top in seven years, Krisbergh said, adding,
"This is universal access."

While WorldGate continues to push its revenue-share model,
middleware vendor OpenTV Inc. said it isn't having much luck with its model, adding
that international affiliates are more interested in it.

"Most of the U.S. cable operators we met with
aren't terribly interested in shared-revenue models," OpenTV senior vice
president of worldwide sales and delivery Tom Jackson said. "We've been creative
in proposing a more traditional programming model -- pennies per sub, per month, on a
fixed basis, maybe with some upfront development costs."

OpenTV said its software has been deployed on 4.3 million
set-tops worldwide, including News Corp.'s British Sky Broadcasting Group plc unit in
the United Kingdom.

An agreement with EchoStar Communications Corp. -- which
plans to deploy set-tops featuring an OpenTV EPG and a weather application -- is the
company's only deal in the U.S. market to date.

"We see the cable guys moving quite aggressively to
interactive television," Jackson said, adding that the company has 10 deals "in
the pipeline," which OpenTV will announce around the time of the Western Show.

"One of the reasons why they want OpenTV is that
we're mature, we're real, we have real products to deploy," he added.

OpenTV may have a tough shot selling its product to Cox,
which owns a stake in competitor Liberate Technologies.

"We're definitely a fan of Liberate. But if
it's a bad business or a bad product, any investment that we have in a company
won't force us to make a bad decision," Jarratt said.

He added that Cox can use Liberate to offer Internet access
to the television and enhanced-television applications. The MSO is testing Wink's
technology in its Palos Verdes, Calif., system.

Cox hasn't committed to rolling out products from any
vendors, including Liberate, Jarratt said. But no matter which companies it selects, the
services will be sold as "primarily a Cox brand," he added.

Interactive services may be sold as an extension of the
MSO's digital-cable package, or they may incorporate the Cox@Home brand, he said.

What feature of interactive television will make it a
must-have for Cox subscribers? "For a while, I think we're going to ride the
backs of that core [digital-cable] service," Jarratt said. "But we are hoping
that some sort of Web/Internet access will drive penetration further."

Cox plans to spend most of 2000 testing products and
developing relationships with vendors, Jarratt said, adding, "2001 is really the year
when we start rolling it out as fast as we can."

AT&T Broadband still hasn't decided which
applications it will roll out through GI's DCT-5000 digital set-top next year, Priddy
said. "We're in the integration phase," she added. "It's probably
one of the most exciting times here."

Priddy emphasized that AT&T Broadband would prefer to
cut deals with vendors that base their products on Internet standards, rather than relying
on vendors' proprietary software or plug-ins.

She added that San Francisco-based B3TV -- which uses the
vertical-blanking interval and Internet overlays to deliver enhanced advertising, similar
to Wink's product -- is the type of model she's looking for.

"It's hard to put in plug-ins for Wink and
ACTV," Priddy said. "I can look at B3TV, and it fits right into my platform --
it's almost a no-brainer," she added, noting that AT&T Broadband
doesn't have a deal with B3TV.

B3TV is pitching its product to programmers and advertisers
that will be charged a flat fee for using the service, CEO David Kaiser said. The company
is also marketing the product to cable operators that can use it to enhance local ad
sales, he added.

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