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Top Five Interactive-Digital-TV Applications

6/20/1999 8:00 PM Eastern

Digital-broadcast cable TV is posting increasingly positive
results every day. In addition, direct-broadcast satellite services continue to grow, and
they have whetted consumer appetites for digital video.

Now, with two-way, Internet-protocol-based digital networks
and interactive set-tops being deployed, many cable operators are preparing to surpass DBS
offerings with truly interactive two-way digital-TV services.

This article seeks to answer the following questions: Which
interactive applications offer high-revenue opportunities for cable operators? And what
applications should be introduced on the heels of digital-broadcast cable TV?

Many people have looked at these issues, so here's my
view of the top five applications, ranked in approximate order of deployment:

1. VIDEO-ON-DEMAND

From the perspective of both operators and consumers, this
application is evolutionary, not revolutionary. While its convenience is indeed
compelling, VOD is simply movies and other video programs.

Consumers have been buying -- and operators have been
marketing -- movies and video programs ever since the cable industry started, so VOD is a
natural extension of an operator's core business.

Analysts agree that VOD holds the promise of capturing a
sizable portion of the $7.5 billion video-rental market. Likewise, most observers agree
that the cable industry is best-positioned to benefit from VOD. Every trial I am aware of
has demonstrated consumer demand for VOD. Why, then, has VOD not yet been deployed?

In the past, the expense of costly servers, switches and
adding extra headend equipment crippled the business case for VOD. These expenses drove up
the cost per stream. In the early trials, the server cost of providing one stream exceeded
$2,000.

Dramatic reductions in cost per stream have occurred over
the past several years. There are three major reasons for the plummeting cost:

• It's no longer necessary to purchase ATM
(asynchronous transfer mode) switches to support VOD. Interconnect standards allow a
server to stream high-speed data directly to multiple QAM (quadrature amplitude
modulation) modulators without going through an ATM switch.

An intelligent QAM modulator, under the direction of the
control system, can then select the appropriate stream that it needs to deliver, allowing
the network itself to serve as a "virtual" switch.

• Servers have plunged in price. One of the beauties
of VOD is that the costs of providing the service are scalable. Originally, a system
offering VOD would need a server capable of 10,000 streams. Today, servers are basically
commodities that can be purchased to handle as few as 100 streams.

• Digital interactive set-tops are moving into
subscribers' homes every day. Since the server cost per stream (now under $350) is a
scalable, incremental cost to the cost of a digital-broadcast network, the business case
for VOD is now much more attractive. One major server vendor reports that total network
costs for VOD are now around $100 per digital subscriber.

Another part of the VOD equation is in the distribution
part of the plant. As VOD penetration climbs, operators need to direct bandwidth to
smaller and smaller nodes. Advances in fiber optic transport have made this migration more
economical.

Another strategy for effectively scaling the VOD service
involves distributed servers. In large systems, a "server farm" in the master
headend might house servers devoted to infrequently accessed titles, while more popular
titles might be delivered by servers in major hubs.

2. E-MAIL

E-mail is the first service that gains popularity with
users of any online network, whether it's a company local-area network, America
Online Inc., WebTV Networks or personal-computer-based Internet access.

Even after it becomes a mature service, e-mail remains the
most universally popular and prevalent activity on every medium on which it is offered.
For example, WebTV customers use e-mail far more than they surf the Internet.

E-mail on TV has significant advantages compared with
e-mail on PCs using conventional modems.

It's launched by simply tuning to a channel. Since the
cable system is always on, there's no connection delay. No dial-up modem is
necessary. And a second telephone line isn't needed, so e-mail doesn't collide
with family telephone calls or call waiting.

TV watchers will know when e-mail has arrived through LED
lights included on the more advanced interactive digital set-tops.

E-mail is a stable, easy application to deliver over the
cable system. Several product offerings, such as the "SofaMAIL" e-mail
application, have ready-made applications available for deployment. Watch for the first
e-mail deployments on digital set-tops in a matter of months.

3. WEB BROWSING

Technologically, Internet access over a television is not a
difficult or expensive application to deploy with an IP-based digital set-top.

However, Web browsing on the TV may likely follow a
different user paradigm than how it's used in the PC world. TV viewers do not need to
enter cryptic URL (uniform resource locator) language, such as "http:/," or even
"www.somename.com."

Instead of accessing a traditional PC browser such as
Netscape Communications Corp.'s "Navigator" or a search engine such as
Infoseek Corp.'s, subscribers may at first simply tune to a channel that displays a
customized, personalized service similar to "My Yahoo!"

In setting up this personalized service, the user will
define which stock quotes, sports scores and city weather forecasts he or she wants to see
regularly. In addition, the user can see the latest news headlines and click on one to
access the full story.

Moreover, headlines of stories oriented to a specific
user's interest, such as gardening or the automobile industry, can also be part of
the customized display.

In addition to this "personal info" method, TV
Web browsing is likely to evolve to HTML-based (HyperText Markup Language) information
that is linked, thematically or otherwise, to the video

4. E-COMMERCE

In general, e-commerce is a category of applications
characterized by minimal upfront costs and rich bottom-line potential. In essence, the
cable operator acts as a mall manager: The business offers storefronts for merchants, but
it does not handle their books or collections.

The range of applications is limited only by one's
imagination. Most involve a graphic overlay in a corner of the screen enabling the viewer
to initiate an order for food delivery or merchandise thematically linked to a program the
viewer is watching.

Some may view e-commerce as too uncertain or too far afield
of the cable business. But one of the most significant digital trials -- Time Warner
Cable's Full Service Network -- and other studies provide ample evidence that
operators should include e-commerce in their interactive plans. Opportunities include:

• Operators can receive an upfront
"shelf-space" fee for each digital subscriber.

• Operators can also receive a percentage of gross
orders with little or no fulfillment, billing or reporting responsibilities.

• Operators and their advertisers can create
cross-promotions and affinity programs to build loyalty and revenue.

The latest advanced digital set-tops have the "ISO
7816" slot needed for "smart cards," so operators could issue stored-value
affinity cards that give subscribers program points as their purchases of VOD, merchandise
and other items accumulate.

Once comfortable with basic e-commerce, operators can
progress to more advanced interactive applications. Some digital set-tops already include
sophisticated public-key/private-key conditional-access systems.

These systems provide the full range of security features,
such as digital signatures and authentication, needed for home banking and credit-card
transactions.

Vendors already provide server software to support all
basic features needed for e-commerce, such as a "shopping cart," a browsable
catalog, tax and shipping calculations and real-time credit-card authorization.

5. TARGETED ADVERTISING

In the world of direct mail, a response rate of just 1
percent can be quite profitable. Imagine an electronic "direct mail on
steroids," where advertising is matched to the profiles of likely purchasers so
precisely that response rates could routinely exceed 20 percent. That's the potential
of advertising messages automatically directed to demographic groups of cable subscribers.

Technically, most capabilities exist today; in fact, many
digital interactive systems already deployed have enabling capabilities for targeted
advertising. Because the potential is unproven, however, this application is the
"wild card" of the group.

For targeted advertising to flourish, operators,
broadcasters and advertisers need to work out standards, connectivity agreements and
privacy issues.

But once these ingredients are in place, targeted
advertising via cable could be the most lucrative application of all. It's easy to
see why the potential is so huge: Gross investment in advertising in the United States far
exceeds the total revenue of the entire cable industry.

THE REVOLUTION

IS UNDER WAY

Remember "VisiCalc" and "WordStar?"
Spreadsheets and word processors started the PC revolution. A similar revolution, centered
on the television, is now somewhat beyond its embryonic stage.

Although a bevy of challengers, real and announced --
including DBS, other wireless providers and xDSL (digital-subscriber-line) providers --
are going after the same opportunities, the cable industry is clearly best-positioned to
lead this revolution.

Bob Van Orden is vice president of product marketing,
digital-subscriber networks for Scientific-Atlanta Inc.

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