America Online Inc. last week announced deals with four
companies -- DirecTV Inc., Philips Consumer Electronics Co., Hughes Network Systems and
Network Computer Inc. -- to help the leading Internet-service provider bring its "AOL
TV" product to market next year.
The deals bring new attention to the nascent
interactive-television category, which will allow friends across the country to chat with
each other while watching their favorite TV shows.
"AOL's powerful brand will drive the acceptance
and value of interactive television," AOL interactive-services group president Barry
Schuler said in a prepared statement.
The announcement drew skepticism from cable interests,
which questioned the viability of a TV-based Internet service that doesn't offer true
two-way broadband connectivity.
"Anything that moves us to a broadband world is good,
but AOL's relationship with DirecTV doesn't change its technology," Road
Runner senior vice president of marketing Tim Evard said.
AOL TV's first set-top boxes from Philips and HNS will
use a telephone-return path with a built-in 56-kilobit-per-second modem.
The set-top boxes will also offer USB (universal serial
bus) ports, so that they can be upgraded for use with a high-speed digital subscriber line
from a telephone company.
"We're working to have a suite of options"
for delivering the AOL TV service, DirecTV executive vice president Larry Chapman said
Over time, companies such as DirecTV parent Hughes
Electronics Corp. are expected to offer two-way data services to the residential market
via Ka-band satellite technology.
Hughes plans to launch its "Spaceway" two-way
broadband service in 2002. The company has already committed $1.4 billion to the project,
and it is looking for investment partners.
According to published reports, AOL is a likely candidate,
with plans to devote up to $1 billion of its own.
"Hughes is always looking for business
opportunities," spokesman Richard Dore said, adding that as a matter of policy, the
company declines to comment on potential business deals.
For the first-generation AOL TV hardware, Philips will
initially make a set-top box that accepts inputs from any video source, such as broadcast
television, cable or direct-broadcast satellite. HNS will build AOL TV boxes with built-in
DirecTV will broadcast new AOL multimedia content over its
satellite spectrum at very high speeds. That content could be cached in memory on a hard
drive in the set-top box for instant access.
"This is not about just putting AOL on your
television," AOL spokeswoman Wendy Goldberg said.
In addition to its strong brand name, AOL brings its 17
million-strong subscriber base to the interactive-television table. This means AOL can
market its new television service to its personal computer customers, who tend to use AOL
an average of 55 minutes per day.
The Carmel Group's vice president of research and
consulting, Antonette Goroch, estimated that AOL controls 53 percent of the ISP market.
"AOL's model is, 'We're going to
handhold our customers, because the Internet is too wild and crazy to handle on your
own,'" Goroch said. "They'll bring that model to the TV world."
"AOL thinks like a programmer does," Chapman
said. "They know how to take an immense amount of information and filter it for a
large customer base."
An AOL TV service would also allow current AOL customers to
carry their e-mail addresses and "buddy lists" over to the television platform
-- something they'd be able to do only with an incremental cost when using an
alternate TV-based Internet service such as those offered by Microsoft Corp.'s WebTV
Networks or WorldGate Communications Inc.
AOL has not yet released subscription or hardware pricing
for AOL TV.
The company would not disclose any financial terms of the
deals, including revenue-sharing models or whether it would help to subsidize the cost of
the new AOL TV hardware.
What AOL stands to gain from Philips and DirecTV are
national retail distribution and strong marketing partnerships. Because both AOL and
DirecTV are already partnered with Bell Atlantic Corp., AOL TV is likely to get a
marketing boost from that telco and from other regional Bell operating companies, as well.
The companies involved were quick to point out that the
deals were not bound by exclusivity clauses.
DirecTV is still in discussions with other ISPs about
bringing TV-based Internet services to its audience of 7 million satellite-TV customers,
Philips, which makes WebTV-capable set-top boxes, is
"platform-agnostic," spokesman Marty Gordon said.
WorldGate CEO Hal Krisbergh said he doesn't believe
AOL's deal with DirecTV would prompt the cable industry to partnerships with AOL --
as much as AOL covets cable's broadband pipe.
Cable operators wouldn't benefit from deals with AOL
because they don't have the need for AOL's telephone infrastructure or ISP,
Krisbergh contended. And cable would have to give up too much potential revenue to gain
the brand name.
Partnerships with AOL and WebTV seem to make more sense in
the DBS environment. DirecTV and rival EchoStar Communications Corp. -- which plans to
ship its own WebTV-capable "DISHPlayer" product by the end of May -- need to
bundle some form of interactive services if they're to compete with cable's
"They realize they need to offer more than just video
programming in order to continue their strong subscriber growth," Alpert &
Associates president Mickey Alpert said. "You can't do that by standing