AT&T'S ITV Backtrack

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AT&T Broadband is retreating from its long-held plans to create an interactive-television platform based on the most advanced digital set-tops.

Instead, executives said last week, the MSO will focus on offering ITV through the 3 million thin-client set-tops it has already deployed, and through new "enhanced-basic" set-tops that it will order.

MSO executives said they're shifting their focus away from the advanced-digital service because they don't have the infrastructure in place to take advantage of the capabilities offered by the high-end boxes. They also said it makes better financial sense to focus on generating additional revenue from the 3 million thin-client set-tops the MSO has already deployed.

AT&T will also finally deploy the Rolls-Royce of digital set-tops — Motorola Broadband Communications Sector's DCT-5000 — sometime this year, officials said. But it will run like a Chevy, as it will only be able to offer the same functionality as the 3 million DCT-2000 set-tops AT&T already has in the field.

The operator will not activate the modems embedded in the DCT-5000 set-tops that would enable Internet-TV surfing, vice president of product development Karl Ofsentjuk said last week.

While AT&T's new focus on offering ITV services through the DCT-2000 could provide a big boost for vendors building products for that platform, such as WorldGate Communications Inc., it could hurt companies like AT&T investor Microsoft Corp. and RespondTV Inc., which are developing products for the advanced digital set-tops.

Another large set-top order from AT&T may also be in the works. The MSO plans to buy new "enhanced-basic" set-tops that will contain memory allowing for personal-video-recorder services similar to those marketed by TiVo Inc., Ofsentjuk said.

AT&T hasn't settled on a vendor for the new set-top. But he said the company has talked with several vendors, including Motorola, Cablevision Systems Corp. supplier Sony Corp. and Rearden Steel Technologies, the company recently formed by WebTV founder Steve Perlman, Ofsentjuk added.

At the National Show, Motorola plans to discuss plans for a "midrange" box, dubbed the DCT-2500.

The MSO may select one or several vendors for the enhanced-basic boxes, Ofsentjuk said. While there's no timeline set for the box rollout, a spokeswoman said AT&T would distribute the enhanced-basic set-tops through retail outlets, as well as via the traditional leasing model.

MALONE, EARLY BACKER

AT&T's saga with the DCT-5000 began in 1997, when the company, then known as Tele-Communications Inc., led a group of nine MSOs in a $4.5-billion set-top order from the former General Instrument Corp. (later acquired by Motorola), which then went by the name NextLevel Systems Inc. The order was for a range of set-tops, including the DCT-2000 and the DCT-5000.

Just a few days before that announcement, then Tele-Communications CEO John Malone revealed his vision of the set-top line during a Western Show panel session, including a "Rolls Royce" of set-tops, which turned out to be the DCT-5000.

TCI had hoped to offer a wide range of interactive services through the OpenCable-based modem embedded in the set-top, including Internet telephony.

AT&T's shift from the advanced digital set-tops appears to be a setback for Microsoft, which invested $5 billion in parent AT&T Corp. in April 1999.

Microsoft officials downplayed AT&T's focus on the thin client, noting that the company is focused on the long term.

"We're in such early days, when you think about it," said Microsoft TV Platform marketing director Ed Graczyk. "There are a billion and half TVs in the world. If you added up all of the ones that have any kind of ITV service today, it's going to be well under 50 million. It's a tiny percentage of the marketplace that's out there today."

Graczyk also noted that Microsoft still has a commitment from AT&T to deploy its middleware on at least 7.5 million set-tops.

Liberate vice president of marketing Charlie Tritchler applauded AT&T's strategy shift, noting that the company already has its middleware platform running on DCT-2000 set-tops deployed by Insight Communications Co.

"It's not clear what Microsoft is going to offer for that space. They have not deployed. We are deployed with paying customers today," Tritschler said.

Graczyk said Microsoft would be able to offer AT&T and other operators a middleware platform through its Access Channel Server, which uses thin-client technology that the company acquired from Peach Networks last year.

WRITE CODE, VENDORS

In another significant strategy change, Ofsentjuk said the MSO will no longer rely on internal staff to develop its ITV platform, and will instead bank on its vendors to develop solutions.

"We are no longer going to write code," he said.

Some AT&T development staffers were among the 1,000 employees the company laid off in February, sources said.

AT&T is now testing a middleware platform that would enable ITV services with 50 employees in an undisclosed market, Ofsentjuk said. Sources said that Liberate Technologies Inc. is providing its middleware platform, and Microsoft Corp.'s Microsoft TV platform is not involved with the trial.

One source said the trial started about six weeks ago on AT&T's Cheyenne, Wyo., system.

The decision to offer ITV services through the DCT-2000 platform is a radical shift in company strategy.

When AT&T announced a deal last July to offer an interactive-advertising system from RespondTV Inc., officials said the company had no plans to offer ITV through the DCT-2000.

"The primary focus is on the DCT-5000," former director for interactive television Rich Fickle said at the time. He now runs AT&T's Headend In The Sky platform.

AT&T had announced plans to commercially deploy RespondTV's interactive advertising service this year through the DCT-5000, but Ofsentjuk said last week that he did not know if the MSO would deploy RespondTV this year, as planned.

"It's not that we're walking away and we'll never deploy RespondTV or Microsoft. It's back to saying let's deploy what we think is right, at the right time, versus now … and doing the right things for our customers and our shareholders, in a way that we feel makes sense for the current landscape," Ofsentjuk said.

RespondTV spokeswoman Kasey Zacher O'Connell called AT&T's shift "disappointing," but said RespondTV is also developing products for the DCT-2000 platform and increasing its focus on European operators, which are outpacing their U.S. counterparts with ITV deployments.

"Whatever AT&T chooses to roll out, we fully intend to support interactive content on those boxes," O'Connell added.

AT&T reported that it had 3.13 million digital subscribers at the end of the first quarter. The company has penetrated 20 percent of its 15.9 million subscribers with the digital package, completing 3,500 digital installs daily on average.

To date, AT&T's ITV initiatives consist of a deployment of Diva System Corp.'s video-on-demand service in Atlanta, and WorldGate's Internet TV product in Waterloo and Cedar Falls, Iowa.

The company has announced plans to expand the Diva offering to Los Angeles, parts of the San Francisco Bay area and Pittsburgh. It also plans to offer WorldGate in Tacoma, Wash.

Ofsentjuk emphasized that AT&T isn't abandoning the advanced digital-platform, but said the company wants to first take advantage of the financial upside it could see from offering ITV services through its existing set-top base.

The move to order the mystery "enhanced basic" set-top was driven by customer demand for new services such as the PVR feature, Ofsentjuk said.

DirecTV Inc. and EchoStar Communications Corp. have beaten AT&T and other cable operators to market with their respective DishPlayer and UltimateTV PVR products, but Ofsentjuk didn't appear concerned about that development.

"The cable industry in general is assessing both the need and the timing and the economics of how and when to offer PVRs. We see it as a service that a segment of our customer base is interested in," Ofsentjuk said.

Sources said AT&T has received about 250,000 DCT-5000 set-tops from Motorola, which are sitting in a warehouse. AT&T will not order additional DCT-5000 set-tops from Motorola, Ofsentjuk said. But he said the company would consider offerings from the 5000 "family" of boxes.

Multichannel News
reported last Monday that Motorola is developing a new line of 5000-class boxes, including models that contain a PVR.

Jeff Baumgartner contributed to this story.

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