Insertion Firms Target Digital Streams

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SeaChange International Inc. and nCUBE, the top two vendors
in the digital ad-insertion field, are moving closer to deploying add-on products for
cable operators, notably involving digital-stream insertion and interactive-advertising
applications.

Those are "the two critical areas" on which
AT&T Broadband & Internet Services, for one, is working with those suppliers,
AT&T Broadband executive vice president Jerry Machovina said.

SeaChange -- still the digital ad-insertion marketplace
leader by far -- will be touting advances in digital streaming and interactive advertising
at this week's Western Show.

Vice president of advertising systems James Kelso said the
vendor will again demonstrate digital-streaming technology, as it did a year ago, but this
time with an eye toward its being "in full release in the first quarter."

Rather being than a new product, digital-stream insertion
is "really an evolutionary product that can be added onto present SeaChange
gear," Kelso pointed out. But it's an important one for the digital era.

As SeaChange explained in its promotional materials,
"Until now, when cable operators began delivering digital programming to the home,
they lost the ability to insert local commercials. [Now] the technology for splicing a
commercial into a digital program stream … [is possible by] combining the Imedia
[Corp.] 'CherryPicker' with SeaChange's spot ad-insertion system."

At AT&T Broadband, Machovina said, "[SeaChange and
nCUBE] have been working very diligently on that front, and we have been working with
them. We're waiting for the economics to play out."

When it comes to digital programming, he explained,
"We still don't have critical mass in many markets to justify insertion in those
markets." That includes Denver, where AT&T Broadband has 100,000 digital
subscribers, which he called "pretty significant distribution."

"We have yet to begin digital-multiplexing insertion,
but we hope to do so in the next quarter or two," Machovina added.

SeaChange's other emphasis at the show will be on
interactive-advertising technology, with Wink Communications Inc., as well as with
WorldGate Communications Inc., Microsoft Corp.'s WebTV Networks and ACTV Inc.

Asked when such applications would become available, Kelso
said the date is uncertain since "we need to finalize the feature sets"
preferred by prospective MSO customers. "We'll be getting MSO feedback on what they
think they can sell," he added.

Machovina felt that tests with unspecified suppliers could
begin "with early-generation equipment by midyear."

Comcast Corp. senior vice president of ad sales Filemon
Lopez said he was told that SeaChange may demonstrate digital-streaming technology at the
Western Show, but he won't be attending.

On the interactive-advertising front, he said,
"There's a lot going on, but it's still kind of premature since there aren't enough
digital boxes deployed yet."

Cox Communications Inc. vice president of ad sales Billy
Farina agreed, estimating that "It'll be six to eight months before we reach a large
enough test base" for interactive advertising, so "it's not a top-three priority
for us yet."

The Wink/SeaChange agreement will enable SeaChange's
digital-insertion system to be integrated with Wink's broadcast-server and
automation-server systems. Explaining how the Wink partnership can work for operators,
Kelso said an operator with SeaChange and Wink equipment can insert a spot for a local
sporting-goods retailer on a cable sports network, for example.

Wink's interactive and electronic-commerce enhancement can
then "create a direct-response situation" by allowing viewers to use their
remote to click on a Wink-enhanced spot and "immediately buy that retailer's products
or request further information. So now, impulse purchasing and lead generation become
significant advantages of advertising on local cable." Viewers can also request
discount coupons or product samples, the companies said.

Wink's "Enhanced Broadcasting" technology now is
available to 115,000 cable subscribers in seven markets.

WorldGate's and WebTV's partnerships with SeaChange,
meanwhile, would enable the latter's insertion gear to link cable commercials to related
Web sites. That way, viewers could click on an icon in a coded TV commercial for, say, an
auto dealership and be linked to its Web site, via WebTV or WorldGate, to get prices or
other information, Kelso said.

In interactive advertising, Kelso added, "We don't
want to be making the choice" as to which technology the operators should go with.
"If they decide on Wink or WebTV or WorldGate, or if they choose WorldGate in one
market and Wink in another, we support their efforts."

As for pricing, he said, operators will pay Wink and its
other partners for use of these interactive systems, rather than paying SeaChange.

Kelso, who forecast "a lot of evolution in
interactive-advertising [technology] in the next five years," said SeaChange will be
working with Wink in six unspecified cable markets in the year ahead; with WorldGate at
Massillon Cable in Massillon, Ohio; and with ACTV "on a demonstration."

In its cable-trade advertising in November, Comedy Central
called attention to what it dubbed "directed advertising" and what others like
spot-cable rep firm National Cable Communications have called "targeted
advertising."

"Advertisers are drooling at the chance to target
their message to the exact consumers who want their products," Comedy said.
Consequently, it added, "The consumer's living room becomes the point of
purchase."

Barely one month before the Western Show, SeaChange and
nCUBE (which acquired SkyConnect Inc. last June and has begun phasing out that insertion
brand name) announced separate orders of digital ad-insertion systems that will cover a
combined total of 44 Falcon Communications Inc. headends in five states.

Everyone was mum on the price tags for those contracts --
the biggest in the insertion marketplace in months, and Falcon's first. In a prepared
statement, Falcon vice president of ad sales Ovie Cowles said his decision to ultimately
split the business followed "a thorough evaluation."

Only SeaChange and nCUBE had competed at the corporate
level, Kelso and nCUBE president Michael Pohl said separately. Cowles said nCUBE equipment
alone would be deployed at 24 headends in Oregon, Washington and California. Those
systems' combined 220 channels reach 331,000 subscribers, he added.

Despite going up against fewer competitors than ever, Pohl
maintained, "It's never easier" to book deals. Although "most major MSOs
have now signed on with us," he said, talks are under way with others for additional
digital insertion deals, but he declined to get more specific.

During the Western Show, at its booth and that of Terayon
Communication Systems Inc., nCUBE will also demonstrate equipment that addresses digital
commercials into a digital-video stream, Pohl said. In addition, the company will talk up
its own interactive-advertising applications.

"If the customers are ready, we're ready to deploy the
products," he said, adding that talks have already begun toward that end with various
MSOs.

At MediaOne Group Inc., vice president of ad sales Ed
Dunbar said he hopes to get updates on SeaChange's and nCUBE's digital solutions at the
Western Show -- particularly on their timetables for digital-into-digital streaming and
interactive advertising. So do his counterparts at Cox (Farina) and at Cable One Inc. (Ron
Pancratz).

Farina said Cox is "coordinating with [SeaChange on]
where to test [the digital-streaming] product."

At the National Show this past spring, SeaChange expanded
into traffic and billing with the "SeaChange Advertising Management System."
Since then, Kelso said, 18 operators have bought it, including Time Warner Cable in
Orlando, Fla., and three other markets; two MediaOne sites; and two Charter Communications
Inc. markets, the company reported.

There are "a couple" of other MSO insertion deals
in the discussion stages, Kelso said, including a potential $2 million order from an
unnamed "large MSO." Moreover, SeaChange booked several $1 million-plus orders
from other cable operators through the third quarter, he added.

SeaChange's biggest insertion customers are AT&T
Broadband and Time Warner (roughly 40 markets each), followed by Cox (16), Cablevision
Systems Corp. and MediaOne (about one-dozen each).

Dunbar is planning to expand MediaOne's channel lineups in
every market, which will require "incremental, not monumental purchases" from
both SeaChange and nCUBE.

All told, SeaChange's cable clients now insert on
"well north of 25,000 channels, mostly in the United States," Kelso said, adding
that the estimate covers the third quarter, and it needs to be updated.

About 70 percent of its most recent insertion sales have
been to existing clients, Kelso said, adding that those orders have given SeaChange
"damn near 80 percent of the [digital-insertion] market. This market is
rockin'."

But not for everyone: nCUBE remains "a very distant
second," Kelso said.

That company -- which, as SkyConnect, estimated last year
that it inserted on 5,000 channels -- now inserts on more than 7,000, Pohl said. That's
partly due to having signed with Insight Communications Co. Inc. for 20 headends in
September and with Fanch Communications Inc. for nine headends in June.

Channelmatic/LIMT Inc., considered No. 3 in insertion last
year, maintained a relatively low profile in 1999 except in early summer, when it
continued promoting its "Digital MoneyMaker" system as a low-cost system
"for small-market budgets."

It later changed its name to LIMT Inc., dropping
Channelmatic once that company filed for Chapter 11 reorganization under bankruptcy law
after a subcontractor on an Israeli project went out of business, putting it in a
financial bind.

LIMT stands for Local Insertion Media Technology, the
Swedish company that bought Channelmatic Inc. in 1997 from IndeNet Inc. LIMT officials
could not be reached at press time.

The list of insertion suppliers also shrank this past
January, when Digital Video Systems Inc. dropped out of the business.

Machovina and Dunbar agreed that they were not worried that
having fewer insertion suppliers would hurt their bargaining positions.

"It doesn't trouble me," Machovina said, because
his MSO has both companies' systems in various markets, and "we have a healthy
relationship with both." Dunbar echoed that, observing that the vendors' pricing
"has been pretty competitive."

Lopez -- whose MSO uses mostly SeaChange insertion
equipment and some nCUBE/SkyConnect -- said, "Obviously, we would like to see others
[in the field]. But as long as we continue to get reliable customer service, which we have
been getting, then we are not that concerned."

Pancratz maintained, "Two or three [vendors] is sort
of the limit where you can get a competitive bid and keep them on their toes when it comes
to service."

He added that Cable One -- which uses SeaChange gear in
four larger markets and Adtec Inc. equipment in its systems with under 25,000 subscribers
-- was forced to replace Channelmatic's gear with Adtec's earlier this year due to a lack
of Y2K support from Channelmatic.

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