The promise of interactive television has been bandied about for decades. Now, after spending billions of dollars on digital network upgrades, headend infrastructure, and next-generation set-top boxes, cable companies have crossed the Rubicon to begin making interactive television a reality.
Digital plant now reaches 70 to 95 percent of consumers in most domestic markets, and most service providers anticipate a rapid ramp up in operating savings and subscription revenues.
But laying plant is just a first step. Significant returns on ITV investments will also depend on superior market development strategies.
Analyst estimate U.S. ITV revenue potential for 2005 could be $15 billion to $48 billion, a threefold differential. The swing factor in these estimates is not so much the ability to get early digital penetration, but rather the ability to make digital adoption and interactive TV behavior so pervasive that interactive advertising and television commerce becomes commercially substantial.
We see three challenges for cable system operators:
- Developing the menu of value propositions and range of service packages needed to make digital adoption pervasive.
- Helping consumers to cross the divide between passive television watching and active television using.
- Knowing the customer well enough to move from today's broadcast "push" marketing approaches to more effective narrowcast "pull" marketing strategies.
DEVELOP THE RIGHT MENU
Digital cable marketing approaches that rely on a single mass-market value proposition of "more channels for more money" are unlikely to inspire the 50- to 60-percent subscriber penetration rates needed to make ITV commercially powerful. It will take a well-designed menu of offerings to appeal to different consumers and achieve pervasive penetration.
Digital subscriber churn and consumer viewing data suggest that people want more than just extra channels. Nielsen Media Research data shows consumers who receive 100 channels watch about 16 of them — only one more than consumers who receive 50 channels. Extra channels may not provide enough value to justify a digital up-charge causing some early adopters to drop the service.
ITV clearly has more to offer than additional channels. Mercer Management Consulting research shows interactive applications such as shopping, information services, time-shifted programs, game libraries and on-demand programming have tremendous appeal and can provide a richer experience for many people.
But different consumers are looking for different ITV solutions and one value proposition will not fit all. Some only want basic enhancements: a better electronic programming guide (EPG) and video-on-demand. Other, more technically savvy viewers are ready for "multimedia" interactive programs. The upscale light viewer will pay a premium for the ability to time-shift and make the most of limited viewing time. Older consumers think broadcast TV is fine as is, but would like low cost, basic information and e-mail capabilities in addition to their TV shows.
Diverse customer desires call for a menu of service offers and price points. The best single ITV offering tested in our research could capture only half of overall market-penetration potential. However, a well-designed menu of value propositions could entice over half of cable and satellite subscribers to spend an extra $25 a month, or the equivalent of $8 billion to $12 billion a year. Moreover, this level of household penetration could provide the broad audience needed to support early development of revenues from commerce, which could ultimately surpass revenues from subscriptions.
The right menu of value propositions will get the digital platform into the home. But how do you get people to use new ITV capabilities?
For most people, TV viewing is a desirably passive experience. Changing that dynamic will be a difficult task. The world is rife with underused consumer electronics equipment: the VCR that flashes 12:00, the PCS (personal communications services) screen phone that has never received an e-mail or the microwave with 10 unused buttons.
Not all consumers will approach interactivity willingly. For every remote control cowboy, there are dozens who are not conversant in the technology and struggle to rid their TVs of the on-screen pop-ups from misfired remotes. ITV satisfaction and revenue stream development will depend on making everyone comfortable and happy with using the TV in new ways. Only then will they click on EPG ads, order movies, buy a pizza or play online games, rather than curse the commercial clutter that surrounds their favorite show.
Consumers will need to learn how to get value out of ITV, just as they had to learn how to use the Internet. America Online became the leading Internet service provider because it understood that consumers needed Internet "training wheels." AOL carefully monitored and cultivated user behaviors to make sure that they quickly found value in service utilities such as e-mail and searches. AOL then systematically exposed consumers to new applications including keywords, buddy lists and online shopping at various relationship development stages, to get them increasingly engaged and embedded in the service.
Satellite and cable companies also will need to invest in a series of customer development initiatives. Getting people to consistently use their EPG is a good starting point to ensure customers find value in their many digital channels. Time-shifting or controllable TV is another appealing application if it can be made easy to use.
Basic TV-information service is a "training wheel" that has helped early ITV development in Europe, where most people have come to rely on teletext as a convenient way to get everyday information such as weather, traffic and sports scores. Active promotion and development of such services will help people learn to interact with their television in ways that make viewing more rewarding so they will watch and spend more.
KNOW THE CUSTOMER AND THE PRODUCT
The cable operator that builds a large, behaviorally interactive digital customer base will have created the right platform for success in TV commerce.
British Sky Broadcasting Group plc's Open ITV service in the U.K. has begun to demonstrate such potential. In its first 12 months, 45 percent of BSkyB customers used the service and 11 percent bought something through the service. But that is just a start. Full development of ITV commerce depends on developing customer insight and delivery systems to assure that marketing and content strategies get the right offers to the right people in the right context.
The new interactive consumer will be harder to direct and control. Consumers who are digitally enabled are also digitally empowered. They will fast-forward over irrelevant commercials, block unwanted channels and employ TV screens to use alternative services. To be effective marketers, operators will need to utilize "pull marketing" approaches that invite viewer exploration and involvement. This requires a deep understanding of customer priorities.
At present, cable operators know little about individual customers' viewing behaviors, preferences or purchasing habits. Hence, they cannot predict which strategies will trigger the desired viewer response. The institution of a structured "test and learn" process is needed to develop systematic understanding of how different consumers will respond to various offerings.
This understanding, in combination with interactive delivery systems, can eventually eliminate broadcast waste by narrowcasting only the most relevant commercial content to individual audiences. Test and learn capabilities are particularly useful in these early stages of ITV. The faster a provider can prove itself capable in interactive marketing, the faster advertisers will allocate substantial budgets rather than experimental money to ITV.
Cable operators with deep customer knowledge can use that information to influence and arbitrate issues affecting other players in the value chain. Consider the issue of managing screen space so customers are not subjected to too much clutter, or identifying the interactive content that will be most appealing to different audiences so that content development investments will pay off for everyone. Coordination among players will help better ITV services get to market more quickly.
As with many great inventions, technology can make ITV possible, but it will not determine success. The winning cable and satellite companies will be those that develop ITV strategies from the customer-in, not from the network-out. Success will hinge on applying interactive technology to make TV richer, more customized and more suited to customers' everyday needs. Providers that get this right stand to capture a disproportionate share of the revenue prize.
Debra McMahon is a vice president of Mercer Management Consulting based in Washington, D.C. and Pamela Flanagan is a New York-based principal of the company.