MSO Shakeups Help Stunt ITV Growth

Author:
Updated:
Original:

Interactive-television deployments had already stalled by this time last year, but RespondTV Inc. CEO David Kaiser was still riding high.

After all, his interactive-advertising company still had a distribution deal with AT&T Broadband. All it takes is one deployment with the largest MSO for an ITV player to hit it big.

But in June, the hammer dropped: AT&T abandoned plans to deploy ITV services on advanced digital set-tops, killing RespondTV's sole U.S. carriage deal. The ITV company responded by laying off most of its staff.

The company — which had expanded to more than 100 employees when it rode the Internet wave that funded dozens of new-media players — now counts just 15 employees.

"We've become a development company again, is what it amounts to," Kaiser said.

While RespondTV's plight may be an extreme example of the market realities that ITV players now face, other companies in the sector are in the same boat.

Most major MSOs are aggressively rolling out video-on-demand. But convincing cable operators to invest in other, more unproven ITV applications remains a tall order.

The sagging economy and a drain in the capital markets are part of the problem. But ITV players also think executive shakeups at the largest cable companies have played a role.

AT&T Broadband, Time Warner Cable and Charter Communications Inc. have all replaced top leaders in recent months. AT&T Corp. is also still wavering on its decision to spin off its broadband unit, and Comcast Corp. has been distracted by its courtship of AT&T Broadband, according to ITV executives.

"We went from [Leo] Hindery to [Daniel] Somers to [William] Schleyer; spinning it [AT&T Broadband] off and not selling it off," said WorldGate Communications Inc. CEO Hal Krisbergh of the top guns at AT&T's cable unit. "And Charter going through its changes. The fact that the industry is trying to sort its way — when that happens, new ITV deployments are going to be delayed."

Added Wink Communications Inc. CEO Maggie Wilderotter: "When you take three of the top MSOs and you change the senior leadership teams, you have a reshuffling of looking at what the priorities are for the business, and how those priorities get executed."

Though WorldGate's stock has taken a beating this year — it dropped from $10 at the end of January to about $2.10 in November — the company had a good year in terms of new rollouts. WorldGate grew from deployments on 14 cable systems in January to 60 cable systems at present, and it now counts 2.7 million subscribers worldwide.

Like RespondTV, WorldGate reduced its payroll in response to slow rollouts and to meet projections that it would turn cash-flow positive in 2002. After cutting 20 percent of its work force in April, it laid off an additional 16 percent in October, and now has 200 staffers on the payroll.

Krisbergh said he sees a huge potential for deploying ITV services through the 18 million thin-client set-tops that Motorola Inc. and Scientific-Atlanta Inc. have shipped.

Charter recently announced plans to deploy an ITV package next year on advanced digital set-tops that run Microsoft Corp. middleware, but most other MSOs are focused on launching ITV services on the set-tops they already have in the field.

AWAITING MIDDLEWARE

Another key factor holding back the wide deployment of ITV service is operators' slow rollout of middleware software from companies like Microsoft Corp., Liberate Technologies Inc. and OpenTV Corp.

Forrester Research analyst Josh Bernhoff said some ITV-application vendors are waiting for either middleware rollouts or an integration with Gemstar-TV Guide International Inc.'s interactive program guide before they deploy.

"Companies like Wink [Communications Inc.] or Diva [Systems Corp.] would be in a lot better situation if middleware was rolling out a lot faster," Bernhoff said.

Liberate Technologies executives said that more than 2 million copies of its middleware have been deployed worldwide, but the vast majority of those deployments are in international markets.

Insight Communications Co. is Liberate's biggest U.S. affiliate, giving the company 125,000 domestic subscribers.

In August, Liberate cut a deal with AT&T's Headend in the Sky unit to offer ITV services to HITS affiliates, but no operators have signed on yet, according to David Limp, Liberate senior vice president and chief strategy officer.

AT&T has tested Liberate in Cheyenne, Wyo., but the MSO hasn't agreed to commercially deploy the middleware systems, Limp said.

He believes uncertainty at the major MSOs — including the arduous process of restructuring MSO-backed data-over-cable provider Excite@Home Corp. — have contributed to deployment delays.

"I do believe that a lot of the geopolitics and macro changes at these companies did have them focus on things that were either driven by regulatory issues or merger issues," Limp added.

Liberate's main competitor, Microsoft, recently announced a deal with Charter, through which it will deploy 1 million copies of Microsoft TV's middleware on advanced digital set-tops over seven years.

But until now, the software giant has made precious little progress in the U.S. cable market. Along with RespondTV, Microsoft was hurt when AT&T bailed out on the advanced digital platform.

Microsoft still has a commitment from AT&T to deploy middleware to at least 7 million homes, but Microsoft senior vice president Jon DeVaan said AT&T "is not working to deploy anything right now."Microsoft TV director of marketing Ed Graczyk emphasized that ITV is still in the very early stages. He pointed out that it often takes years for new technology to catch on. It took personal-computer manufacturers five years to penetrate 11 percent of the consumer market, and only 6 percent of American homes had VCRs by their 10th year on the market, Graczyk said.

GEMSTAR HANGUPS

A delay in integrating with Gemstar's TV Guide Interactive guide has been a key factor holding back OpenTV's first U.S. cable deployment. The company has an agreement to deploy its ITV system on USA Media Group's Half Moon, Bay, Calif. system, but the system can't deploy OpenTV commercially until the integration is complete, USA Media chief operating officer Jim Faircloth said. Complicating matters further for OpenTV: AT&T Broadband recently signed a deal to acquire the 7,500-subscriber system, a deal that one source said will likely close by the end of the year.

Gemstar co-president Peter Boylan said he didn't know the specifics surrounding the Half Moon Bay system, but insisted that the key factor holding back an OpenTV integration with TV Guide Interactive was a lack of interest from MSOs in OpenTV's middleware and challenges in reducing the company's application size so it can run on thin-client set-tops.

"I think the challenge OpenTV has is they have not been successful in getting any cable operators to choose to license their technology," Boylan said. "Therefore, the cable operators have not come to us and said, 'Please integrate with this new vendor we've chosen,' which, in contrast, they have done with a dozen or so other vendors."

Most of OpenTV's growth has come from Europe, where it's used by British Sky Broadcasting plc in the United Kingdom, NTL Inc. in Switzerland and France and by other cable and satellite platforms.

In many cases, European operators — which might penetrate only 20 to 25 percent of homes —are more motivated to deploy ITV services as a means to drive subscriber penetration past 50 percent, OpenTV CEO James Ackerman said.

But U.S. operators, which already penetrate most homes, say: "The only way I'm going to deploy interactive TV is if I can prove to my self that I can generate more revenue per subscriber," he said.

CHURN BUSTER

Insight Communications Co., one of the most aggressive U.S. operators in deploying ITV services, has improved customer satisfaction and reduced churn with the technology, chief operating officer Kim Kelly said.

Factors that have delayed other operators from embracing ITV include the effort involved, integration issues and the plurality of vendors, according to Kelly.

"If you continue to listen to a number of vendors, it's hard to see which one is the right one to go with because the technology is advancing," she added.

Wink has also successfully deployed its ITV technology in 2001. The company began the year with about 1 million subscribers, and headed into the fourth quarter with 5 million, Wilderotter said.

Unfortunately for cable, most of the interactive advertising provider's growth has come from satellite: 4 million DirecTV Inc. subscribers.

Attempting to integrate with TV Guide Interactive has delayed some cable deployments, Wilderotter said. Wink is in the final stages of gaining Gemstar certification for Motorola's DCT-2000 platform. It has 90 systems — mostly in Comcast and Adelphia Communications Corp. markets — ready to deploy once that certification is complete, she added.

Boylan said Wink's integration with Gemstar is in the final stages of software testing.

While Wink is one of the most widely deployed ITV services, the company still hasn't reported any significant advertising revenue. Wink was hurt in the third quarter by the Madison Avenue downturn that followed the Sept. 11 attacks, but Wilderotter said the company will have three times the number of advertisers in the fourth quarter than it had in the second quarter.

Analysts predict Wink will break 10 million subscribers by the end of next year. The company also has a deal with EchoStar that will put it in 4 million Dish Network households by summer 2003.

COMCAST: NOT DISTRACTED

For his part, Comcast vice president of digital services Mark Hess says the company's focus on buying AT&T Broadband hasn't been a distraction. "I don't think five minutes about the deal. It's not my job," Hess said.

Nonetheless, Comcast hasn't been aggressive in deploying any ITV services beyond VOD, and it hasn't settled on a middleware platform.

Comcast is conducting lab tests of an ITV portal from MetaTV, but Hess said he doesn't know when the MSO will deploy the product.

Hess, whose company is working to deploy VOD to more than 2 million households, suggested that once Comcast selects middleware and other ITV applications, it would be aggressive in rolling them out.

"When we decided to do VOD, we went at it in a big way," he said. "When we decide that there's an interactive-television product that requires middleware, we'll do the same thing."

Related