What Europe Can Teach Us About iTV

Interactive television (iTV), which perhaps really started with the invention of the remote control, has been incubating for more than 30 years, when the first iTV service in the U.S. was launched out of a renovated appliance store in Columbus, OH. Backed by Time Warner's corporate ancestor Warner Amex, the system, called QUBE, offered an unprecedented 30 channels, 10 of which were dedicated exclusively to interactive content.

At the same time Warner Amex was deploying iTV services, the BBC added Teletext to its channel lineup, giving viewers the opportunity to gain access to specialized information on demand. Viewers in 17 European countries now use Teletext, an analog, one-way transmission of text and graphics through terrestrial or cable networks, to access localized news, sports, transportation schedules, and weather information. Although QUBE shut down in 1985, and much publicized attempts to jumpstart iTV in the U.S. in the mid-1990s failed, the historic popularity of Teletext paved the way for broad acceptance of TV-based commerce ("t-commerce") and information delivery in Europe and opened up exciting, new revenue streams for network operators.

Even now, as new services such as Microsoft's WebTV (now known as MSN TV), Wink, TiVo, ReplayTV, and UltimateTV hint at the future of iTV in America, much of the promise of what TV can be is already happening in Europe. According to a February 2002 study by Strategy Analytics, there are 32 million iTV households in Europe. There are approximately 16 million in North America. What's more, Forrester recently reported that in the U.K., one of the leading iTV countries, more than 30 percent of consumers report using iTV regularly.

Europe's use and acceptance of iTV is an indicator that consumers are interested in using their TV sets for more than just passive entertainment. At the heart of iTV's growth and adaptation in Europe are three key factors:
*ÊEuropean viewers have been conditioned to interact with their TVs.

Led by Teletext, leaning forward, remote poised toward the set has become a part of everyday life. Hence, the mindset barriers for tapping TV for a range of uses have, in many respects, been removed. The result is an audience conditioned for iTV.
*ÊEurope has an intensely competitive industry landscape.

Europe enjoys a more competitive environment between cable, satellite, and terrestrial delivery networks. Unlike the U.S., where cable penetration rates are close to 70 percent, fierce competition throughout Europe spurs more rapid innovation in the digital TV market. The result is the availability of new and advanced TV services in a condensed time-to-market as network operators add iTV features to increase their edge over rivals. In particular, satellite TV in the U.K. has used iTV services as a competitive edge, spurring the overall market.
*ÊIn terms of revenue and viewership, cable companies are lagging behind public and satellite

TV, and must emphasize digital and iTV in order to compete. In fact, findings from the Yankee Group suggest that by 2006, 65 percent of all cable TV set-top boxes in Europe will be digital. In contrast, the National Cable Telecommunications Association in the U.S. predicts in that same year, 49 percent of the country will have access to digital services. U.S. technology companies are actively involved in this digital transition, and are learning a lot from the European experience about ways to help drive public acceptance and jumpstart the growth of iTV in the U.S. Here are some things they need to do to get the engines running:
*ÊThe first need is to condition the consumer to interact with the television for more than channel-changing. As a result, it is important to roll out universal availability of very simple interactive experiences central to watching TV, such as better, more responsive and powerful interactive program guides, "virtual" information channels, and video-on-demand (VOD) services. These initial services will also help to reduce digital churn and enable cable operators to better leverage their infrastructure investments. New software downloaded to existing digital set-top boxes in the field can make it much easier to develop and roll out these initial services.
*ÊThe next need is to roll out a wider variety of new set-top boxes and options such as digital video recording (DVR)/personal video recording (PVR) as a well-integrated part of the digital cable experience. Cable operators who fall behind in supporting such compelling new product options risk losing their best subscribers to satellite. By stepping up their response to satellite, cable operators can retain their most valuable subscribers today and help to create more users in the future.
*ÊWhile we realize that the speed of transition to digital and interactive TV is a function of capital markets and a cable operator's ability to invest in new set-top boxes and the build-out required, deploying interactive products and servicesÑvia downloads to existing boxes or rollout of new productsÑis key to capitalizing on that investment. Cable operators can reduce digital churn, increase average revenue per unit (ARPU), and create more engaged and happy subscribers by taking a thoughtful, but aggressive approach to interactive services. iTV has been proven to provide new revenue opportunities for operators such as BSkyB, which reported interactive revenue of approximately $130 million during the period of June-December 2001.
*ÊVideo-on-demand (VOD) is one service that the cable company can provide which sets it apart from satellite operators. As the "holy grail" for iTV services, VOD exploits the broadband cable modem as part of the digital cable TV experience. While the cable modem chipset adds $50-$70, with some added complexity to the set-top box, most operators already have the network infrastructure to support broadband PC connections. Overall, the broadband market and broadband interactive television services are rigorously evaluated by Wall Street, given the overall collapse of the Internet bubble, so widespread investments have been difficult to get off the ground. But clearly, the long-term advantage for cable is to determine how to best exploit the cable modem as part of the TV viewer experience.

One example of a European cable company that has taken the lead in iTV is TV Cabo, the largest cable operator in Portugal. The TV Cabo Interactiva service provides more than 40 channels of interactive programming, with services such as t-commerce and online banking, and is the world's first cable iTV service with integrated PVR. Customers all over Portugal are embracingÑand paying forÑthe new service. "We see real value in iTV. It affords exciting and unique new services to our subscribers, and it will dramatically enhance the value of what we can offer," said TV Cabo Chief Executive Officer Jose Graca Bau.

The success of iTV in Europe demonstrates the potential strength and viability of TV-based interactive services and t-commerce. Can we expect the same results in the U.S.? There are strong indications that there is high consumer interest in iTV today, but much will depend on the cable providers' commitment and innovation while working in tandem with hardware, software, and content companies to deliver on the great promises iTV offers. Now is the time to bring these promises to fruition and focus on providing American consumers the interactivity and services that will take TV to an entirely new level.

Alan Yates is the general manager of Microsoft TV Marketing for the Microsoft TV Division.

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