Tech firms focus on TV

Then, somewhere along the way, a lot of folks in the high-tech industry got it into their heads that families should gather around the PC to watch their favorite TV programs.

Guess what? The tube still rules. So it's little surprise that the tech industry, led in a most unlikely way by computer networking giant Cisco Systems, is looking to the TV to finally, once and for all, get out of the home office and into the living room.

On Nov. 18, Cisco announced the $7 billion acquisition of video set-top box maker Scientific-Atlanta. Microsoft has a deep home entertainment strategy built around the TV. And Apple Computer watchers speculate that Steve Jobs & Co. are preparing a new TV-centric product. What exactly that product is, or whether it even really exists, is still a mystery.

"For a lot of companies like Cisco and Microsoft, growth opportunities in their traditional markets may be diminishing," said Joe Laszlo, an analyst with Jupiter Research. "But home entertainment is one of the few places left that will grow in the future. And the TV is a centerpiece of that."

Focusing on the TV as the cornerstone to a home entertainment strategy seems like a no-brainer for technology companies, considering nearly 99 percent of all households in America have a TV set, and most often more than one. On average, American households spend between three and seven hours per day watching television.

By comparison, 55 percent of American homes had a Web-connected PC in 2003, according to U.S. Census data. That's more than triple 1997's total, but still a long way from TV's home penetration.

"TV watching is one of the few activities that most people spend time doing," said Albert Lin, an analyst with American Technologies Research. "It has tremendous mass market appeal."

But the TV market is gearing up for big change as more and more shows and movies are digitized, and as new competitors enter the market. Telephone companies like Verizon Communications and AT&T (formerly SBC Communications), for example, are building new networks to deliver TV service.

Internet companies such as America Online, Google and Yahoo are also getting into the video market. On Tuesday, AOL announced it is funding a start-up called Brightcove, which helps programmers syndicate shows across the Web and collect money from it. Content providers like CBS are also seeking out alternative distribution channels for their shows. CBS recently said it was talking to both Google and Yahoo about helping it distribute some of its TV shows, such as episodes from the "CSI" franchise, across the Internet. Google and Yahoo have both been dabbling in video.

"It's gotten so cheap to deliver video over a network using IP (Internet protocol) that anyone can do it," Lin said. "The biggest expense is getting the rights to the content."

TV is changing in other ways, too. Viewers are using digital video recording services, such as TiVo, that allow people to record and store TV shows and movies and watch them at a later time. Thanks to cable operators, which are now offering similar digital video recorder services, the trend is hitting the mainstream.

But once people have one DVR, they'll want it for every room there's a TV--or so the gadget-happy theory goes. This means that devices are needed to network or shuttle video around the house to different TVs in different rooms.

Tech gets in the act
That's where executives at companies like Cisco, Microsoft and Apple believe they can play a role. Cisco and Microsoft are helping the phone companies and cable operators build networks that can deliver more interactive TV over an Internet protocol network. They're also in the home, helping users view what they can already get on their PCs on their TVs.

"There used to be talk that all entertainment, including video, would converge onto the PC," said Laszlo. "But I think now we're seeing that clearly isn't happening. It's all about bridging the gap between your PC and the TV, so that you can watch TV shows and movies streamed over the Internet on your TV."

Cisco, which is best known for making switches and routers that shuttle IP traffic around corporate networks and throughout the Internet, has made the boldest move so far with the planned acquisition of Scientific Atlanta, the second largest supplier of set-top boxes to cable companies in the United States.

Cisco only entered the consumer networking market in 2003 when it acquired Linksys, which makes low-cost wireless routers. The company hinted strongly at its video strategy earlier this year with the acquisition of a small Scandinavian company called Kiss Technology, which makes DVD and DVR players.

Then the other shoe dropped with the proposed Scientific-Atlanta deal. A company that can provide the home networking gear, the cable box and the DVR technology could prove a powerful combination.

Cisco has long been the leader in building the underlying infrastructure--the pipes--that connect various pieces of a carrier's network. Through the Linksys division, it has also become a prominent player in the home networking market, connecting PCs and laptops in the home to the broadband network.

Scientific-Atlanta is also an infrastructure player, but for video networks. It provides gear that transmits the video feeds coming from satellites on a cable operator's network and feeds those transmissions into the set-top boxes that are connected to TVs.

With their forces joined, Scientific-Atlanta helps make Cisco a true end-to-end player when it comes to building the next generation of IP networks that will handle video. Cisco will be better able to help cable operators and phone companies build entire networks optimized for video, which is the most bandwidth-intensive and demanding application on a carrier's network.

Analysts believe the complimentary expertise of the two companies actually makes a very good fit.

"Delivering content for TV over an IP network is going to be a significant element for cable and phone companies in the future," said Erik Suppiger, a networking sales specialist for Pacific Growth Equities. "The Scientific-Atlanta acquisition will likely be a catalyst for convergence by pushing service providers toward faster change."

Meanwhile, Microsoft has made no secret it also is focusing on TV, though its efforts have sputtered off and on. In 1997, it acquired WebTV and later invested $1 billion in Comcast and $5 billion in AT&T.

The software giant has acknowledged that its early efforts in the TV market came too early and were too ambitious. Since then, Microsoft's vision has morphed from an ambitious attempt to bring PC-like functions to the TV to simply improving video delivery. These days, it's focused on developing software that goes into set-top boxes to enable DVR functionality and improve program menus.

But Microsoft hasn't stopped with set-top boxes. It also sells its Media Center operating system to allow users to display pictures, play music, watch videos or record television shows on their PCs.

As part of a recent update to its Media Center, Microsoft has added the capability to stream digital media--music, videos, photos television and movies--from Media Center PCs to any television via its new gaming console, the Xbox 360, thus bridging the gap between the PC and the TV.

And then there is Apple, which has been rumored to be working on a new home entertainment product focused on delivering video from the computer onto the TV. In typical Apple fashion, the company has been tight-lipped about its plans, but analysts like Lin believe Apple is pulling the pieces together to introduce a product as early the first quarter of 2006.

Some speculate that an early sign of Apple's intentions was the Mac Mini, introduced earlier this year. The low-cost computer came complete with special media playing software.

"The Mac Mini doesn't really have the power to be a true video product," said Lin. "But you can see this where Apple would like to go."

Another clue for Apple tea leaf readers is the release of its new video iPod and updates to its iTunes store, which will now sell TV episodes for $1.99. Apple also has a long history of developing software for movie editing.

"In some ways TV-centered products may seem like a separate industry for these companies and far from their areas of expertise," Lin said. "But the market is changing, and it will increasingly make more sense for them to be here."