Idiot box gets smart

Until recently, television hadn't changed much over the last several decades. But the push for digital technologies in a formerly analog world changed that in 1999. From digital high-definition television to digital video recorders, technology is forcing companies already involved with broadcasting and receiving TV signals to reinvent themselves and introduce new services or have start-ups like digital VCR specialist TiVo take their thunder.

In 1999, "slow moving industries--TV and cable--awoke to the world of the Internet and figured out it was not a fad," said Dave Limp, senior vice president of corporate development for Liberate Technologies, which has seen its stock price explode in recent weeks. "We also saw another change: The providers of technology moved out of the research project phase and into the delivery phase."

Information appliances--devices that access the Internet but do not perform all the functions of a computer--have been hyped for the last couple of years, but "we're actually seeing these things coming to market, which is new and exciting," said Kevin Hause, an analyst for International Data Corp.

Nonetheless, as Hause and others pointed out, the industry just started rolling in. Which technologies and companies thrive, and which fail, will likely be the next big issue.

Be your own network boss
The TV year kicked off last January at the Consumer Electronics Show in Las Vegas when TiVo and Replay Networks introduced their digital VCR-like services.

The TiVo and Replay set-tops and associated services use a hard disk drive to record broadcast shows, much like a standard VCR. But the devices also allow users to automatically record an entire season's worth of shows with the click of a button and let consumers pause and rewind live television by recording video streams onto a hard drive.

TiVo, in particular, stood out because its product reached the retail market and the company went public--all in 1999. But aside from the speed of developments at TiVo, big changes loom for broadcasters and cable programmers.

"The changes coming to the TV business because of TiVo-like technology are incredibly massive," said Jim Barton, chief technology officer of TiVo. "You are just seeing the tip of the iceberg."

While hyperbole about a technology forcing changes in businesses is typical in this industry, Barton's comments may contain a kernel of truth, analysts say.

Earlier this year, several major television and cable networks formed a coalition designed to make sure TiVo, Replay and similar companies pay licensing fees on the grounds that the devices they manufacture modify copyrighted material. The coalition argued the technology could allow these companies to insert their own commercials in place of network ones.

What's more, if enough of the devices are sold to create a large installed user base, the whole notion of ad sales at the networks may be turned upside down. Not only will there no longer be a prime time slot where networks can charge premium prices for ads placed with the top shows, but revenue may come instead from new forms of targeted advertising, including more product placement ads and sponsored shows that are featured in portal-like "showcases" on the TV's program guide.

TiVo has locked up a variety of strategic alliances. The company already has deals with Sony, Philips, America Online and satellite television provider DirecTV, as well as content partnerships with media companies such as NBC, CBS and Disney. To boot, TiVo has investments from most of its partners. These companies are simply being pragmatic, according to TiVo.

"With a potential threat, the best thing to do is invest in them. [Content providers such as broadcasters] recognize that there is going to be change in our industry," so they have invested in us, Barton said. "It's a way to be on the edge of developments rather than watch the parade go by."

That parade could be a long one: IDC is predicting 10 million hard drive devices will be sold in 2004. The only thing that might rain on TiVo or Replay's parade is potential competition from video-on-demand equipment vendors that are looking at adding broadcast recording functions to their products.

Set-top and game console madness
Companies making set-top boxes and game consoles increased efforts to inject a little adrenaline into the TV this year. In the rush to establish a foothold in the market for interactive TV services delivered via a computer-like attachment, the market saw both consolidation and new entrants.

The potential stakes of the interactive television market apparently provided more than enough reason to lure Sony back to the TV business and Motorola into the game for the first time.

Motorola, which sells cable modems, processors and other communications products, had been looking to sell to a new growth market. The company settled on set-top box maker General Instrument, the largest cable equipment supplier in the United States, as a way to do that. Motorola purchased GI for $11 billion, a deal that was quickly followed by Sony's $1 billion dollar deal to supply Cablevision of New York with up to 3 million set-top boxes.

Forrester Research is forecasting that interactive TV services will generate $11 billion in advertising, $7 billion in commerce and $2 billion in subscription revenues by 2004.

In addition to jumping into the cable set-top market, Sony also began talking about plans for the successor to its wildly successful PlayStation game console. Those plans could eventually translate into a competition for consumer dollars against the PC.

Initially, Sony envisions its gaming console as a device that can download games from the Internet. Later, analysts expect Sony to use its considerable clout in the movie and music businesses to offer PlayStation users the ability to purchase and download multimedia content such as movies.

Not to be outdone by Sony's plans, Sega Enterprises is attempting a comeback on the back of the Dreamcast console's successful launch. The device, which includes a modem, could eventually offer interactive services to a wider consumer audience in the United States. E-commerce activities are already increasing in Japan, where there is talk of offering stock trading services on the Dreamcast system. The game console could even overtake the PC there in terms of influence and development activity, because few consumers in Japan own PCs that are connected to the Internet.

Not to be outdone, Microsoft is developing its own game console platform, which will likely look a lot like a PC that offers a more limited range of functions. The degree to which Microsoft is apparently willing to take on companies that it partners with in other areas, such as Sega and Sony, speaks to the serious money being spent in the game market.

"Dot com" mania hits interactive TV
Perhaps the most widely used yardstick of a technology's or market's potential is the initial public offering. The lure of interactive television--where viewers can respond to advertising and buy the promoted product without picking up the phone--seems to have become the buzzword du jour in California's Silicon Valley. A number of companies delivered investors a promise to provide technology for interactive TV and scored big in the financial markets.

Liberate Technologies, which struggled as Network Computer, officially reinvented itself this year as a provider of software for information appliances and went public, proving to investors that it was not going down with the sinking ship of NC.

So far this year, Liberate's shares have risen over 1,100 percent from their initial offering price as the company scored new deals and began shipping products to customers, generating new sources of revenue.

Limp said that Liberate's initial success is part good fortune and part hard work. Several things came into place for the company, including an improved digital infrastructure that includes upgraded cable plants and digital set-top boxes coming into consumer's homes, he said.

Meanwhile, other companies such as Wink, Worldgate, OpenTV and Be also went public and have seen some significant gains in their stock prices--again, based on optimism that interactive TV services will soon become a widespread phenomenon.

Wink has gained almost 38 percent in December alone, and it has climbed from an opening price of around 21 to 60 in trading today. Worldgate started out of the gate at around 15 a share and is now trading at 45.88; the stock has gained 40 percent this month alone.

OpenTV, which counts Sun Microsystems and AOL among its investors, set its opening share price at 20 and traded as high as 94 before sliding back almost 20 percent in December to 62. The company is already valued at 2.7 billion.

Another lesser-known company, ACTV, has seen its shares rise 76 percent this month to 38.44. The company, which makes software for interactive TV, said GI invested $5 million in its Digital ADCO subsidiary. The subsidiary provides software designed to target TV advertising to consumer households via software running on digital .

Even Be, purveyor of the Be operating system that was once courted by Apple Computer, went public and has risen on news of a deal with Compaq to license its information appliance software and rumors of a takeover from around six a share to as much as 39.56 per share. The stock is currently trading at 22.12 after a significant sell-off in the last two days of trading, but the price still gained nearly 55 percent this month alone.