Time Warner deal pushes interactive TV forward

Pace said today Time Warner has signed an order for 750,000 set-top boxes built to Time Warner's specifications that will provide interactive services such as email, online shopping and an electronic channel guide.

Financial terms of the three-year deal were not disclosed. An industry analyst, however, estimated that the value could reach $300 million based on the $400 price that cable companies are paying for similar set-top boxes.

The announcement is the latest in a string of deals and alliances in recent months that indicate the future of interactive TV is finally coming into focus. However, the question remains as to whether consumers will buy into the services--television viewers so far have been mostly reluctant to embrace the limited interactive services that are now available.

The significance of Time's deal with Pace today is that it marks another step forward in the cable industry's ability to freely mix and match different versions of the TV set-top boxes that can be used in their networks.

Cable companies currently have to juggle interactive services in different parts of the country. Building a common service with interchangeable hardware is less expensive and therefore more attractive to cable companies. As a result, companies might find it more profitable to come out with advanced TV services that consumers find appealing.

Scientific-Atlanta, for example, has been Time's main supplier of set-tops and network equipment, particularly the next-generation, digital set-tops. By being able to shop among numerous suppliers, however, the industry hopes to spur competition among box makers, which should result in more features and lower prices.

"Interactive TV services is an area that's gathering a lot of momentum. I think this Christmas, with the WebTV push, that it's going to put the issue in people minds," said Mark Snowden, an analyst with Dataquest.

The idea will start to take hold because consumers are looking for new ways to get information on demand, and for the ability to control the entertainment experience, he said.

The deal for Pace helps it to entrench its position in U.S. markets. "The U.S. currently and for some time will be the largest market for digital set-top boxes," Maclom Miller, CEO of Pace Micro, told Bloomberg. "It is currently about a third of the worldwide set-top box market, and is certainly the largest for cable boxes and has the world's largest cable operators. We now are playing in the heartland of the U.S. cable industry."

Within the cable industry, Pace now succeeds consumer electronics giant Sony as the newest competitor in the cable set-top arena. Cablevision Systems of New York inked a $1 billion deal with Sony in September that sees the consumer electronics giant building at least 3 million digital boxes that will be available to consumers next summer.

Time Warner's deal isn't a full charge toward what is called an open architecture--which would allow it to substitute in any brand of set-top--but could be taken as a sign that's where they are headed. Pace will have to license operating system software and security technology from Scientific-Atlanta for its boxes, making it harder to just swap boxes out. Eventually, though, the cable industry will adopt wholesale technology standards which allow for this, resulting in a situation where consumers will be able to buy their set-tops at retail outlets and simply plug them in like a telephone.

Another set-top trial is expected to put the squeeze on other set-top makers to expand the capabilities of their machines. Next month, MediaOne is expected to kick off cable TV set-top box trials in two U.S. cities that will incorporate technology from Philips and Canal Plus, as first reported by CNET News.com.

Bloomberg contributed to this report