Consumer demand for interactive TV has yet to meet industry expectations, but
that isn't stopping another hopeful from gambling on the ill-defined and elusive market.
Steve Perlman, who founded WebTV, will show
off the technology behind his 2-year-old
company, Rearden Steel, at next week's Consumer Electronics
Show in Las Vegas. According to sources, the Palo Alto,
Calif.-based start-up is developing software and hardware specifications that could turn
set-top cable boxes into multimedia entertainment devices capable of recording and storing digital
Although Perlman's experience and the company's investors make Rearden a
viable contender, the problem is defining exactly what it is
contending for. Although Europeans have embraced
advanced TV services, most Americans still prefer to
limit their interactivity to the PC. As a result,
products from big names such as America Online and Microsoft--which purchased Perlman's WebTV in 1997--have been slow to catch on.
"This market is still very much in its early stages, to
the degree that no one seems to have the same
definition of what (interactive TV) is," said J.P.
Morgan Chase analyst Jack Ripsteen.
However, Perlman's background could give Rearden Steel
a boost when, or if, the market takes off. "Perlman has
a certain amount of currency with the market based on
what he did at WebTV," Ripsteen said.
Rearden Steel won't sell or manufacture the boxes,
according to sources.
Instead, it will license its technology to cable
companies and others, as
well as assist them in integrating the services into
A Rearden Steel representative declined to comment but
did acknowledge that the company will make an
announcement on Jan. 7 at CES.
Finding a successful formula for blending the television with the PC has been akin to the search for the Holy Grail. And to date, most attempts have met with meager results. A number of start-ups promoting interactive
TV have crashed and burned. PC makers Gateway and
Compaq Computer have also tried, and failed, with PC-TVs.
But Perlman is considered one of the more successful in
this quest. He co-founded WebTV in 1995 with current
Microsoft TV executives Bruce Leak
and Phil Goldman. They sold the company to Microsoft in 1997
for an estimated $500 million.
After the sale, Perlman joined Microsoft to develop
interactive and broadband TV services. He left the
company in 1999.
Although successful in its early years, WebTV has stalled
recently, with subscriptions languishing at about 1
million. WebTV is now part of MSN, Microsoft's
sprawling online unit.
Following his stint at Microsoft, Perlman founded
Rearden Steel, named after a character in Ayn Rand's
novel "Atlas Shrugged." In April
2001 the company received
$67 million for its first round of funding, led by
America Online, the subsidiary of cable and Net giant AOL Time Warner; satellite company EchoStar; and networking
titan Cisco Systems. Other investors include Mayfield,
Vulcan Ventures, The Barksdale Group, The Washington Post Company and
With such big-name backers, expectations are high that
Rearden's latest venture will be profitable and
groundbreaking. Sources said the company is working
on a platform, which includes software
and hardware specifications, to be used on devices such
as set-top boxes. Consoles using the technology will allow viewers to record and store digital audio and video, as well as pause live programs. The technology will also allow cable companies to add features, such as interactive program guides and online games, based on market demand.
Rearden Steel will announce its partners on Jan. 7,
possibly including cable and satellite companies,
Interactive TV services may be the first
by Rearden Steel's technology, but the company has grander
plans, including using wireless networking to allow devices in the home to communicate with one other.
While Rearden Steel appears to be carving out a fairly
novel niche, the
company's product plans will likely eventually compete
against services from Microsoft, Liberate Technologies and Sonicblue, among others.
The technology's flexibility in incorporating features is
likely to be a selling point to cable companies, which have been hesitant to offer new capabilities to their subscribers.
"Unlike satellite companies, who are always willing to
engage early, cable companies don't have the mindset yet for
interactive television," said Steven Ericsson Zenith, chief executive of Pear Avenue, a company
offering a high-end home entertainment system that
includes satellite TV reception. "Cable companies understand the benefits of interactive television, but no one is ready to engage in something that
is going to take two to three years to mature."
Wooing partners will be key for success of the
Rearden Steel platform.
"In any kind of content strategy (in the interactive
it is very significant to work with cable and satellite
because they increasingly control the pipes into the
home," said Aditya Kishore, an analyst with The Yankee Group.
The Rearden Steel platform will largely be invisible to
consumers. Platform companies typically make money
through licensing agreements and by
getting a cut of the revenue generated from advanced
services. Both methods can be highly
profitable, but few interactive TV companies
have managed to make any significant money with either approach in the United States.
Part of the problem is a matter of perception. The
interactive TV market has taken longer than expected to
develop, because providers have had a poor understanding of the market and some companies have overpromised their products. The overall economic
downturn also has made cable companies more hesitant to
invest in new services that many cash-strapped
households might consider optional.
Earlier this year, for example, cable giant AT&T abruptly changed its
interactive TV plans, saying that viewers wanted simpler
features. Some industry insiders have suggested that the company grew tired of constant software delays from Microsoft's TV division and decided to go with more basic
products from Liberate.
Even more ambitious than an interactive TV product is
one that would
serve as the center for other home entertainment
features. The idea of a
digital entertainment hub has floated around Silicon
Valley for years.
Last year, Intel, Microsoft and PC manufacturers kicked
off a campaign
to popularize the PC as a central port for managing,
playing audio and video.
Demand for a specialized hub may be justified, but
price is an issue. The hard drives, compression
technology and other components necessary right now
to build a set-top box that can record and
store audio and
video might cost manufacturers $200 to $300, according
to Jon Peddie,
chief executive of Tiburon, Calif.-based Jon Peddie
Research. That's as
much as the components cost for a bargain PC. By the time such a set-top box reaches
it could cost as much as $1,000.
"I don't think we've seen a product yet for pent-up
demand. The problem
is, to put all the stuff in that people want, there is a
the bill of materials," he said. "For a home
entertainment center, you
have to do video and audio."
Like WebTV and game consoles, the hardware would likely
have to be sold
below cost and profits regained through services or after-market
is going to have to be some sort of subsidy," Peddie