AOL may flip the switch for Net TV

The proposed AOL-Time Warner merger creates an Internet entity that has the potential to dramatically shake up interactive television. By merging with media giant Time Warner, AOL has both subscribers and content in spades and will flex its muscles in areas such as interactive television, handheld computers and Internet access devices.

But AOL's goal--to create a popular online service for TV viewers--has been tried before without much success, by a company with pockets just as deep and an equal commitment to boosting the popularity of Web-enhanced television: Microsoft.

Since the mid-'90s, Microsoft has been aggressively positioning itself as a leading provider of TV-based content, services and Internet access. But despite buying its way into the market with its 1997 acquisition of WebTV, the company has been thwarted at almost every attempt to build the service into a mass market alternative to computers and traditional ISPs.

AOL is hoping that today's acquisition--and the company's track record of continually beating the pants off Microsoft's MSN online service--will translate into success with a new user group: TV viewers.

Set-top specialists working with AOL on TV projects, in fact, saw a stock surge today. By the time markets closed at 1 p.m. PST, Liberate Technologies had climbed $42.06, or 18 percent, to $232.69, and Motorola had risen $11, or 8 percent, to $140. Scientific Atlanta had risen $8.38, or 14 percent, to $59.25.

TiVo, a digital hard drive designer that has plans to work with both AOL and Liberate, shot up $30.96, or 43 percent, to end the day at $72.

Of primary interest is the interactive TV arena, where AOL, Microsoft and numerous other technology companies are prospecting for new revenue streams as consumers start purchasing goods and services using little more than a remote control. AOL's newfound heft could jump-start the market by sparking companies such as Yahoo, which currently have no clearly enunciated TV strategy, to start placing bets in the marketplace.

"AOL has 20 million subscribers that they can take to other devices, with one critical category being TV," said Dave Limp, senior vice president of corporate development at Liberate, which provides software for interactive television. Assuming the transaction closes, the new AOL Time Warner entity would have an equity stake in Liberate amounting to almost 10 percent of the software provider.

In addition, numerous Time Warner media properties could use interactive television to drive online sales of music albums, for instance. Limp thinks there's a potential for the company to eventually add $1 billion a year in revenue through commerce over television. "It's a huge possibility that's sitting a little beneath the radar screen yet," Limp said.

Although Limp's view is certainly colored by Liberate's involvement with AOL, he isn't alone in seeing a lot of potential for interactive television.

The Direct Marketing Association estimates that approximately $91 billion of goods and services were purchased through direct response television programming and advertising in 1998, even though people had to phone in to purchase products. The association predicts this amount will grow to approximately $127 billion in 2002. AOL could generate a large amount of revenue by letting people easily tap into its own shopping services through an interactive set-top.

Experts have also been predicting that hardware companies will partner more closely with content developers and communications companies to carve a market for simplified Web devices. AOL already has teamed with Hughes Network Systems, Sun, Gateway, Intel and others on non-PC access devices aimed at a wider audience.

Today's deal between AOL and Time Warner will make AOL's strong points that much sharper. Through the merger, AOL will move from being a leader in dial-up Internet connections to a major player in entertainment and cable. Hardware and software makers that sign up with AOL will likely find access to a huge customer base.

Microsoft, through its domination of the market for PC operating systems, has long been used to moving the PC hardware market in a particular direction as consumer tastes have changed. The company even created another operating system for everything from handhelds to interactive televisions. But since it moved further afield from its core market, the company has had less influence in the development of those markets despite its large investments.

Instead, companies such as Philips Electronics, Hughes and Gateway have been increasingly focused on making deals with AOL because it has the potential to help create a market for new devices that might not otherwise succeed without the content people want.

In fact, at the recent Consumer Electronics Show, AOL showed off its first steps toward offering its services to markets beyond the PC. The online powerhouse displayed interactive TV services in conjunction with satellite programmer DirecTV and previewed AOL TV-branded boxes made by Hughes and Philips.

Meanwhile, around the corner from the TV products, AOL representatives also showed services on both Palm and, for the first time, Windows CE-based handheld devices from Compaq, Hewlett-Packard and Casio.

AOL's newfound heft also will have an effect on the PC industry. Already, the company invested in Gateway and said the PC maker agreed to market information appliances such as email readers and Internet set-tops for the "AOL Anywhere" strategy.

The deal is a signal to some that PC makers have to join with service providers to make the leap into the brave new market for information appliances. With the AOL Time Warner merger, PC makers may be more eager than ever to leap into the fray with AOL's plans, lest they be left on the sidelines.