AOLTV service to hit market Monday

America Online will launch its AOLTV service Monday, giving the company an entry into the growing interactive TV market and pitting it against Microsoft's WebTV, according to sources.

The online giant is expected to make its

Gartner analyst Adam Daum says because a large demand for Net access among non-PC owners doesn't exist, AOL's attempt to sell boxes to access the Web through a television is likely a difficult market opportunity. see commentary

announcement in New York, and some of Circuit City's 617 stores may begin selling the digital set-top boxes as early as Monday, sources said. AOL also will begin running pop-up ads on its online service touting AOLTV to its members, they said.

AOL previewed the service at the Consumer Electronics Show in Las Vegas and to Wall Street analysts. While the launch is a big step for AOL into household living rooms, analysts predict AOLTV will not make a big splash in the short term.

AOL executives declined to comment on any matters involving AOLTV.

The service is the online giant's effort to extend its interactive offerings, such as Internet access, email and instant messaging, to the TV screen. It will come in the form of a set-top box manufactured by Philips Electronics and as a product shipped with Hughes Electronics' DirecTV.

AOLTV set-top boxes are expected to carry a comparable cost to competing WebTV Plus boxes, sources said. WebTV Plus boxes sell for an average of $200 to $250. But sources noted that Circuit City may offer discounts or rebates that could be applied to any of its merchandise, including the AOLTV set-top box, depending on the length of the AOLTV service contract.

Circuit City and AOL signed a marketing deal last December that called for the retailer to promote AOL's services and products in exchange for an "anchor tenant" spot on Shop@AOL online.

Circuit City plans to finish installing "AOL Everywhere" displays this week and will incorporate the AOLTV service once it is released, said Bill Cimino, a Circuit City spokesman. He declined to comment on the AOLTV service's pending release.

A subscription to AOLTV is expected to cost $21.95 a month for new subscribers, sources said. For existing AOL members, the service will cost an additional $14.95 a month, which is on top of its standard $21.95 AOL subscription fee.

Subscribers using only AOLTV will not get all of the perks of AOL's online service. AOLTV includes email, Web browsing and instant messaging, but it does not allow people to download files.

With AOLTV, AOL hopes to grab a piece of the $9 billion in e-commerce and subscription revenues that the interactive TV market is expected to generate by 2004, according to Forrester Research. And that doesn't count the $3.2 billion in advertising that TV-based online ads are expected to raise.

Still, the advent of interactive television has been hyped for years, with only a handful of players distributing two-way digital set-top boxes.

"What AOL brings to the table compared to other players to date is a very strong skill set based on its interactive communications capabilities," said Michael Parekh, a Goldman Sachs analyst. "AOLTV will basically empower this user base on a platform that uses a service they're already used to."

He added that AOLTV will have an advantage over Microsoft's WebTV, as AOL already has a large audience and the ability to leverage members' preferences in the services it offers and advertising it generates.

AOLTV is one piece of the company's "AOL Anywhere" strategy, an initiative by AOL to offer its services in an array of non-PC devices. The company recently created a wireless division and inked an alliance with PC-maker Gateway to develop Web-enabled appliances.

AOL has downplayed its pending launch of AOLTV, noting that it's considered a soft launch, analysts said. One source said that AOLTV was interested in a soft launch for two reasons: It would give the company enough time to work out bugs, and a marketing push in the fall would likely be better received than in the slower summer season.

AOL is pursuing interactive television to boost growth as its penetration in PC-based access levels off, according to Jim Pehune, an analyst with The Yankee Group.

"It's kind of going from a breadth strategy of getting more and more customers to pursuing more of a depth strategy," he said. "Now that we're in the home, let's get more traffic and more usage out of our customers."

The strategy is similar to one Microsoft has been forced to embrace in the operating system market, where it made its name.

"You've got to keep growing," Pehune said. "Why does Microsoft, a company with 90 percent market share in PC operating systems, think they have to have software running on cell phones to game players to set-top boxes? You need to expand. It's the same premise."

The release of AOLTV comes as AOL awaits federal approval of its merger with Time Warner. The merger would unify the world's largest Internet and media companies and would likely speed the convergence of technology and entertainment. If the merger goes through as expected, AOL will have Time Warner's cable properties under its belt, such as its popular CNN and HBO channels.

Monday's announcement will follow an agreement inked earlier this week between AOL and TiVo. The deal, accompanied by a $200 million investment in TiVo by AOL, will tie TiVo's digital recording features into future versions of AOLTV.

TiVo produces set-top boxes that record TV programs using a hard disk instead of a traditional videocassette. The technology allows viewers to not only record their favorite shows, but also to skip commercials, shuffle their programming lineups, and repeat missed parts of shows.