Commentary: Worth the wait?

Although Rearden Steel founder Steve Perlman has declined to discuss what his company is building, the hints point to a home system that may include some form of advanced digital services delivered via broadband lines and set-top boxes.

It is difficult to discuss Rearden Steel specifically, since the possibilities even within the rumored space range from a fairly simple set-top system to a home entertainment network connecting television set, stereo, radio and PC, delivering information, Internet transactions and games. One can, however, examine the potential for delivering digital entertainment to consumers and the role that companies such as AOL Time Warner and other Rearden Steel investors might play.

Eventually, a market will emerge. The issue is finding the right set of services at the right price. Clearly, at some time in the near future, people's television sets will be expanding from their current capabilities to provide a richer entertainment experience that brings elements of the PC world such as games and digital content together with the classic Hollywood content delivered via television today.

The problem with the technology on the market today is that it is relatively hard to use and relatively expensive. Why would people spend $500 to $600 for one of these boxes and then pay a monthly fee on top of that? We do not think there is a clear value here yet for consumers.

The first generation of enhanced television services--interactive TV--has consistently failed to attract users. Clearly, the public does not want to turn its television set into a PC or the primary Web access device; rather, it wants a different kind of entertainment and educational experience.

	See news story: Perlman's Rearden Steel raises $67 million

The latest generation, represented mainly by TiVo and Microsoft's recently announced UltimateTV, seems to be gaining users but so far has not achieved a mass market. Whether that market is just around the corner, waiting for prices to drop and marketing to increase, or whether it is still waiting for the right set of services to appear, remains to be seen.

What watchers want
To change the market dynamics, Rearden Steel--or any other company--must support a business model that attracts information and service providers. Personal TV recorders such as TiVo appeal to a certain subset of high-end customers willing to pay for custom content while stripping out advertising. But this approach destroys the very revenue stream that funds the development of the content consumers want.

For this venture to pay off, Rearden Steel will have to create a way of compensating content providers and distributors while still appealing to the consumer. That's a difficult task, but the involvement of a major content provider (AOL Time Warner) and a distributor (Echostar) makes this something to watch closely.

This clearly is the opening of a new front between Microsoft and AOL Time-Warner. We probably will see these two giants dominating this market, with other players falling into a second tier, although the competition will probably take years to play out.

Given the lack of success that companies in this market have had, some will dismiss Rearden Steel out of hand. That would be a mistake. AOL Time Warner has a huge mix of services, entertainment and information that it can deliver, and it seems to see Rearden Steel as a potential player and possibly partner in the market, as do Cisco Systems and The Washington Post Co., which are also among its investors.

Customers eventually could see an attractive combination of Time-Warner's high-bandwidth cable investments, which deliver hundreds of channels, with Internet content and services from AOL, and new set-top technology from Rearden that blends the environments and provides advanced in-home control of the environment.

Rearden Steel probably will not have a real effect on the marketplace for some time and the advanced digital content service market is probably some 18 to 24 months from any sign of maturity. In the longer term, however, advanced digital content delivery and control may provide businesses with a new channel for providing e-learning to teleworkers and an opportunity to redefine their brand to anyone who may care.

Meta Group analysts David Cearley, Val Sribar, Dale Kutnick, David Willis, William Zachmann and Jack Gold contributed to this article.

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