Talking back to the tube

For media and cable companies, video on demand presents intriguing possibilities, Wharton experts say. But does it have the potential to bring the couch potato market to the Web?

8 min read
Imagine being able to turn your television on, pick the program you want to see from your customized prerecorded list, pull up an on-screen menu to check the latest weather, instant message a friend, and order pizza from your remote control, all without leaving your couch.

Welcome to the world of interactive television.

The idea of having consumers actively engage in the television experience isn't new. After all, shopping channels like QVC have turned viewer-to-buyer conversion into a science. Cable and satellite systems have greatly increased the number of channels available to consumers, and pay per view (PPV), where viewers use the telephone to rent access to certain programs, is a fixture at most hotels. In an effort to drive traffic to the Internet, TV show hosts often exhort viewers to log on to Web sites and take companion surveys, enter sweepstakes and download recipes.

More recently, the spotlight has been on personal video recording (PVR) technology, which is offered by devices like TiVo and Sonicblue's ReplayTV. These products take the VCR one step further, offering hard disk-based recording of favorite programs, pause-and-rewind capabilities for live television, and the ability to skip commercials during playback.

In Europe and elsewhere, satellite system providers such as BSkyB and Canal Satellite are offering enhanced features. By connecting their set-top box to their phone line, viewers can access e-mail, shop, bank, place bets, and more. Many providers are also experimenting with video on demand (VOD), which allows consumers to request and view content whenever they want without having to record it first.

Ask, and ye shall receive
"Video on demand is the next big thing," says Gerald Faulhaber, professor of public policy and management at Wharton. "It will change the way people watch TV. We're going to start moving away from a traditional model of channels, each of which carries a 24-7 video stream, toward a model where people request shows they want to see. There probably still will be channels (after all, you have to see "Buffy the Vampire Slayer" somewhere for the first time) but this is going to be a sea change in the industry."

For entertainment and cable companies, video on demand is more of a sound economic model than t-commerce, says Charles Benson, a 1996 graduate of Wharton and former vice president of Liberty Digital, a subsidiary of Liberty Media. "The most basic form is pay per view, where viewers call or click on the remote control to watch a previously scheduled program. Near video on demand, or NVOD, uses the same PPV technology, but the cable operator offers many more windows of the program--say, airing it every half-hour--so the consumer doesn't have to wait too long to watch it at any given point.

In true VOD, the consumers can start watching the movie whenever they want and are free to pause, rewind or fast-forward and watch it at will during a specific time window of, say, six hours or 12 hours.

"There are all kinds of reasons that many people are not connected to the Net, but everyone has a television set."
--Gerald Faulhaber, professor of public policy, Wharton

"As for deployment, there are two schools of thought on VOD," Benson said. "One is a head-end based system, where the content is broadcast to the viewer in a stream from the cable operator's server. The other is a model in which the content is downloaded to the viewer's set-top box and resides there for a specific number of hours before it is automatically erased. I don't know which model will win, but my guess is it may be the head-end based model so studios have some control over the content distribution."

Eddie Monnier, a 1996 graduate of Wharton and vice president of corporate development for Liberty Broadband Interactive Television, believes the device most likely to succeed will be a set-top box with user-friendly integrated PVR technology. "I consider myself quite technologically savvy, and I had some trouble setting up my stand-alone PVR to work with all the other systems I had," he said. "This stuff has to be very easy for consumers to set up."

Often, Monnier said, consumers don't understand why they need something until they're using it. "People who don't have a PVR often wonder why they would ever want to pause or rewind live television. But skeptics said the same thing about the microwave, asking why they would ever need to bake a potato in eight minutes. Once they use it, it's a different story. For instance, when I'm at a hotel while traveling for business and I don't catch what someone said on the news, I instinctively reach for the remote to rewind--but then I remember that I can't do that there as I can at home!"

Laurence Marks, a 1996 graduate of Wharton and vice president for content development at Static, a subsidiary of OpenTV, notes that when the PVR is integrated with the set-top box, cable companies might balk at including the commercial-skipping feature. "Some of the cable companies' money comes from firms to whom they sell advertising. It will be difficult for them to put that skip button on the remote controls."

Indeed, several entertainment companies have filed suit against Sonicblue, claiming that the ad-skipping technology in the ReplayTV device violates content-providers' copyright. Five consumers, assisted by the Electronic Frontier Foundation, have countered by filing a suit against the entertainment companies, seeking to affirm their right to use their ReplayTV boxes to skip advertising and digitally record content.

Show me the money
Television can certainly influence consumers to buy products--Home Shopping Network and QVC are examples of success in that arena--but exactly how much commerce can be integrated into entertainment remains to be seen.

"As for the classic example--viewers being given the opportunity to buy an article of clothing that Monica is wearing on "Friends"--I don't think that will really materialize into an attractive business opportunity," Monnier said. "There are two questions to be asked. One is: Do consumers want it? I think the answer is no--when they're sitting down to be entertained, I'm not sure they want to switch from that into shopping mode. The second is: If consumers do want it, can you make a business out of it?"

If one spins out the hypotheticals, notes Monnier, a lot of issues come up. "Suppose you want to sell a sweater that a character is wearing during one episode. How do you accurately predict demand? How long do you keep it in stock and maintain fulfillment, especially if the episode goes into reruns after it airs?"

"With such highly targeted ads and the accompanying technology, we can evaluate what people are viewing in unprecedented ways."
--Eddie Monnier, vice president of corporate development, Liberty Broadband Interactive Television

Enhanced television features, however, might be a different story. Who is going to pay for these services? "It depends," Monnier said. "Some types of programs and events have enthusiasts who would be willing to pay a subscription fee for access to multiple camera angles, instant replays and the like. Think NASCAR in the U.S., Formula One in Europe, or World Cup soccer anywhere in the world. In other cases, networks might offer these features if they believe that such enhanced features will net them more advertising dollars or reduce churn among viewers."

But even simple TV portals have run into stumbling blocks, Benson noted. "The portal concept isn't catching on so well because you need a more advanced set-top box for fancy user interfaces. There have been a lot of technology glitches in the software and middleware required, and program guide providers such as Gemstar-TV Guide often hold many of the patents on interactive guides. Sometimes their guide takes up so much memory that you can't run too much else on the box."

The Web channel?
When it's done correctly, Faulhaber believes, interactive television has the potential to bring the still-offline couch potato market to the Internet. "There are all kinds of reasons that many people are not connected to the Net, but everyone has a television set. It just has to be really entertaining and easy." Just as handhelds evolved from Newtons to Palms, he says, MSN TV and AOL TV will give way to more compelling interfaces when the time is right.

But many feel that the television just isn't the right device for a Web-surfing experience. "I personally am not a believer in using television to surf the Web," Monnier said. "The Web is completely a consumer pull experience; it is a one-to-one, active-mode experience where the user is at most 18 inches or so from the screen. Television, on the other hand, is a push experience. Interactive television will allow consumers to incorporate some pull into their TV viewing experience but it will still be a largely passive experience.

"I think Web on television has not been able to reach critical penetration levels because those who like getting that information on a television eventually just graduate to a PC. So getting the Web on a TV just isn't interesting."

Discomfort on Madison Avenue
As consumers get more and more control of the TV experience, where does that leave advertisers?

"For advertisers, who are used to being able to schedule commercials at particular times, the idea of allowing people infinite flexibility to watch shows at other times may not fit with their scheme. So they might have to find ways to insert commercials through set-top boxes to these people who are constantly time-shifting," said Joseph Turow, professor of communications at Penn's Annenberg School for Communication.

"Madison Avenue will increasingly have to prove its worth," Monnier said. "With such highly targeted ads and the accompanying technology, we can evaluate what people are viewing in unprecedented ways."

"I believe advertising will become truly targeted," he notes.

Benson agrees, and points out that good commercials do get viewed. "It will be a wake-up call for the advertisers to get more creative on their commercials. They have to figure out other ways to reach consumers. After all, we do sit and watch Superbowl ads. I've rewound and watched commercials even when using TiVo."

Turow notes that the growing popularity of interactive television features raises interesting questions about viewership and about the viability of local TV stations.

"Historically, we have been used to the idea of program flow, and entire schedules of shows are created with the idea of people continuously watching the lineup," he said. "The idea of flow is now changing. The network may become more of a brand that the consumer turns to just to consider which programs are worth adding to his personal schedule. If people are cherry-picking programs that way, they might not go to their local stations at all."

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All materials copyright © 2002 of the Wharton School of the University of Pennsylvania.