Interactive Television Needs Quality Ratings

Will ITV be voted off cable operators’ lineups, or can it make them millionaires?

Put these interactive television (ITV) offerings in the order that they will be deployed, from earliest to latest:
a) television commerce
b) video-on-demand
c) online games
d) enhanced TV

If you answered D, B, C, A, you may have fast-fingered your way into the hot seat. With the “enhanced TV” of “Who Wants to be a Millionaire” and other programs, ABC is guiding the public toward interactive TV. Enhanced TV offers no revenue for cable operators, but through ABC’s and other broadcast-related content sites, the public is getting its first glimpse of how the static nature of television can be blended with the Internet’s interactivity.

Educating the public, says Bernadette Vernon, director of strategic marketing at Motorola, is the first step toward widespread adoption of revenue-generating ITV. “An early challenge is getting people accustomed to interacting with their TV,” she says. “New revenue streams will appear next.”

Viewers might not use television commerce (commerce TV) to purchase baseball hats during the World Series’ seventh-inning stretch until long after Regis has retired, but video on demand (VOD) is already available in some regions. And just behind VOD, cable operators have queued up online games for their next ITV deployment.

“Pay-per-view video was expected to be successful, but it didn’t take off,” says Bob McKenzie, senior vice president of strategic marketing at DST Innovis. “Now VOD is the leading ITV contender. During the next 12 months, VOD will penetrate the market, then we will see more expansive ITV services.”

Although progressing, ITV has experienced setbacks. AT&T Broadband stung the sector when the cable provider squelched its development of advanced ITV set-top boxes. The company, like many other operators, claims it needs to focus on improving current services and understanding customer needs rather than spending resources on unproven services.

This negative news from the market leader, combined with the communications sector’s overall financial difficulties, has caused many industry watchers to lower their expectations. “Interactive services are struggling to survive,” says Curt Champion, senior director of marketing of Convergys’ cable and broadband solutions.

Wall Street has withdrawn support for almost anything associated with the Web, e-commerce or the Internet, but no one seems to view ITV’s slower adoption rate as related backlash. Instead, many software and hardware providers lay the blame on cable operators’ weak infrastructure. “Enabling ITV requires an expensive infrastructure upgrade that allows traffic to flow two ways,” says Kent Steffen, president and CEO of Telution.

ITV Barriers

“ITV is in the middle of its evolution. It’s pseudo-interactive,” says Robert Bratulic, director of marketing and strategy at Sigma Systems.” To reach interactivity, all the hardware and software providers must ramp up their development efforts. Set-top boxes, application servers, middleware providers, content providers and back-office systems are guilty of slowing ITV’s progress. Closed systems, integration difficulties and minimal applications are some of the technical issues causing delays. But cable operators are also facing business-related barriers.

The first technical hindrances that folks like to point to are proprietary set-top boxes and a lack of standards. “Until a year ago, the cable industry had no standards, which has slowed the rollout of large-scale investments,” says Convergys’ Champion.

Motorola, Scientific-Atlanta and the other set-top box providers claim their devices have known interfaces that can be easily adapted to ITV services. “A billing system would require few changes to interact with the box for ITV,” says Motorola’s Vernon.

Motorola pushes the blame further upstream, claiming a lack of robust, compelling ITV applications.

Sigma’s Bratulic agrees that ITV software has some catching up to do. “Some boxes are very sophisticated, but cable operators need software that permits advanced services. The developers need to improve picture capabilities and create applications customers are willing to pay for.”

The set-top manufacturers have other defenders as well. Gerard Kunkel, senior vice president of WorldGate, which offers ITV services to MSOs, says that blaming the set-top boxes is a cop-out. “The boxes are finely designed to fit cable networks. They ward off hackers, and they never crash. To work in the cable space, you have to work with these low-resource boxes.”

Even with the boxes’ limitations, Telution’s Steffen has noticed manufacturers responding to the call for openness. “We’re starting to see walls coming down,” he says. “It’s too easy to say the boxes are proprietary.”

Liberate, an ITV middleware provider, is trying to create the interfaces that will bring all the systems together. Charlie Tritschler, vice president of marketing, says working with nonstandard set-top boxes is Liberate’s biggest challenge. “The interfaces for the boxes require a considerable amount of work, much more than any other hooks we have to create. On the content side, people are familiar with HTML, XML and Java, or they have Internet back ends. It’s relatively easy to re-purpose the content for TV.”

Creating interfaces to the content may be technically feasible, but business issues are also slowing ITV. Cable operators are having difficulty getting first rights to content, especially videos. Disney has pulled its content from VOD, and Blockbuster revoked its VOD contract.

To keep from cutting into their rental profits, Hollywood studios may release movies to VOD after they appear in the rental stores. If VOD titles have already been on rental shelves, the offering becomes much less appealing. “Operators don’t want to offer movies that are stale or old, but Hollywood doesn’t want to cannibalize its rental contracts,” says DST’s McKenzie.

Hand in hand with content difficulties are the digital rights to assets. Hollywood and the government are only in the early phase of deciding copyright laws for electronic media. Telution’s Steffen says that settling that controversy will open the content floodgates.

“Digital rights management has been missing,” he says. “Before anyone gives us content, the artists and studios will have to be protected. Once digital rights are integrated with digital assets, the consumers will have more options.”

Billing Bottleneck?

Billing systems also pick up some of the blame for ITV’s delay.

“The cable operator’s billing system requirements are much more complex than we first thought,” says Mitch Askenas, vice president of software engineering at ICTV, which supplies cable operators with systems for interactive TV. “They don’t have a mechanism to meter for usage. They can’t do real-time billing or pass transactions in real time. You can’t offer a commerce perspective without these capabilities.”

In light of the closed systems ICTV has encountered, the company created its own billing system that passes transactions to the operator’s billing system. ICTV collects usage information from subscribers, which is then broken out into peak and off-peak rates. The services are billed in real time, including transactions. This data is aggregated on a monthly basis and e-mailed to the cable operator to enter into its billing system.

For VOD, the systems must acknowledge individual users and their accompanying profiles. These users must also be tied to a master account. This scenario is typically used for families with multiple set-top boxes.

One hurdle is to unbind an account representing multiple users with a single, specific set-top box. If unbound, subscribers are not tied to one location and can order movies at a friend’s house or while on vacation.

DST’s solution to that problem is to create user profiles based on account establishment, and then to track which videos have been ordered and how long the customer had them. The biller also lets cable operators put financial limits on the consumer. “The operator may say the user is only good for $150 each month,” says McKenzie. “Our software can do predictive rating. As goods are purchased, the amount is posted to the account. A prearranged trigger will alert the operator that the subscriber is nearing his limit.”

While DST and its competitors are striving to stay abreast of upcoming ITV services, ITV platform providers want the billers to decrease their development times. “Cable operators with their own custom solutions are in a much better position to make customized changes. If they outsource their billing, they have long waits for change requests,” says WorldGate’s Kunkel. “If I had one piece of advice for billing companies, I would say look at the ITV space and jump on board to help build APIs that will transfer new types of transactions.”

Reality TV

The billing upgrades necessary for VOD pale in comparison to the requirements for commerce TV. There’s talk of allowing consumers to order from a local pizzeria as they order their video, but placing a charge on a credit card or on the cable bill for a purchase is not ready for prime time.

“Commerce TV requires too much integration for the cable operator,” says ICTV’s Askenas. “Their batch-oriented systems that run once a week can’t capture the transactions, and they are not linked to applications in the set-top box. I don’t see it happening in the near term, and I haven’t seen any movement among the operators to deploy the flexible billing systems that people have been talking about for the past few years. They just aren’t coming online.”

Most likely, consumers will make purchases over the TV just as they do over the Internet—with credit cards.

Adding purchases to the cable bill could disrupt consumers’ monthly payment routine, says Kunkel. “Cable operators are not keen on selling products that end up as line items on the cable bill. They are worried that subscribers with unexpected high bills may respond by deleting their premium services.”

Even micropayments, says Liberate’s Tritschler, aren’t destined for the cable bill. “Those billing systems were not designed for micro or multiple transactions. We have to handle the micro transactions through the Liberate platform.”

Although operators seem to be shrinking away from adding purchases to the customer’s bill, they are still grappling with taking some cut of the transaction. Two potential revenue streams would be a cut of 2 percent to 3 percent for each purchase, and a fee—or bounty—for delivering subscribers to a content site or advertiser’s site. Operators are also considering asking a percentage for delivering interactive content.

“We will see multiple players wanting a percentage of the revenue,” says Telution’s Steffen. “Cable already has a simplified partner revenue model, where the operator gets $4 for each HBO subscriber. This model will get much more complex as more partners are added and broken out in usage rules, costing rules and settlement rules.”

“Content settlement is extremely important,” adds Convergys’ Champion. “But as it gets more complicated, it will be an operator’s biggest headache.”

The bounty example would require better tracking capabilities of individual users. “Operators would track users much like you track commerce hits,” says Sherita Ceasar, vice president and general manager for SciCare subscription network services at Scientific-Atlanta. They could use the set-top box to track usage and application servers visited.”

WorldGate tracks a subscriber by identifying the set-top box. It tracks the path of the subscriber, identifies the channels the subscriber has tuned into, records any activity at partner content sites and registers any commerce activity. The operator receives a report of these events every 24 hours. “All these records are necessary for partnership management in the ITV marketplace,” says Kunkel.

In the initial stages of ITV, most operators will employ these business models within a “walled garden.” “MSOs will want to control the subscribers’ entertainment experience and tailor applications,” says Scientific-Atlanta’s Ceasar. “If subscribers cross the wall, there’s no guarantee that they will return to MSO.”

In a walled-garden model, ITV subscribers would only be able to access content from a closed set of providers who are partners with the operator, much like AOL. Using this approach will make it considerably easier for operators to track subscribers’ activity and cut deals with partners for a percentage of the transactions.

Sigma’s Bratulic describes the subscriber’s experience within the walled garden approach: “When they turn on the TV, they will have an option of getting weather forecasts, stock information, e-mail and an electronic guide with their favorite shows’ times and channels pushed to them by TV Guide. Operators will make deals with content providers and retail providers and be able to claim a piece of all the content they serve and all the transactions made within their walls.”

Holding subscribers within the garden may be reasonable in the early stages, but the model eventually will have to be opened. “Operators will have to move beyond the walled garden. At some point operators will want a cut with every purchase made through their pipe,” says DST’s McKenzie. “They will have to negotiate an interconnection agreement with every commerce provider out there and create multiple wholesale-retail relationships.”

Architecture Assets

Just as cable operators are struggling to devise a successful business model for their ITV offerings, the operations folks are debating possible architectures. A centralized architecture has the majority of support because it gives the operators more control while easing maintenance and application support needs.

A drawback to that approach, though, is the need for a strong backbone. “Operators can’t afford for subscribers to experience latency. People don’t want to sit and wait for content or to make purchases,” says DST’s McKenzie.

Aside from the backbone requirements, most industry watchers see centralization as the best tactic. “Our customers have been very open to the centralized approach because it provides more flexibility and the rapid delivery of applications,” says Scientific Atlanta’s Ceasar. “Centralization can guarantee responsiveness, utilization and accuracy of an application.”

Increased security is another advantage. If purchases are made over cable networks, Liberate expects that consumers will want the transactions processed as close to the operator as possible.

“Commerce TV would use commerce servers just like over the Internet. People will want the transaction to occur in the head end and be based on open Internet standards, such as SSL and 128-bit encryption,” says Tritschler. “While this type of security is possible in a distributed or centralized environment, a centralized architecture improves subscribers’ perception of security.”

And lastly, a centralized architecture allows the operators to understand subscriber behavior.

“Operators have an amazing amount of customer information,” says Sigma’s Bratulic. “They know what the subscriber is watching, how many TV sets are in the home, and which family member is in front of the TV. This information would be especially useful for direct advertising.”

The ability to gather this type of information could cause privacy concerns. Lawmakers have been busy protecting consumers from companies that misuse customer information, and they are imposing stiff penalties for proven misconduct. For cable operators to stay within privacy guidelines, WorldGate’s Kunkel suggests that they use tools that never personally identify a consumer’s actions.

“You must have a separation of personal identity and usage. Cable operators are prohibited from disseminating consumer information, so tracking must never be personally identifiable.”

Consumers are also concerned that profiling could increase the amount of junk mail they receive or that an adult video purchase could be tracked. “It’s technically possible to do that type of tracking, but we have built-in safeguards to keep that type of profiling from happening,” says Kunkel.

Mixed Metaphor

The marketing folks are trying to promote ITV as potential new revenue that cable operators shouldn’t ignore. A favorite argument is that with ReplayTV, Tivo and the like, which allow consumers to record and store video, subscribers will quickly fast-forward through commercials. “Once the viewer can skip commercials, the broadcast revenue model goes away,” says Bratulic. “Cable operators and the broadcast media must create new revenue by blending TV with commerce.”

AT&T Broadband never actually receives advertising revenue from commercials, but Bratulic has pointed out how ITV services could disturb established business models. If the cable operator can introduce commerce to TV, any number of new business models could arise. Unfortunately, the tighter economy, combined with the sector’s growing aversion to propositions that are not a “sure thing,” may limit new ITV ventures.

E-commerce’s earlier golden touch is now poisonous, and convincing investors to support commerce TV will no doubt be difficult. Naysayers regard a complete melding of TV and the Internet as unlikely. The public has set TV habits that are traditionally not interactive, and their Internet activities are completely different. “When I want to do something like search for a house mortgage, I use the Internet, and I lean forward,” Telution’s Steffen explains. “When I want to be entertained, I watch TV, and I lean back. These are two opposing interactions. The two mediums have grown up in their own silo—one for entertainment, and one for information. Most people haven’t had a good experience when companies attempt to bring the TV and the Internet together.”

Looking past the concerns for ITV, a handful of regional operators have moved from the test phase and are offering ITV services. VOD, ReplayTV, customized programming requests and commerce TV are available now. In the October issue of Billing World and OSS Today, operators will describe the challenges they faced deploying ITV and the demands of preparing their billing systems for a new set of services.