Changing Channels

Interactive TV may outshine the Net for e-commerce stardom

At a time when many businesses are just beginning to recognize the need for coordinated online strategies throughout the enterprise, the rules of the game are about to change. The Internet revolution is moving to television, forcing companies to adopt interactive strategies for a medium that for the first time merges advertising, entertainment and electronic commerce into a single platform.

With new projections of a huge boom in interactive TV (iTV) over the next few years, major Internet players and Fortune 1000 companies alike are being forced to rethink their interactive marketing and advertising strategies, and a small vanguard are already redesigning and retooling their Web sites to adapt to this new e-commerce tool.

Among these pioneers are two automakers — Ford Motor and Volvo Cars of North America.

"This isnt about throwing dollars at a new medium just for the sake of being in the space," said Phil Bienert, manager of e-business at Volvo, which unveiled its iTV campaign with this months sponsorship of The Road to the Final Four National Collegiate Athletic Association basketball championship. "Its about going to the places where our customers are, testing how they react to this integrated approach and leveraging the learning to communicate better with them."

In contrast to the freewheeling Internet, however, this new interactive arena is being built around the concept of "walled gardens," pay-to-play marketplaces that control an audiences access to content, much like the America Online model. The goal is to keep the viewer on your channel and/or your sponsors Web site, away from the boundless Internet flea market where rival merchants abound.

"We believe you can have a much better experience in a walled garden," said Antoine Boucher, vice president of engineering at iTV pioneer Liberate Technologies.

In its simplest terms, a walled garden might be the first screen you see when you turn on your TV. From there, navigation is highly controlled and destinations are largely limited to paying partners. Log on to AOL on your personal computer, and you are confronted by a collection of partners that paid their way to the home page. The price of admission for bookseller was $40 million for four years. First USA paid $500 million for five years. Certainly, you can leap AOLs hedgerow to rival merchants on the World Wide Web, but few ever really do.

"Eighty-five percent of AOLs users dont ever leave AOL," said Ranjit Sahota, CEO of MetaTV, a Sausalito, Calif., company that builds portals and walled gardens for cable operators.

While few online portals can match the value of AOLs exclusivity, the model demonstrates how effective a walled garden can be. And many believe the time is ripe for companies to make the deals necessary to move at least a portion of their e-commerce platforms to this next level.

"Advertisers are now understanding what the value is," said Scott Newnam, president of GoldPocket Interactive, an upstart iTV innovator that last month won a $5 million investment from AOL Time Warner.

"I think historically advertisers didnt know how to get involved in the Internet," Newman said. "There was a lot of buzz about one-to-one marketing, but a lot of people didnt really understand what it meant. I think thats changing pretty dramatically."

Indeed, the numbers coming from top research firms look promising for iTV and, by extension, for the walled garden model in the form of TV portals.

Gartner Group predicts TV portals will generate $4 billion in revenue by 2004 from advertising, subscriptions and commissions on TV commerce sales. Sales of goods and services alone will account for $10.7 million, said Mark Snowden, senior analyst for Gartners e-business services.

"As two-way digital cable plant upgrades continue, as services are introduced in more areas and as TV viewers become more accustomed to interacting with their TV, we expect TV portal revenue will double the 2004 level by2007," Snowden said. "The business relationships with all of the contributors can range from licensing deals to outright ownership. The TV portal itself can be an initiative on the part of each cable system operator, or it could be a separate business entity."

Jupiter Media Metrix predicts that households signed up for iTV services will grow at an annual rate of 83 percent through 2005. By next year, 17 percent of U.S. TV viewers are expected to adopt iTV services, a threshold that indicates a new technology has reached critical mass, said Jupiter analyst Lydia Loizides.

The good news in a technology downturn is that cable has proven virtually recessionproof. While homeowners may shed their extra telephone lines, they are loathe to sever their entertainment lifelines. Thats why Wall Street has exempted cable companies from the recent round of high-tech torment. Comcast, for example, hit its 52-week high when most tech stocks were underwater.

Forging Alliances

While many advertisers on the internet carried unfamiliar names preceded by "e-" or followed by "dot-com," those that pay the freight for iTV will be mainstream corporations — General Electric, General Motors, Procter & Gamble and Sony.

And the commerce engines will be built on concepts with which consumers are already familiar and comfortable. The heart of Volvos campaign, for example, was a contest to win an S60 sedan. Anyone checking scores during the basketball tournament saw a Volvo ad with a chance to enter the sweepstakes. Viewers with iTV could click through the contest entry during the commercial, a process that served two purposes: keeping the viewer on the TV screen during the commercial, and measuring interest in the new sedan.

"The smart thing we have about the relationship with Volvo is were learning as were going," said Arthur Ceria, interactive creative director at Messner Vetere Berger McNamee Schmetterer-Fuel.

Developing successful iTV campaigns is as crucial for ad agencies as it is for their clients, because as the Internet invades TV, viewers will be able to dodge ads as never before. Devices like the personal video recorder already enable viewers to scoot past ads or read e-mail during commercials.

"The result," said Josh Bernoff, principal analyst at Forrester Research, is "a 30 percent decline in viewing of commercials, leading to the loss of $18 billion in traditional ad revenue."

Bernoff said that trend makes the time ripe to develop two-way deals that merge TV and e-commerce. Adding enhancements to advertising now can cost as little as $500, he said. By the end of the year, Bernoff predicted, 4 million people will be able to interact with programs and commercials, obviously driving up costs.

"Any company spending $10 million or more on TV advertising should invest now in building interactivity, turning impression-based ads into lead generators," he said. "Interactivity will cost far less per lead than telemarketing or direct mail.

"The average household watches TV 50 hours a week, seven times the duration of typical Internet usage," Bernoff said. "Interactive TV could dwarf the Net as a response-based medium."

Consumer Concerns

The pervasiveness of TV — the fact that homes without telephones often have TVs — has led world leaders such as U.N. Secretary-General Kofi Annan to promote iTV as a bridge over the digital divide. But few of the companies pouring money into the medium see their efforts as missionary work.

For AOL Time Warner, the worlds largest entertainment company, the promise of blending of TV and the Internet was a major driver of the AOL and Time Warner merger.

"Its important to be flexible and open-minded about how value chains might migrate," AOL Chairman Steve Case said recently. "And if youre in all parts of the value chain, you have the flexibility to be more aggressive than if youre trying to protect a particular way of doing things."

AOL Time Warners large stake in that value chain almost derailed its merger, with the European Commission looking askance at the synergy.

"The more content AOL acquires and the bigger its community of users," the commission wrote, "the less reasons for a subscriber to abandon AOLs walled garden and the more reasons for potential Internet users to join AOL."

In the U.S., consumer groups share those fears and are trying to tear down the walled gardens before they can even be built.

"One of the great triumphs of the Internet has beento create an unprecedented forum that accurately represents the ideas, creations and concerns of the public," said Andy Goldman, policy associate at the Center for Media Education. "It is imperative that we reserve a significant portion of the new interactive technology for the kinds of civic content that have been given the opportunity to develop on the Web."

Goldmans comments came in a filing to the Federal Communications Commission, which is considering rules that would force open access to iTV. Consumer groups fear that commercial interests — the components of the walled garden — will maintain the same stranglehold they now have on TV.

While the FCC under its new chairman, Michael Powell, appears reluctant to interfere with market forces, iTV players must still hedge their bets until the FCC announces the house rules.

"Merely by sending a signal that nascent technologies and services are in its sights as possible candidates for regulation, the [FCC] has lowered a dragnet over this emerging but struggling new industry," the National Cable Television Association told the commission.

Meanwhile, other groups are concerned about iTVs ability to gather information on the audience and feed that data to advertisers. The Denver-based Privacy Foundation issued a recent report that personal video recorder manufacturer TiVo can collect data on viewers channel choices, a claim TiVo disputes.

Promises vs. Risks

Little doubt remains, however, that the real promise of iTV is the ability to stream ads and communicate to markets the size of a single household. Through its SpotOn product, ACTV touts its ability to target customers based on readily accessible demographic data.

"If youre Procter & Gamble and you sell Pampers, it doesnt make any sense to send Pampers commercials to a household of 60-year-olds or Fixodent to a household of 25-year-olds," said ACTV President David Reese.

But that raises another touchy issue — security, or the perception thereof. While interactive players tout the "virtual wallet" as a convenient repository for your credit-card information that allows viewers to make purchases with a simple click of their remote control, consumers may hesitate to create an iTV file for that information, firewall or no.

The virtual wallets appeal goes to the heart of the walled garden — the TV viewers desire for instant gratification. If British Airways offers $200 round-trip fares to London, you dont want to waste time calling reservations or your travel agent if you can click your way to London from your La-Z-Boy.

While the TV experience may be "lean-back" compared to the PCs "lean-in" ambience, emotions and impulse purchases are much more likely on TV, experts say. The comparison shopping that has driven online prices into the ground is not expected to occur on TV, especially in a walled garden.

For all the players, the most important question is: Who owns the viewer? Currently, theres only one answer, Jupiters Loizides said: the cable operator. But that will change gradually, as the disparate array of programmers and advertisers maneuver for critical mass, she said.

As that scenario plays out, Gemstar-TV Guide International, the dominant creator of interactive programming guides for multichannel TV and iTV, expects to reap a windfall among overstimulated audiences everywhere.

"Were not one of 5 million Web sites; were not one of 300 TV channels," said Peter C. Boylan III, co-president of Gemstar-TV Guide. "Were the checkout counter at the grocery store where everyone has to go."

Others maneuvering for the inside lane in iTV include MetaTV, a company housed in a former elementary school where Gumby was once filmed.

In creating an iTV ad campaign for Ford, MetaTV dressed up the Web site for prime time, enlarging the type, changing the color scheme and improving the graphic appeal.

"We have prebuilt 90 percent of what you need to build a walled garden," MetaTVs Sahota said. "And we built it using enabling technology rather than new service."

At [email protected], the cable modem Internet service provider for AT&T Broadband, executives are translating the Web sites for iTV amid high interest from Fortune 500 companies, said Susan Bratton, [email protected] senior vice president for advertising.

"We have a good idea of what Web technologies work on the PC and what the limitations of those technologies are," Bratton said. "But we have a major advantage in that we have already used the kind of media that can only run on high-speed broadband, the streaming video and audio."

But dont count traditional ad shops like J. Walter Thompson out either. The Detroit office of the venerable agency is teaming with MetaTV to create cutting-edge iTV ads for Ford, one of its major clients.

"All of the forms of communication are leading into one gate," said Sara Hall, emerging media strategist at J. Walter Thompson. "It is definitely something that requires a lot of education. But even though were an old agency, I dont think we have to rethink everything when a new technology comes around."