Potential of interactive TV is great, despite slow start

AOL is likely to become a major player in industry


Dollars & Sense

January 23, 2000|By George Nichols | George Nichols,MORNINGSTAR.COM

The promise of interactive television has been heralded for many years but has yet to live up to the hype. Nonetheless, investors have boosted the stock of interactive TV companies in the past several months, believing that the convergence of television and the Internet is finally materializing.

Even though the full benefits of interactive TV may not reach consumers for many years, the merger of media giants America Online and Time Warner has given the infant industry a shot in the arm.

So what's this interactive TV hubbub about? Investors believe that video-on-demand and especially personal video recording systems will develop into lucrative markets.

There is some meat behind these beliefs.

Forrester Research forecasts that the video-on-demand industry will generate more than $3 billion in revenue by 2005, accounting for 15 percent of video-rental sales. Other forecasts by the market research firm project that interactive TV services will generate $20 billion in sales from commerce, subscriptions and marketing by 2004.

Personal video recording systems are starting to sell briskly. TiVo sold about 25,000 units last year, and most of those sales were late in the year.

Also, the phone and cable companies have been building the broadband infrastructure necessary to support video-on-demand technology. Old media companies -- several of which have large stakes in personal video-recording companies -- are also jostling for a piece of this burgeoning market, underscored by a flurry of recent deals with technology companies pioneering this market.

Among these companies, AOL is very likely to be a major player when the interactive TV world comes of age. Chances are good you've already seen Steve Case's face plastered across TV channels in the wake of the company's merger with Time Warner. Chances are also good that the same idiot box will be the gateway to a vast AOL-Time Warner multimedia empire in the not-too-distant future.

Well aware of interactive TV's potential, AOL introduced its AOLTV service at the recent Consumer Electronics Show in Las Vegas, and it plans to market it this year. Using a television and set-top box, users will be able to surf the Internet while watching television.

Expanding into TV land is a shrewd move by AOL, because one of the company's biggest competitors, Microsoft, has a head start with its WebTV service.

Despite the rapid growth in Internet users, most Americans still spend a lot more time glued to the boob tube than surfing the Net. According to Nielsen Media, U.S. households watched television for an average of seven hours and 15 minutes daily in 1998. Internet companies are realizing that it's easier to bring the Internet to the TV than it is to pull people from the TV to their computer.

As a two-way digital broadband infrastructure is built out across the nation, more homes will be able to use interactive TV services, and AOL stands to be among the greatest beneficiaries.

Time Warner's high-speed cable network already penetrates 13 million households. Of those, 420,000 subscribed to its Road Runner high-speed cable service by the end of September 1999, with 100,000 of those subscribers added in that quarter alone.

This is also great news for other interactive television companies as AOL speeds up market development by making it easy for its 20 million subscribers and new Road Runner customers to surf the Net via television.

In fact, the stock of TiVo has piggybacked onto AOL's foray into this market, shooting up nearly 50 percent after the AOL-Time Warner announcement.

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