Interactive TV – Its Real Value to MSOs

Michael Fisher, Consulting Analyst, Advanced Digital Media Services

Interactive TV (iTV), despite its storied past, is back in the news again and in a very big way. Time Warner Cable’s recent deal with BIAP systems is just the latest in a string of noteworthy developments. The service, which allows users to play football fantasy and use eBay from an existing set-top box, was initially available in eight of Time Warner Cable’s divisions, will now roll out in the remaining divisions across the country.

Much has been written about the promise of iTV, but sadly too little of that promise has been realized by actual customers. Ever since QUBE, the then-Warner-Amex cable system in Columbus, Ohio , launched the country’s first “interactive” two-way cable plant in the late 70’s, vendors, operators, programmers and advertisers alike have dreamed of delivering interactivity. However while the promise has certainly been compelling, little has been delivered on a mass scale. And Wall Street has noticed, punishing iTV solutions vendors.

So why is iTV making noise again? For one, DBS continues to keep the pressure on. DirecTV just last year launched DirecTV Active which allows to customers the ability to choose between multiple camera angles during live events. As well, Dish Network has launched an interactive shopping channel and Dish Games, which allows subscribers to choose from a number of games to be played right from the company’s set-top box. Despite having a less robust return-path (upstream) signal than cable, DBS interactive deployments are uniform across their footprint. Unlike MSOs who are saddled with legacy systems and whose networks and technologies can vary, DBS providers can more easily deploy a new platform, application, or service across all of their interactive customers.

The telcos, especially those who use fiber-to-the-home architecture, have already signaled they are going to leverage the two-way power of their networks to create a richer customer experience. Verizon, for one, has announced plans to launch what it calls ‘TV Widgets’ which allow subscribers to view local weather and traffic information on demand. Though limited in scale (the service will use customer-entered zip-code information to target the info), it will help consumers become more familiar with interactive TV features and thereby help position Verizon’s network as more ‘advanced’ than its competitors. And, like DBS, telco networks are unencumbered by legacy or differing technologies. Verizon’s FTTH effort is fundamentally the same across most of its footprint, meaning that interactive TV is going to get more robust and expansive as PayTV providers look to differentiate themselves from one another.

So why is this particularly relevant? Does the customer really want interactive TV? There has been plenty of research suggesting that interactive TV is not high on the list of consumer ‘must-haves’. As TDG has noted in prior research, there just isn’t strong demand for iTV services among U.S. consumers. Despite this fact, there are a number of iTV success stories that can be identified, most notably in Europe .

For example, BSkyB, Rupert Murdoch’s U.K. satellite service, launched its interactive platform in 1999. Sky’s Interactive uses British Telecom’s (BT’s) twisted-pair telephone lines for its return-path, yet delivers advanced services including games, voting, shopping, and betting. Revenue from the service was accretive, though it rapidly grew to equal Sky’s own ad sales business. Assuming an interactive TV service offered by US cable operators could deliver the same appeal as Sky to its roughly 31 million digital subscribers, MSOs could see incremental revenue in excess of a billion dollars annually.

But direct revenue per subscriber may not be the true measure of iTV; it’s not necessarily about what iTV contributes directly to the bottom line. It may be more about what a fully-functioning, integrated and robust iTV application platform enables: targeted, interactive advertising. The promise of iTV advertising combines the compelling nature of television content with the targeting and measurability of the Internet.

Delivering relevant ads to customers and allowing advertisers to track results are key ingredients to advertising’s success on the web. And while today’s network broadcast ad revenues are flat to declining, Merrill Lynch recent reported that Internet advertising is expanding at more than 30% a year. In the BSkyB experience, where iTV applications and targeting were used, the satellite provider was able to charge a 20% premium to normal spot advertising rates, plus a click-through fee.

No longer a pipe dream, interactive TV and advertising are both within reach. Thanks to the convergence of IP and legacy technologies, switched digital video, and new VOD ad-insertion technologies, both of these formerly ‘advanced’ media technologies are ready for prime-time. MSOs are already experimenting with a variety of interactive solutions to determine which solution is best for each individual MSO (and for each individual market).

So what’s next for cable-delivered interactive TV? There are two areas on which operators should focus: consumer electronics and advertisers. Operators will soon begin deploying next generation set-top boxes that are based on Cable Labs’ OCAP spec, a Java-based standard. Leveraging an open-sourced language like Java will allow developers from across gaming, CE, and entertainment all to create content and applications for cable operators on a single, unified standard. This will enable cable operators and their applications to be more consumer-driven, thus delivering an improved experience to the consumer and (hopefully) less churn for the cable operator.

But this is just the start for today’s cable operator. Next steps should include partnering and collaborating with advertisers, marketers, and agencies on how to make interactive TV work for everyone. Allowing these key strategic partners into the fold early on will help drive awareness of cable’s potential, adoption of its standards, and ultimately help the operators build features and functionality into platforms that advertisers want, thus delivering value to the market.

The promise of iTV improves cable’s value proposition to two key constituencies: subscribers and advertisers. Given cable’s position as the incumbent provider in the PayTV space, as well as its experience in programming and its vertical and horizontal integration, the industry is well positioned to lead the coming interactive TV revolution.

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