COLUMN ONE : Betting on a High-Tech Jackpot : NBC and TCI are among media giants bankrolling a controversial entrepreneur whose interactive TV idea may lead to a big payday. But is playing Lotto at home what the information highway is all about?

The information highway is paved with good intentions. Interactive television, its promoters say, will allow users to shop and bank at home, earn college credits or obtain medical treatment.

But the big payday for interactive television may be in helping viewers hit the jackpot--literally. If proponents have their way, the family TV will turn into a living room slot machine, with the information highway leading to Las Vegas rather than the Global Village.

Giant media corporations, including Tele-Communications Inc. and NBC, are maneuvering to reap a multibillion-dollar windfall by backing a company that would pump off-track betting and the lottery into every one of the country’s 93 million TV homes.

Just as intriguing as the media giants’ ambitions is the man they’ve selected as their pathway into American homes. TCI and NBC, along with Sprint and Motorola, are bankrolling a little-known entrepreneur named David Lockton who has spent $120 million over the last eight years trying to get an interactive TV system off the ground.

Along the way, Lockton has been accused in lawsuits of staking a false claim to a patent, stealing trade secrets and betraying business partners. Lockton denies the charges and claims that he’s been the one maligned by jealous rivals. To date, he has prevailed at every turn--except in enlisting customers for the game system touted by his San Jose-based firm, Interactive Network Inc.

What’s at stake? Lockton says the company is poised to become “the toll booth on the information highway.” Detractors are skeptical of such boasts, but his backers believe Interactive Network represents the best possible technology until fully interactive TV is available early in the next century.

That confidence rests on the prospects for an obscure, relatively simple patent that, if Lockton and his investors are right, may be more valuable than the billions of dollars being poured into the hard wiring, computer software and programming innovations normally associated with the electronic communications revolution.

The patent--which Lockton claims he co-developed but a former partner has alleged he stole--allows for the simultaneous transmission of interactive games among millions of players. Interactive Network says it has a five-year lead over any competitor; its system, the firm says, can accommodate 50 million users compared to the 10,000 limit under current cable and telephone company technology.

A U.S. District Court in San Francisco upheld Interactive Network’s claim to the patent last year. The case is on appeal.

A nation playing Lotto and Keno in the comfort of its living rooms may not be what Vice President Al Gore and lawmakers envision when they dream about the information highway. And a maze of state and federal regulations blocks the immediate spread of cyberspace gambling.

But some technology pioneers are betting that gaming will turn out to be the “killer application” consumers really want. With barriers to gambling rapidly tumbling, interactive TV--originally conceived as the ultimate yuppie technology--may end up catering to Joe Six-Pack instead.

Media analyst Paul Kagan, a longtime investor in Interactive Network, says the company has developed a fail-safe technology that prevents users “from scamming the system,” one of the biggest worries when millions of players are registering their answers simultaneously.

One day, Kagan foresees, people will be able to compete for prizes anywhere--in their cars, at bus stops, at the corner 7-Eleven, in stadiums and, most crucially, at home. Interactive Network’s system will be the gaming connection of choice. He predicts: “This is the ultimate off-track betting device.”

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Few have ridden the interactive bandwagon better than Lockton, whose two-way TV system lets viewers try to predict plays in sports programs or match wits with game shows.

Lockton, a onetime sports lawyer who represented O.J. Simpson and Evel Knievel and helped launch the Ontario Motor Speedway in the 1960s, has anointed himself as a leading advocate for the emerging interactive TV business.

He recruited the industry’s premiere futurists, including Nicholas Negroponte of the MIT Media Lab, Apple Computer senior scientist Alan Kay and pollster Robert Teeter, to sit on a company advisory board. He’s a regular on the trade show and interactive conference circuit.

Yet while it has been widely anticipated for more than a decade, interactive television is still an industry waiting to lift off the launching pad.

Media leaders such as TCI and Time Warner have tested it only in small trials; phone companies such as Bell Atlantic and US West are still years--perhaps decades--away from wide-scale rollouts of interactive services. The only major tests--including the QUBE experiment in Columbus, Ohio, in the 1980s and GTE’s five-year trial in Cerritos, for the most part were regarded by industry observers as costly duds.

To skeptics, Lockton’s Interactive Network is further proof that the market for interactive television may be much smaller and less lucrative than many have supposed. The company, which once projected that it would have 4.8 million users by 1993, has only 5,000 customers playing along with game shows and predicting sports plays. Using the company’s system, subscribers can interact with more than 40 programs, including “The Price is Right,” “Jeopardy,” “Murder, She Wrote” and NFL football.

Indeed, if new research bears out, consumers may be less interested in touted interactive wonders like movies-on-demand and sports programs and more eager for such run-of-the-mill services as phone lists, electronic mail and tailored news reports. A recent poll by Lou Harris & Associates on behalf of the journal Privacy & American Business found that only 40% of consumers surveyed want to engage in interactive entertainment.

Lockton, however, is an unrepentant believer in the value of his product and its consumer appeal.

“There is a great big pot of gold for the one company that sets the broadcast communications protocol for simulcast, ‘play along,’ TV programming services,” he predicts.

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That kind of upbeat rhetoric has helped Lockton keep Interactive Network alive when other companies long ago would have folded. In the seven years after he founded the firm, Lockton raised more than $80 million, mostly from stock sales and cash infusions from TCI and NBC. Recently, those corporate backers--along with two other telecommunications titans, Motorola and Sprint--pledged $42 million more.

Since it began selling stock to the public in 1991, though, Interactive Network has generated only $2 million in revenues. The company has lurched from one cash injection to another, by its own acknowledgment often on the brink of bankruptcy before another bailout from its partners. Lockton owns 5% of the firm and has options on another 2% to 3%.

Although he has been at war with stock traders who have pounded down Interactive Network’s share price, Lockton has demonstrated a deft touch when it comes to keeping his biggest investors on board.

While one reason they stick with him is the technological promise of the firm’s system--and the prospect, down the road, of a home-gambling gold mine--another may be Lockton’s well-honed salesmanship. Watching Lockton is “like watching a revivalist . . . “ says Ron Kuhl, a former executive at the Young & Rubicam ad agency who worked on the Interactive Network account. “He was promising interactivity years in advance of everybody.”

In September, after years of failing to meet marketing and financial targets, the company again delayed a national rollout of its interactive TV service, laid off 17% of its 275-member staff and, at the urging of its backers, shifted strategy to deliver its product through cable TV. Up to now, subscribers have used a laptop keyboard with a small screen that displays questions or other information needed to play along.

Observers attribute the shift to the influence of TCI, which believes that viewers want to interact with TV “on the screen” rather than having to awkwardly look back and forth from a hand-held unit to the set. The Denver-based cable TV company has invested close to $30 million in Interactive Network.

The change in plans also triggered the resignation of Peter S. Sealey, a highly regarded former marketing executive from Coca-Cola and Columbia Pictures who was brought in as president to jump-start the company’s national rollout. With the marketing campaign delayed at least another year, Sealey says: “I would not be needed there.” The company has no current plans to name a successor.

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The son of a businessman who later fell on hard times--his father once owned the company that made the popular after-shave West Indies Bay Rum--Lockton grew up in Indianapolis, attended boarding school at Lawrenceville, N.J., and graduated from Yale University and the University of Virginia Law School.

“The genetics of risk-taking are overpowering,” says Lockton, 57, explaining the impulse behind his participation in 14 companies over the course of his entrepreneurial career. His heroes, he says, are his father and Bobby Knight, the ill-tempered basketball coach at Indiana University. “For all his warts,” he says of Knight, “I like what he stands for.”

Lockton returned to Indianapolis to practice law. The firm he worked for represented the Indianapolis Motor Speedway, and Lockton fell in with the auto racing crowd, where he palled around with celebrities.

His interest in motor sports led Lockton to the Ontario Motor Speedway, which he helped raise $25.5 million to build in 1968.

Lockton was president of the company that operated the track for two years. The first race at Ontario drew record crowds, but the speedway quickly ran into financial trouble and closed in 1980. Lockton says the problems occurred after he resigned and were not because of his management.

Motor racing also was what brought Lockton to interactive television. Always scouting for new ideas, he had been looking for ways to automate a scoring and timing system for a “$1-a-lap” mini-race car business he owned.

The solution came by accident.

At a Long Beach Grand Prix in the late 1970s he ran into Anthony Fascenda and others from a little Burlingame, Calif., firm called Dataspeed Timing. The men were clocking cars with radio devices as they buzzed around the track.

That meeting drew Lockton into Dataspeed--and, eventually, into the lengthy, bitter, legal brawl that left Interactive Network with the patent on which its business is based today.

Because of his contacts on Wall Street and ability to raise financing, Lockton became Dataspeed’s chief executive, running the company from 1980 to 1985.

It was at Dataspeed in the early 1980s that Lockton met brothers Patrick and Dan Downs, owners of Carlsbad, Calif.-based NTN Communications.

NTN had developed an interactive TV sports game called QB-1 that was played mostly in bars. And the brothers sought out Dataspeed for help solving certain “communications problems” with QB-1, as Fascenda described it in a June, 1992, letter to Dan Downs relating events that occurred years earlier.

Dataspeed had developed a device of its own, the QuoTrek, that delivered stock market information over the FM radio band. But “when (NTN) presented QB-1, I was very impressed with the concept, as was Lockton,” Fascenda recalled in a deposition. He and Lockton “had no concept of anything like that,” Fascenda said, adding that he was “astonished” when Lockton later wrote NTN that they “had discussed and invented such a game concept prior to (the Downs’) visits to Dataspeed. This was simply untrue.”

Lockton remembers the events quite differently. He maintains that Fascenda was not present at meetings with other Dataspeed staffers in the early 1980s when Lockton “laid out the concept” for a similar interactive technology.

Indeed, Dataspeed sought a patent on its technology. And when the foundering firm was sold to Lotus Development Corp. in 1985 for $6.5 million, Lockton bought the pending patent himself--for $1--and used the technology to launch Interactive Network.

He was granted the patent the next year--”an extremely happy day in my life,” Lockton later recalled. In a deposition, he testified that he flew to Carlsbad to celebrate with the Downs brothers. They “met me with open arms--took me out to dinner,” he said.

But the next thing Lockton knew, the Downs brothers sued him, alleging that Lockton stole the concept for his interactive TV system from NTN. Fascenda supported their assertion, testifying that Lockton falsely claimed on the patent application that he was the co-inventor.

NTN and Lockton reached an out-of-court settlement in 1987, with the Downs brothers stipulating that they had infringed the patent themselves and that Interactive Network’s two-way technology had been developed before and independent of their own.

But NTN revived the litigation in 1992, claiming that QB-1 did not infringe the patent after all. A year later, U.S. District Judge D. Lowell Jensen in San Francisco ruled in favor of Lockton and Interactive Network.

Regarding NTN’s claim that the patent was invalid because Lockton wrongfully named himself as a co-inventor, Jensen ruled that NTN “has failed to bring forth sufficient evidence to establish genuine issues of material facts in dispute.” Rather than giving the Downs’ claims a fresh review, Jensen relied on their earlier stipulation.

What about Fascenda’s deposition? “He lied,” Lockton insists today, though Fascenda stands by his account.

Despite the court outcome, Lockton’s actions continue to rankle some of Dataspeed’s former principals. Lockton “walked away with one of the patents from Dataspeed,” claims Jim Ellis, a former Dataspeed shareholder. “He told Lotus it was worthless. Then he sold the rights to start Interactive Network. You give him enough rope and he’ll hang himself one day.”

Lockton says he tried to get Lotus to pursue the technology, but that the company “was not interested in entertainment applications.”

Great business empires have been founded on far less sturdy footings. And home gambling has only begun to be recognized over the last year or two as Interactive Network’s potential trump card. But Lockton’s ambitions for the firm’s game system consistently have outstripped its performance.

In an offering memorandum prepared by Kidder Peabody & Co. in 1988 to raise capital through the sale of convertible stock, Interactive Network said that five years after launch it would have 4.8 million “active subscribers” and would have sold 6.5 million units.

The firm “conservatively” projected that 29 million users ages 18 to 54 with incomes of more than $40,000 were “very likely” for the company’s sports programs and game shows. (By comparison, the most popular pay cable network, HBO, has 18 million subscribers.) Interactive Network projected pretax earnings of $344 million by 1993.

Twelve months later, the firm had dramatically scaled back its growth projections. According to presentation materials from a September, 1989, board meeting, the company hoped to sell 5,000 control units by June, 1990, including 4,200 in Los Angeles and San Diego.

Yet by June, 1992, Lockton’s expectations had soared again. He proclaimed that “40% of American homes will have this device by the year 2000.”

“Dave wanted to make sure investors wanted to invest,” said Kevin Randolph, who headed marketing at Interactive Network until 1991, when he parted ways with Lockton over strategy. “To some extent you say what people want to hear. They wanted to hear this would be a big business soon.”

Instead, Lockton ran into a brick wall of indifference. While the so-called “early adopters”--the users who quickly gobble up any new technology--initially responded, securing long-term customers has proved much tougher.

Anticipating robust sales, Interactive Network ordered 50,000 control units at a cost of about $270 apiece. About 5,000 were disbursed to customers and another 4,000 were given away, but about 41,000 units still are stored in a Mountain View, Calif., warehouse.

Lockton concluded he had no choice but to go into the “hardware business,” because he had to establish the platform on which interactive games would be played. In addition, one former executive said, Lockton wanted the “large upfront revenue” that sales of the control units could generate.

But since the units were sold at a loss, Interactive Network never made money on them.

Lockton now says the barrier to acceptance was forcing customers to spend roughly $200 for a control unit and then charging another $15 a month as a subscription fee, with the charges increasing for extra play of certain games.

Now, Lockton says, Interactive Network has adopted a “service model” that builds the cost of the control unit into a $20 monthly subscription fee. In essence, Interactive Network has decided to style itself after cable TV, which embeds the cost of set-top decoder boxes into the monthly subscription charge.

TCI and NBC view Interactive Network’s technology as an “interim step” until upgraded cable and telephone lines can deliver the full range of interactive services around the year 2000. “Interactivity is going to be incremental, with game shows and sports leading the way,” says Tom Rogers, an NBC executive vice president. Interactive Network, he says, will establish a customer base “before the world goes digital.”

Kagan expects Interactive Network will need another $100 million before it builds a business beyond a few thousand customers. That--and broader acceptance of the “killer application”: gambling.

TCI and NBC don’t advertise their long-term interest in the gaming business, although they occasionally have hinted where they think the big potential rests.

TCI Chief Executive John C. Malone, speaking at industry trade shows, has made no secret of his belief that the big winners for interactive television will be “games of skill for prizes” and “near-gambling”; laws, not technology, are the only barrier to full-scale gambling, he has observed.

NBC’s Rogers, while acknowledging that Interactive Network’s technology is applicable to lotteries and off-track betting, says the priority is to design a “prize system” that makes playing along with game shows rewarding and compelling.

But Lockton, the inveterate promoter, feels no compunction about disclosing his ambitions. He may finally have found his customer.

“The biggest surprise to me in the changing morals of our country over the last five years has been the collapse in the resistance to gambling,” Lockton says. “I may personally deplore it, but I’m running a public company here.”

How Interactive Network Operates

San Jose-based Interactive Network sells a system that lets TV viewers at home play along with sporting events, game shows and other television programs. Backed by media giants, the company for now has only about 5,000 subscribers. But it has big plans--including hopes for bringing gambling into the home. Here’s how its system works:

1. Local TV stations and cable systems broadcast programming.

2. Interactive Network producers in San Jose view local telecasts, enter “lock-outs” that prevent cheating, insert game calls (“Will the quarterback pass or hand off the ball?”) and other statistical information instantaneously, as the game or other programming unfolds.

3. This play-along information is transmitted to FM radio stations and public TV stations around the country, which simultaneously broadcast it to Interactive Network customers on unused portions of their frequencies.

4. Customers play along with the program on laptop control units outfitted with liquid crystal display screens. At the end of the game, players plug the unit into their telephones to download their scores. In the future, Interactive Network will drop the control units; viewers will see play-along information superimposed directly on the screen.

5. Telephone lines carry player’s score back to Interactive Network’s computers, which collect, tabulate and rank scores. Network sends results back to each customer within four minutes.

A. Normal TV Signal Enters Home

B. Customer Records Play Choice

C. Customer Sends Score on Phone Lines

D. Network Producers Enter Game Calls

E. FM Signal Carries Network Input

Sources: California Commission on Police Officer Standards and Training.

More on the Internet: The TimesLink online service includes a large selection of other recent articles and information about the Information Superhighway in its Business & Technology section.

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