Entertainment Merger Mania : Mega-Deal II : Interactive TV, 1994’s Darling, Is Struggling to Survive

Remember interactive television?

It was the version of our future so vivid that it drove billion-dollar deals, spawned dozens of entrepreneurial start-ups and created a collective memory of its impact, despite having never existed.

That was last year. But now, as Disney absorbs ABC and Westinghouse bids for CBS in deals that promise to redefine consumer culture, ITV, as it came to be known, is nowhere in sight.

In a dramatic shift, the nation’s telecommunications and media companies have scaled back their plans to bring us the future via the TV screen. It’s expensive. It’s risky. It’s hard to get anyone to develop programming for it. And most of all, it doesn’t really seem to work.

“This is extremely complicated stuff,” says Bruce Ravenel, vice president for technology at Tele-Communications Inc., the cable giant that was once ITV’s loudest cheerleader.

“We’ve all learned that. Yes, I think we’re all very aware of just how complicated it is now.”

TCI’s proposed $22-billion merger with Bell Atlantic Corp. in 1993 didn’t go through, but it nonetheless led to a flurry of alliances among firms that hoped to stake a synergistic claim in the brave new broad-band world. The ability to send high-quality video back and forth over phone or cable lines with no delay, they hoped, would usher in a new generation of entertainment and information services including movies-on-demand, sophisticated home shopping programs, customized news and on-line games.

But as media and technology firms revert from digital deal making to the more traditional bigger-is-better principle, others are turning to a new version of the future that places the Internet at the center of a newly ascendant vision.

Last year, Microsoft Corp. was worried it might get left out of an emerging industry and raced ahead with an interactive television technology called Tiger. This year, the software firm is focused on the launch of Microsoft Network, its own on-line service.

Back in 1992, TCI was promising to wire 1 million homes with digital technology by last year--but is nowhere near that goal. It has, however, purchased a stake in Microsoft’s on-line service and has started its own Internet company called @home.

The entrepreneurs who hoped to build a business on the promise of broad-band technology have also had to reorient themselves. Da Vinci Time & Space, one of the most promising of the new companies developing programming for ITV, recently closed its Los Angeles office and is now designing interactive worlds for children, accessible via a combination of CD-ROM and modem.

“The biggest change for us is around our central statement of self,” Da Vinci Chairman Carol Peters says. “We’ve always said we’re building an interactive programming channel for kids. And there is neither location nor partnership desire for that kind of thing right now.”

The reasons for that are a combination of cost, regulatory obstacles and the vast complexity of the technology. Dataquest, a San Jose consulting firm, estimates it will cost a phone or cable company an average of $2,500 per home to deliver movies-on-demand.

“There’s a huge gap between how much it costs and what people are willing to pay for it,” says Bruce Ryon, multimedia analyst at Dataquest.

The set-top box, a crucial piece of any interactive television system, was supposed to cost just a few hundred dollars by now for what would essentially be a powerful, specialized computer. But the box vendors, such as Scientific Atlanta and General Instruments, have not been able to deliver on their promises.

Technology glitches have plagued many of the efforts. US West, which had plans to begin a major test of an interactive system in Omaha to as many as 50,000 homes by this summer, now plans to offer only cable for the foreseeable future.

“Our customers pick up the phone and find it available 99.98% of the time,” says David Banks, a spokesman for US West. “We don’t want something on the video side that is anything less reliable.”

The dozen or so users of the interactive system find that 30% to 40% of the time when they ordered a movie they would either get the video equivalent of a busy signal or the movie they were watching would suddenly get cut off.

Bell Atlantic, too, expected to have its interactive television network under construction by now. Instead it has found a cheaper technology that provides cable services--without interactivity. The company will begin testing a wireless system capable of offering 100 satellite quality channels. “All you need to do is build the transmitter and you can serve a whole city,” says Bell Atlantic spokesman Eric Rabe.

The nation’s telephone companies have aggressively argued for the deregulation, in part by suggesting that, unshackled, they would pour tens of billions of dollars into new broad-band networks.

A bill to deregulate the telecommunications industry is close to passing. But now the phone companies are getting cold feet: Most now have plans to offer only simple cable services in the foreseeable future.

Some cable companies remain optimistic. Time Warner says its technology is working and that its suppliers, including Silicon Graphics, have promised set-top boxes at a cost of just $350 a house by next year. Other technology, including the computers in which movies will be stored in digital form, should also come down in price dramatically over the next two years.

But that remains to be seen: Time Warner’s experience thus far certainly doesn’t offer much reason for confidence. Its Orlando, Fla., test bed currently provides service to only about 30 homes, compared to the original plan of 4,000. Its computer room holds an unfathomable 15 terabytes of disk storage space--hardly practical for installing in dozens of cable offices across the country.

Cable and television companies insist their plans haven’t slipped that much from original projections: They never expected to have true interactive applications ready for use before 1997 anyway, they say.

But there is also a flavor-of-the-day element to all this talk. Two years ago, interactive television was the hot topic. Today, it’s the Internet, and everybody is eager to describe their latest acquisitions and plans to exploit excitement over on-line services.

Cable companies such as Time Warner are trumpeting the potential for using cable modems to connect computers to on-line systems at rates 1,000 times faster than current modems by the end of the year. Baby Bells such as Ameritech are investing in travel and on-line shopping systems that will give them a foothold on the net.

Still, interactive television may yet materialize in unexpected forms. Two groups of Baby Bells have joined with Hollywood companies to develop compelling programming for interactive television, and they may yet find the right formula.

“It was over-hyped early,” says Pat Campbell of Chicago-based Ameritech. “We are now in a cycle of under hype.”

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