In the Square-off Between TV and Computer, The Smart Money Might Be on the Boob Tube : BOOK EXCERPT

Remember the discussion of 500-channel TV and a world of TV “channels” limited only by your imagination? Remember the magazine articles about how, in the comfort of our living rooms, we would soon all be able to direct our own customized TV coverage of football games, hold video conferences between children and grandparents in far-off cities and wander on our TV screens through the virtual aisles of Nordstrom’s, Macy’s and Safeway, clicking our remote controls at whatever we wanted to buy?

In 1993, a surprising number of experts were telling us that this wonderful world of interactive television would be here by the end of 1995. Obviously, if you’ve looked around your living room lately, the reality is that it isn’t. In fact, it is still a long way off. Even Time Warner’s fabled Full Service Network project outside Orlando, Fla.--the granddaddy of interactive tele-topias--has only wired a small fraction of the 4,000 test homes the company announced would be wired a year ago, and even those are receiving much more limited program selections--and with much more technical difficulty--than was once forecast.

The seeming failure of interactive television trials in test markets all over the country has given ammunition to those who always saw interactive TV as a never-never land anyway. Indeed, techno-utopians imagine that even plain old ordinary TV will die a fairly rapid death in the face of the new center of life in the Information Age: the PC, linked of course, to the Internet and the World Wide Web. “Toss out your TV, fire your secretary,” declared the cover of Forbes recently. “The cyberspace revolution is getting serious.”

Some observers, like technology writer George Gilder, author of “Life After Television”, forecast a future in which the diverse entertainment choices offered to computer users via Internet-style networks will bring an end to Hollywood itself and mass entertainment as we know it. As a matter of fact, some believe this has already happened. “If you want an arbitrary date for the burial of the 500-channel dream, Aug. 9, 1995, will do just fine,” intoned technology-watcher Steven Levy recently. That was the day that Netscape, the company that makes the leading Web-browsing software, went public. Its single-day leap from $28 a share to $75, according to Levy, showed how the action has shifted from the dream of clicking a remote at an interactive set-top box to the reality of surfing the World Wide Web via computer and modem.

For Levy and other influential gurus in the wired world, the “old future” was about interactive television that would allow you to sit on a couch and press a button to order “Dumb and Dumber.” But the “new future” is about using a PC for “Web surfing, open systems and freedom.” In fact, the most leading-edge theorists now see even PCs as dumb commodity boxes of little consequence. In the future, all intelligent life will live on the Web, we are told. In this techno-utopian way of looking at the world, broadcasters, cable TV firms and telephone companies are already in the tar pits for certain. Microsoft is scarcely less dinosauric than IBM. And all who don’t immediately shift their strategy to the Web are condemned corporations.

As for why the wealthy and powerful in our society would be throwing their billions at deals like Disney’s acquisition of ABC or Time Warner’s acquisition of Turner, well, according to this view, they are just rearranging the deck chairs on the Titanic of traditional media. And those who wonder exactly how a company like Netscape--brilliant as its software may be--will earn profits commensurate with the $2.5 billion market capitalization conferred upon it by the stock market in its first day of trading, are just asking antediluvian questions.

Let’s be clear: There is no question but that the computer predominates in the world of business and in the professional lives of Americans. For serious, hard-core communications and information-oriented activities--whether undertaken in the office, in the home, at school or on the road--the metaphor of the computer connected to the ‘Net is the right model. For a certain percentage of our society, the Web is indeed the embryonic royal road through cyberspace and the prototypal key to a whole new world of electronic commerce, communication and information services. The question is whether the PC and the ‘Net will also come to predominate as the appliance of choice for entertainment and light information-gathering in American homes.

*

Do the surge of home PC sales and the burgeoning use of on-line networks and multimedia CD-ROMs really suggest that computers are about to supplant the ubiquitous (and much maligned) television as the centerpiece of family fun and conversation in America’s living rooms? Is this realistic? If true, this would obviously signal an unprecedented transformation in American social life. Couch potatoes would become an endangered species, reduced to gathering in small hobbyist circles and be moaning the loss of their once-proud status as the butt of late-night talk- show jokes. We would all become more informed, more productive less prone to overeating--and of course, much better typists (thanks to the keyboard). Soon we would be renowned the world over not as a nation of beer-guzzling, football-watching biffs but as a morally superior, knowledge-loving culture of interesting and very slender people. Even the French would have to stop turning up their noses at us.

There are many virtues to this notion that computers are about to replace the TV as America’s principal living-room window on the world. Unfortunately, a realistic chance of this happening anytime in the foreseeable future is not one of them.

The debate over PC versus TV does, however, offer an intriguing vantage point from which to view the challenges confronting the computer industry today. As metaphor, it gets to the heart of the technological change process: Do new media replace old or merely infuse them with new possibilities and expanded capabilities? And as a practical matter, it helps to illuminate the divergent strategies being pursued by PC companies today--including Microsoft, the industry’s most powerful company--in their pursuit of new high-growth markets.

More than any other business, the personal computer industry has come to symbolize the great ideals of Yankee ingenuity, entrepreneurial capitalism and economic progress. In less than 20 years, it has grown from a small collection of garage hobbyists into one of the greatest wealth-creating forces in modern history. Its economic impact goes far beyond the nearly $100 billion in annual revenues generated by PC hardware and software sales. It has also been the proximate cause of profound changes in the structure and internal life of American business and in the basic building blocks of commercial activity itself, from sales and marketing to manufacturing and distribution.

How ironic, then, that even as the computer’s digital vocabulary of ones and zeros becomes the lingua franca of the economy, the PC business finds itself facing a difficult challenge. On the one hand, growth in the industry’s core desktop office-computing market is slowing and its profit margins shrinking. The world of networked communications--the Internet and the Web--with its explosive growth and high demand for computer processing power, would appear to be a gold mine for the computer industry. Yet to mine that gold, computer hardware and software companies will have to become good at dealing with millions upon millions of ordinary consumers. And few, if any, PC companies have much experience navigating genuine consumer markets.

By contrast, it is the consumer electronics companies, the broadcasters, the cable companies, the movie studios and the telephone companies who have the experience and know-how when it comes to getting inside tens of millions of homes, delivering what consumers want and keeping them coming back for more. And while all of these entities are interested in the Internet and the Web, all of them are still focused largely on a TV and set-top box-based business strategy for their future.

No one can underestimate the power of the information explosion underlying the growth of online services and computer networks or what this phenomenon means in terms of the long-term future of communications, knowledge, lifestyles, business and the economy. But while welcoming, embracing and enjoying the wondrous world of opportunity unleashed by new communications technology, it is also important to bear in mind some basic reality checks:

* With all their phenomenal hyper-growth of recent months, commercial online services--such as America Online, Compuserve and Prodigy--taken as a group, still only reach about 7% to 8% of all U.S. homes. This compares, for example, to cable television, which is subscribed to and paid for by more than 60% of American homes.

* Despite all the “ease of use” talk in the computer industry, using the Web still requires a consumer to own a reasonably powerful home computer and a high-speed modem. The household should have enough disposable income to be able to spend $30-plus per month in online access charges. A telephone line should be available--preferably a second home line if you plan to be a moderate to heavy ‘Net surfer and have other family members who still expect to be able to use the telephone. Throw in a high level of literacy, a modicum of techno-sophistication and a lot of patience. The latter is best combined with desire to explore the Web, because otherwise, consumers will find it hard to justify the endless delays, disconnects, server errors and “host unavailable” messages. Probably some 20% to 30% of the American population fit this criteria. That is surely enough to build some huge, path-breaking businesses. But it is not a description of the masses of American households.

* Many of the Internet and Web users today pay nothing personally for their use of these systems. The bill for most university students and corporate professionals, for example, goes to their institutions. If they had to pay--as households do--many of them wouldn’t use the systems as heavily. In fact, of the 36 million people said to be using the Internet (surely an inflated number), fewer than 300,000 have their own, personally paid-for accounts with an Internet Service Provider. What’s more, in this wonderful age of early exploration of the Web, almost all the best content is available for free. You can be sure that won’t last.

* Some Americans want and enjoy some of the incredible diversity and niche content available in the 55,000-plus Web sites now operating and the hundreds of thousands of Internet locations throughout the world. But the development of this diverse world of choice does not take away from the human desire to share the experience of watching and participating in what is perceived as the best content at the highest production values, “edited” or “packaged” for the most compelling emotional experience. Given these realities, it is no wonder that those in the entertainment, television and consumer electronics businesses see a bright future ahead. To them, the Web is a good new source of PR to reach some of their target markets, not a threat to their basic business.

Obivously, there’s plenty of room for the Net and television to coexist in our society. The rise of one does not mean the “death” of the other; not enem the inevitable surpassing of one by the other. So what’s all the fuss about? While competing PC and Tv visionaries duel, hurling hype and hyperbole at each other to bolster their own vested interests, the voices of reason lie more in the intelligent middle. To many in the industry, in fact, the whole PC versus TV debate is silly. Larry Ellison, CEO of database software giant Oracle, put it this way: “That’s like trying to figure out what’s going to be more successful, the stove or the refrigerator. PCs, personal communicators, smart televisions--[all] will be attached to the information highway.”

True enough. Just as they do today, people in the future will continue to use a multiplicity of devices to communicate, entertain themselves and get their work done. In one sense, therefore, Ellison is correct. But if it’s such a non-issue, why won’t the PC vs.TV debate go away? Why does it keep resurfacing in the boardrooms and product labs of America’s biggest computer firms? The reason is that when the time comes to bet your company on the pursuit of one particular business strategy--and on the decision to build a specific set of products for a specific market--hard choices must be made.

Jim Clark, the mercurial computer-industry pioneer who has now been the force behind two great success stories, Silicon Graphics (SGI) and Netscape, has even made the hard choice twice. First, he left SGI, the company he had shepherded to success as the leading high-end graphics-processing system in the world, after a bitter dispute with his colleague Ed McCracken over the need to move the company more into the consumer market: set-top boxes, TV sets, video games and partnerships with media companies. Once out of SGI, however, Clark determined that the Web was the future and became the driving force behind the successful effort to turn Marc Andreessen’s Mosaic software into the Web’s first industry standard, Netscape. Clark is now betting heavily on the Web and proselytizing everywhere for it. But his year-old prediction that there would be more people using the Internet in the United States today than there’d be viewers of cable TV has fallen considerably short of the mark. Meanwhile, McCracken has taken Silicon Graphics in exactly the direction Clark had favored--toward the TV set and the living room.

Larry Ellison is also making some bets, either in spite of his stated agnosticism toward the PC vs. TV debate or precisely because of it. Oracle is now waging competitive war on two fronts: to become the preeminent supplier of media servers and set-top software for interactive TV networks on the one hand, and a major vendor of PC-based software for managing data and video news over the Internet on the other. Despite his two-pronged approach, Ellison leaves little doubt as to where he thinks the greatest mass-market revenues from interactivity will ultimately be found. “The Internet is very low speed,” he points out. “So the idea that the Internet will ever be the primary multimedia hookup into the home is sheer nonsense.”

If Ellison is betting, at least over the long term, that television does have a mass-market future, then Andy Grove, CEO of the $10 billion Intel Corporation, the world’s largest computer chip maker, has lined up squarely on the side of those who think television is dead. “The PC is it,” Grove declares. “That sums up Intel’s business plan and rallying cry.”

“Some think the information superhighway will come through their TV,” Grove proclaimed in an ad plugging his keynote speech at the PC Expo convention in 1994. “[But] the information tool of the future is on your desk, not in your living room.” Grove apparently missed the irony of his free offer of a videotape of his speech--online services carried only a summary of it--which could only be viewed, of course, on a television set. Despite that oversight, Grove continues to boast that the personal computer is going to “eat” the TV, which he calls a mere “toy.” It’s worth recalling that similar hubris was displayed by IBM in the late 1970s when Grove and his then-tiny Intel Corp. dared to suggest that the newfangled personal computer--also scorned as a mere “toy”--would soon become the principal productivity tool for business.

Be that as it may, under the leadership of the semiconductor industry’s hardest-charging chip monk, Grove, otherwise known as the “Mad Hungarian,” Intel is investing an astonishing one-third of its total revenues developing new products to make the PC dominant in the consumer market. That’s a rather weighty vote in the PC’s favor, because Intel is the most profitable company of its size in the world. And its size is doubling every two years.

According to one glowing business magazine profile on Intel, the company intends to “take over your home even more completely than it has already conquered your office.” How exactly does it intend to do this? The magazine featured four new “Smart TV” products from Intel that will supposedly let consumers “shop for shoes, watch the news, rent a movie or buy a CD” from their homes. But wait a minute--there seems to be something wrong with the picture--or, more precisely, with all four photos the magazine used to illustrate “Desktop TV.” Each depicted a computer and keyboard, and in a little corner of the PC’s monitor, a two-inch-square video image. One showed a Cable News Network shot of Secretary of State Warren Christopher above the caption: “Watch the News!”

One wonders, why go to all that trouble just to cram the TV news into a tiny box on our PC screens? We’ve already got TVs. Sure, there’s a growing market in offices for PCs that can archive and display television news. And sure, the Internet is getting a little less jerky at handling real-time audio and video signals--and the progress in the years ahead will be significant. But if Andy Grove really wants to offer the mass of consumers digital interactive TV at home, where most people would watch it, why not just toss the keyboard, crack open the computer, pry out the chips and hook these up to the TVs people already have, as Oracle and Silicon Graphics are doing?

What’s being offered to consumers here is not “Smart TV” but a PC in drag. As computer industry leader Michael Dell notes: “Yes, you could make a PC that also [receives] TV, but at those prices why would you want to?” Good point. If this is really how Grove intends to “eat” the TV, he’s probably going to develop a major case of indigestion.

It’s not hard to imagine one of Grove’s motivations for endorsing the PC as Information Highway vehicle-of-choice. Intel’s enormous capital investment and line-of-business expertise is a compelling enough reason to try to push his PCs into the consumer marketplace. But recall for a moment Intel’s 1994 public relations fiasco with the Pentium chip, when it was discovered that the chip caused certain kinds of computational errors.

The difference between PC and the Tv and consumer electronics industries are not simply cultural but reflect fundamentally different commerical dynamics. That fact is often ignored, however, by TV’s naysayers, including author George Gilder, who jumps into the debate on the future of technology with both feet planted firmly in the sky. Combining utopian economics with stat6istical sleight-of-hand to promote his views. Gilder argues that the PC is the only viable interactive device in the home, and that any thought of TV playing a role in the Information Highway is Bunk. “The computer industry is converging with the television industry in thesame sense that the automobile converged with the horse,” wrote Gilder in one influential business magazine. “Making the boob tube into an interactive hive of theater, museum, classroom, banking system, shopping center, post office and communicator is contrary to the nature of the box.” Indeed Glider said multimedia PCs are going to “usurp phones, televisions and video game players entirely.” To back up his view Gilder attempted to prove, first of all, that PCs are fast becoming the gadget of choice among consumers.

Gilder asserts that the PC business is already outstripping the film and TV business in revenues--as if that has very much to do with the relative popularity of PCs and TVs among the general public. Dollar sales of home computers now equal those of color TVs. While such growth excites PC enthusiasts, it’s important to note that far more TVs than computers are still being sold; TVs simply cost a lot less.

In fact, 25.4 million color TVs were sold in the United States in 1994, at an average price of $293, compared to 6.7 million home PCs priced at $1,200 each. Perhaps recognizing that comparative measures of PC and TV industry revenues are hardly the best gauge of consumer usage of each device, Gilder tackles actual home penetration rates--but with a twist. First he cites industry studies showing PCs present in over 30% of American homes. Of course, that figure does not tell us that only 9% of households had multimedia computers--the kind obviously needed for the interactivity Gilder talks about. But instead of comparing the PC home penetration rate to that of the television, Gilder employs sleight-of-hand and asks: “How long will it take before [interactive TVs] are in 30% of American homes?”

Actually, as Gilder is well aware, 63% of U.S. homes already receive cable TV service. True, those TVs must be outfitted with new digital set-top decoders--and the networks that link them must be upgraded with fiber-optics and digital switches--before they can receive interactive programming. But the same is true for today’s computers, the vast majority of which do not have the capacity to process data at video speeds (let alone meet FCC requirements for closed captioning and the like). Likewise, today’s slow-speed, low-bandwidth PC networks such as the Internet need upgrading before they can offer high-quality interactive multimedia and video service.

Indeed, a San Diego user inadvertently shut down most international access to the Internet not long ago when he broadcast an audio-visual test pattern over the network. According to one estimate, it would in theory take only 100 full-motion video signals to swamp the entire information-carrying capacity of the Internet, although this will soon change.

The truth of the matter is, neither TVs nor PCs are presently equipped to receive interactive multimedia transmitted over networks. As for the comparative cost of upgrading each device--a critical factor in consumer acceptance--even with all the uncertainty over the future prices of TV set-tops and video-capable computers, for many years to come it is going to be significantly cheaper to install an interactive set-top box atop a TV than it will be to buy a multimedia computer with a 27-inch TV-ready screen--the average size preferred by consumers.

There’s yet another issue that Gilder sidesteps, one that historians and business people alike recognize as critical in shaping the manner and speed with which new technologies are adopted by consumers: ease of use. A key reason for the prevalence of TVs and VCRs in American homes is that their form and function are so easily understandable. PCs, in contrast, can be a nightmare for the average consumer. “This is the only business in the world in which people take home a product and [can’t use it] one third of the time,” concedes Richard Thoman, a senior vice president of IBM.

With the number of PCs sold now going into the home now approaching half of all U.S. sales, PC vendors are coming to realize just how difficult these truly are for most people to use. Microsoft reportedly receives about 750,000 calls for help from frustrated consumers every month. Dell gets close to 500,000. IBM answers 200,000 calls and third-party support lines field another 100,000 calls every month. Add perhaps another 500,000 calls each month to the thousands of smaller-sized PC hardware and software vendors in America.

Even those staggering numbers, however, don’t begin to reflect the true extent of consumer difficulty with PCs. As studies conducted by market researcher Robert Johnson at Dataquest reveal, only one in seven customer support calls at midday even get through to a technical support operator. About 85% reach a busy signal. We may be talking here about half a million cries for computer help each day.

In assessing which device--the PC or TV--is most likely to be used by the majority of Americans (not students, intellectuals and professionals but the true majority of Americans) to drive the Information Highway, perhaps it would be useful to look at the question from the notoriously practical point of view of the average consumer: Which would you rather have go on the blink--your PC’s CD-ROM or your TV’s VCR?

Here’s what the instructions for Microsoft’s PC- based Encarta encyclopedia say about dealing with a CD-ROM that won’t play (grammar and spelling are Microsoft’s): “Make sure that the Encarta program is looking for the compact disc on the correct drive. Check that ENCARTA.INI file in the WINDOWS directory. The section called [94Options] should have a entry called “BookPath.” The path should be set to the encyc95 directory on the drive that you CD-ROM appears as. For example, if your CD-ROM drive is drive D:, the entry would appear like the following: [94Options] BookPath=D:encyc94”

Now, compare the above with a Sharp VCR manual’s instructions for handling a videotape that won’t play: “Make sure the power cord is plugged in.”

SGI’s McCracken notes, “Everyone’s PC and workstation will be connected to the [Information Highway]. That takes care of the 10% to 20% of the population who have PCs and workstations. Now, how are we going to deal with the other 80%?”

Precisely. Any clear-headed analysis of the factors shaping the adoption of new technologies, from cost and ease of use to installed base among consumers, suggests that while PC use is certainly growing rapidly in the home, it is not about to kill off the television any time soon. In fact, the TV--or a device that more closely resembles a living room TV than a desktop computer--will probably be the chief interactive window on the world for most Americans.The TV itself, of course, will be transformed and will incorporate many of the attributes of computers and other interactive communications devices. Yesterday’s interactive dream of all information and entertainment programming ever created being available all the time will be scaled down to a manageable menu of choices.

Interactive TV networks, however, are still years away from practical mass deployment, which means that for the present the only truly viable commercial business in interactive services still lies with the PC. This is why cable giant Tele-Communications, Inc. has invested $125 million in Microsoft’s new online service, the Microsoft Network, and why TCI and others are developing cable-modems that enable PC users to receive high-speed, high-bandwidth video and other multimedia services over the Internet.

But when the technology for interactive TV matures and the new mass interactive services are successfully bundled together, the original drawing power of tradition TV programming, an important, large-scale business may be created that dwarfs the home market for networked computer services. Why? The answer is “Willie Sutton factor”. Sutton, the famous bank robber, liked to explain that he robbed banks because “that’s where the money is”. And TV is where the people are. In the home, the number of eyeballs glues to TV sets will be far larger that the number of fingertips clicking away at kekyboards for a long time to come.

The PC vs. TV competition is a race in which apparent leadership will change hands from time to time, corresponding to the business cycle, media fashions and who’s up and down on Wall Street. We wouldn’t be surprised to find some disappointment with the Web turning out to be the big story of 1997. Despite the techno-hype that goes on regularly about electronic commerce on the Web (one recent study predicted a $270 billion market in online commerce by the year 2000), the prosaic reality is that actual online purchases by real consumers is still only about a $1 billion a year business--about half the size of the blow dryer marketplace. Both the TV and the PC will continue to evolve along with many other new devices, systems and services in our lives. At bottom, though, PC vs. TV is a debate about who Americans really are and where our economy and society are heading. The reality is that we are heading more deeply into an Information Age, but only a comparatively small portion of the population--the 20% to 30% at the top--have the skills, training, education and culture to participate actively, enjoy and benefit from the creation, processing and communication of information.

Absent society-wide initiatives to bring more people into this world, the rest of our society will not only continue to live by the TV but will lose economic and social ground because they are cut off from the process of wealth creation going on inside the Web and will lack the new kind of skills and connections needed to function in the wider networked world.

Is it any surprise, then, that there is a high degree of correlation between the people who think that TV is “dead” and those who believe that government ought to stop fretting about the poor and those without access to the Information Highway? Indeed, the idea that the PC will conquer the TV is a justification for sidestepping the profound challenges that lie ahead in developing a social conscience for cyberspace and preventing the Information Highway from further polarizing our already polarized society.

Don’t get us wrong. We are immensely excited by the Web and all the intellectual, social and economic opportunity it suggests. But it’s going to take considerable time, not to mention an uphill climb over the laws of capitalism and human nature--before “everyone” is really surfing the ‘Net.

This article is adapted from “Road Warriors: Dreams and Nightmares Along the Information Highway,” by Daniel Burstein and David Kline, which will be published by Dutton in November. Burstein, the author of three previous books on global economic trends, serves as senior adviser to The Blackstone Group, a Wall Street investment bank. David Kline lives in San Francisco and frequently writes about the digital revolution for Wired.