Cable’s Future Seen in a Small Black Box
A bundle of electronics encased in black, it looks more like a mutant VCR or CD player than the high-tech Holy Grail.
But there is more than electronics in this device that the cable television industry calls its next-generation set-top box. It carries the burden of two decades of unkept promises, millions of dollars for failed market trials and the moneymaking dreams of business giants from John Malone to Bill Gates.
With this box, the cable industry hopes to transform television sets into high-tech nerve centers, powerful appliances that deliver not only sitcoms, but e-mail, movies on demand, online shopping, at-home banking and more.
If you think you’ve heard all this before, you’re right. Interactive television has been “the next big thing” for nearly 20 years, always proving too costly, too clunky or both.
Many believe that the era of disappointments may finally be ending and that interactive television is about to be realized by an unprecedented alliance between the cable industry and Silicon Valley.
The last few weeks have been marked by a flurry of deals that call upon giants of the high-tech industry, including Sun Microsystems Inc. and Microsoft Corp., to help build set-top boxes that have more in common with PCs than the boxes familiar to most cable subscribers.
It may turn out to be another bust, and many question whether people really want to interact with their television sets.
But this time there is no turning back. Cable companies, including Malone’s Tele-Communications Inc., have ordered 15 million boxes. In so doing, they have given Silicon Valley an invitation into the nation’s living rooms that can’t be rescinded.
“This is the moment when the whole cable television industry changes,” said analyst Gary Arlen of Arlen Communications in Bethesda, Md.
*
Until now, TV set-top boxes basically have been decoding devices, converting cable transmissions into signals that televisions can display. Many cable subscribers with newer TVs don’t even need the boxes because their sets receive and display cable signals on their own.
The new boxes are designed to do much more. For starters, they will handle the cable industry’s ongoing conversion from analog transmissions to digital signals that allow more channels, sharper pictures and additional services.
Instead of just receiving information, the new boxes also will send data back through the cable network, so consumers can surf the Internet, send e-mail to relatives and order goods from online catalogs. The boxes also might have enough memory to download a video game or store a program so subscribers can watch it later.
Accomplishing this requires the power of a computer, and essentially that is what the new boxes are. Like any PC, they will have a microprocessor, memory, an operating system, software and a modem.
Cable executives say they know TV audiences demand simplicity. So although keyboards will be available, remote controls and on-screen program guides will remain the primary tools of navigation.
Set-top boxes traditionally have been assembled by a handful of companies, including Scientific-Atlanta and General Instrument Corp. That won’t change. But for the first time, the parts for the new devices will come from giants of Silicon Valley, including Sun, Microsoft, Intel Corp. and Oracle Corp.
The emerging alliance between the cable and computer industries is an uneasy one, with each side wrestling for a dominant position. But in many ways, the two sides need each other. Cable has the customers and the all-important pipe into their homes. Silicon Valley has the technology and the manufacturing muscle to build systems cheaply. And both sides are likely to profit from the relationship.
For the cable industry, more services mean more charges. Consumers might not drive to Blockbuster if they can order movies from their cable company for a few dollars, for example. Blockbuster Video controls about 25%, or roughly $2.5 billion, of the $11-billion domestic video rental market.
The relationship might be even more lucrative for the computer industry. With PC penetration stalled at about 40% of U.S. households, Silicon Valley has been eyeing the living room as a ripe market. Nearly every household has a TV, making the living room the ultimate mass market.
“The volumes in TV are staggering compared to the volumes in the PC industry,” said Marge Breya, a marketing director for Sun, which aims to supply software and microprocessors for the new boxes.
*
If interactive TV has been such a tantalizing prospect, why is the rush to deliver it only happening now? Mainly it’s because the last few years have ushered in changes that few expected.
Competition from satellite TV has put pressure on cable operators to upgrade their equipment. The costs of the necessary hardware and software have come way down. And out of nowhere, the Internet showed up to do much of the groundwork, proving consumers have an appetite for interactive services and spawning the software and standards needed to deliver them.
None of this was true during the failed experiments in interactive television over the last 20 years, including a high-profile trial by GTE Corp. in Cerritos and a more recent one by Time Warner Cable in Orlando, Fla.
During the two-year experiment in Orlando, Time Warner delivered 100 channels of programming, online games and even the ability to order pizza by remote control. But the company pulled the plug on it last year.
Jim Chiddix, Time Warner chief technical officer, said many obstacles that doomed the project have since evaporated, demonstrating how quickly technology evolves.
A critical problem in Orlando was the enormous expense of delivering the service. It took a staff of 300 people to operate a system that served only 4,000 subscribers. And in those days--before the Internet blossomed--creating even basic online shopping services was an onerous task.
“It took months, and hundreds of thousands of dollars, just to create the pizza-ordering application,” Chiddix said. “Today a bright high-school kid could do that in a couple days with a series of Web pages.”
Indeed, millions of people every day are using the Web to purchase everything from books to automobiles. The cable industry no longer has to create those services.
What’s more, the set-top boxes deployed by Time Warner were custom-made and cost the company about $8,000 apiece. The new boxes do more, but because they use standard computer parts and can be mass-produced, they will cost the cable companies just $300 apiece.
For all its synergies, the budding relationship between the cable and computer industries has had all the romance of a shotgun wedding. Cable executives were particularly nervous about doing business with Microsoft, a company that prefers to rule any market it enters.
“They’re a great company and have great technology,” said Bruce Ravenel, senior vice president of TCI Ventures Group, a division of the nation’s largest cable company. “You just don’t want to turn your back on them.”
Ironically, no one has done more to shore up confidence in the cable industry than Microsoft’s Gates. His decision to invest $1 billion in Comcast Corp. last year was a catalyst for a stock rebound that has boosted cable shares by an average 100% over the last year.
But cable executives who watched Gates and Microsoft gain a stranglehold on the computer industry feared he had similar ambitions in cable. Indeed, Microsoft’s early proposals would have given the company control over set-top box technologies.
But cable executives, led by Malone, thwarted Microsoft by playing the company against its enemies and insisting the boxes be built on open standards, meaning software and other components had to be interchangeable. The boxes themselves also will be interchangeable, able to function anywhere in the country, in any cable system.
Earlier this month, TCI said that the 10 million or so boxes it buys will have a Microsoft operating system but also will contain key software from Microsoft’s archenemy, Sun Microsystems. Analysts credit cable executives with trying to declaw Microsoft, but wonder whether they succeeded.
“Malone has done a wily job of counterbalancing Microsoft,” said analyst Arlen. “But we know from Microsoft’s other adventures, if they get a toehold in something, they’re eventually going to get their whole body in.”
*
Even though the technology may finally be falling into place, there still are many questions about the new boxes.
Where will consumers get them, for instance? Until now, cable companies have owned the boxes and rented them to subscribers. But the industry hopes that consumers eventually will buy the boxes at Radio Shack, Circuit City and other retail outlets.
Will consumers be willing to pay for such a device, and, if so, how often would they be willing to upgrade? These are crucial questions for computer companies, which have thrived on a business model of rapid obsolescence.
Intel, for example, has said it hopes consumers will trade up to new boxes every few years. But consumers expect their TV sets to last a decade, and cable doesn’t want to test consumers’ loyalties just to make Silicon Valley happy.
“Technology advances very rapidly, and you want to be thoughtful of riding that wave and not being swept under by it,” TCI’s Ravenel said. “These boxes will have to have a useful life of five to six years or longer.”
Finally, the most fundamental question is, how badly do consumers want to interact with TV sets?
Some services are likely to be instant hits. Movies on demand, for the right price, will probably be popular. So will online games that let players compete with others across the street or across the country.
But online banking, at-home shopping and other services are likely to catch on slowly, partly because television is less personal and private than a computer. Some suggest that set-top boxes eventually will be connected to other screens throughout the house. So maybe banking won’t be done in the living room, but in the study.
If a new type of programming will blend standard television fare with interactive touches, even industry visionaries say they don’t know what shape it might take.
“Nobody knows,” said Avram Miller, an executive at Intel who is largely responsible for that company’s digital television initiatives.
“I don’t think we’ll see people acting with their TV sets the way they act with their computers,” he said. “But I think we can get them to do a little more than pushing the up and down channel buttons.”
For now, cable companies are harboring modest expectations. Sure the new boxes can deliver banking, shopping, online classes and perhaps entertainment hybrids that Hollywood hasn’t dreamed up yet. But when asked to predict the killer application of the new set-top boxes, Ravenel didn’t hesitate.
“Watching television,” he said.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Converter vs. Computer
The cable industry hopes the new generation of set-top boxes will turn televisions into high-tech nerve centers. A look at the features of old and new boxes:
OLD
* Analog tuner
* Signal-conversion equipment
* Descrambler for premium channels
* Access control for pay-per-view movies
* Remote control
Old set-top boxes functioned primarily as a tool for converting analog cable transmissions into signals that could be displayed on the TV set. They also controlled access to premium channels and pay-per-view movies.
NEW
* Pentium-caliber microprocessor
* Computer memory
* Cable modem for high-speed Internet access (minimum 1.5 megabits per second, 50 times faster than a 28.8 modem)
* Operating system, such as Microsoft’s Windows CE
* Additional software, such as Sun Microsystems’ Java, for delivery of interactive content
New set-top boxes are essentially computers. They are designed to handle new digital transmissions and to enable services, such as e-mail, high-speed Internet access, interactive games, online shopping, sophisticated program guides, digital audio channels and real-time pay-per-view movies.
Source: General Instrument Corp.
