AT&T Pares iTV Plans to Microsoft’s Chagrin

While Microsoft Corp. has been busy ramping up its arsenals for the Xbox
game console and .NET services, it seems to have lost some traction in the
interactive television arena.

The software superpower Friday felt the sting of an investment that won’t
quite live up to its billing as AT&T Corp. has come forward to say that it
won’t go full throttle into the interactive television (iTV) service market
with Microsoft as originally planned.

The software giant has to consider the situation a raw deal, as Microsoft
two years ago had pumped $5 billion into the huge cable operator in the hope
of creating an iTV service for about 10 million users, according to the
Wall Street Journal

Instead, AT&T has plans for a significantly smaller service model in mind.
Worse still, the cable firm has been testing software from Microsoft rival
Liberate Technologies for this service, opening up the competition in the
hopes of seeing which firm’s products are a better fit for the scaled-down

AT&T’s logic is simple enough: it believes customers aren’t yet ready for
advanced iTV. AT&T said it did research and concluded that the average Joe
did not consider surfing the Web as a priority for iTV, and instead desired
video on demand (VoD) and personal video recorders-devices that
automatically save a TV show to a computer hard drive. These devices let
users pause live TV and skip commercials, much akin to the products made by
TiVo Inc., which advertises regularly on, of course, TV.

To be sure, recent research from the Yankee Group would seem to bear the
weight of AT&T’s argument about digital video recording devices, which may
be affixed to set-top boxes. The research firm estimates that the
integration of hard drives and digital video recorder (DVR) software into
electronic devices, particularly set-top boxes, will result in 880,000
DVRs being installed in U.S. homes by the end of 2001, with a projection to
blossom to more than 20 million by the end of 2005. While stand-alone DVRs
haven’t made much of splash, Yankee Group analyst Adi Kishore said consumer
adoption may pick up rapidly. Kishore explained the DVR situation.

“Is it an electronic device that you buy at retail, or a service that is
paid for every month? What exactly does it do, and how does it work?” said
Kishore. “Add to that the high price point for the device, and you have the
issues that are confusing consumers and limiting the penetration of DVRs.
With the integration of the technology into consumer electronics and set-top
devices, the DVR becomes an incremental feature or service. That greatly
increases the value proposition for the consumer, and coupled with greater
understanding of the service through word of mouth and advertising, it will
help drive the adoption of DVRs over the next few years.”

Kishore told Friday that situation is not so dire for Microsoft because most cable operators are going toward the low-end DCT-2000 as opposed to the high-end 5000 model, which is about $500. Basically, Microsoft, Liberate and OpenTV are all finding themselves in the same position; there is low interest in the higher-end DCT 5000 model because the cable firms feel consumers won’t want to go there when they can get a more basic 2000 model for a couple hundred of dollars less. Kishore said the exception is Charter Communications, which just tabbed Liberate to build software for DCT-5000s.

“There is definitely a difference between interest and the question of whether someone wants to put their money down on something,” Kishore said in explaining why consumers may be loath to pick up the high-end DCT-5000 over the DCT-2000.

But is AT&T’s thinking too much in the near-term? This may be, as analysts have long been bullish on iTV, going so far as
to say it will revolutionize the TV viewing experience for the average couch
potato. Allied Business Intelligence is one such company. In May, the
research firm said iTV, which was used by 14.9 million households at the end
of 2000, will experience an annual growth rate of 59 percent,
totaling over 244 million households worldwide by 2006. The outfit sees
revenues from iTV services increasing from $300 million in 2000 to $19.2
billion in 2006.

“Interactive TV is the confluence of an enhanced TV experience along with
increased Internet connectivity outside of the PC environment,” said ABI
Digital Media Analyst Joshua Wise. “Consumers are now expecting greater
connectivity through their TVs and the myriad opportunities that come with

But AT&T is firm in its resolve to have Microsoft and Liberate craft
software for a much simpler set-top box, which is the nut and bolt of any
iTV platform. The Journal said the device would lie somewhere in the
middle between the high-tech box that was first planned, and the DCT-2000
unit it is currently installing. AT&T seems to welcome the competition
between the software powerhouse and the smaller, iTV-oriented Liberate.

AT&T’s focus on the near-term may be a necessary tact to take; it is
believed that another reason for AT&T’s change of heart from its original
plan of two years ago is that it is concerned about debt, the Journal
said. The company is in the process of breaking into four separate pieces
and does not want to run the risk of putting out a product it is not sure
consumers will buy.

While the turn of events with AT&T may be disappointing to Microsoft, it is
certainly soldiering on. Just Thursday, the company went live in Lisbon, Portugal with TV Cabo in a deal in which the software giant will deliver e-mail, TV banking, online shopping, digital video recording and high-speed Internet access over TV Cabo’s cable network. This deal is important in part because iTV’s presence is greater in Europe than it is in the U.S.

Microsoftis also making use of iTV software solutions it picked up in its acquisition of Israel’s Peach Networks. In an agreement inked Thursday, Israel’s Matav Cable Systems Media Ltd. said it would begin
field trials of Microsoft’s TV access channel server, which would grant
users access to multimedia games and educational titles.

Microsoft also extended its iTV tendrils to Mexico in an agreement with
Cablevision (CVC), a subsidiary of Grupo Televisa S.A. In that deal,
Microsoft said it would add its TV Server and Microsoft TV Advanced client
software to create an iTV solution using the Motorola DCT5000 advanced
interactive set-tops. The trial is scheduled to begin in Mexico later this
year with broad commercial deployment to follow.

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