Interactive TV: It's Baaack!!!
Years ago, the big boys like Time Warner, Bell
Atlantic, and TCI failed to deliver video-on-demand.
A few startups are turning that bad dream into real
By Marc Gunther,
Fortune, July 20, 1998
For Ted Maguire, a 52-year-old truck driver who lives near
Philadelphia, the future of television is now. He and his wife, Linda, no
longer drive to the video store when they want to rent a movie;
instead, they turn on TV, choose from 150 titles on their cable
system, and settle back to watch - pausing, rewinding, or
fast-forwarding at will. "It's very convenient," says Maguire, who
subscribes to a video-on-demand service called OnSet, "We love it."
That reaction won't surprise executives at companies like Time
Warner, Bell Atlantic, and Tele-Communications, Inc. that spent
hundreds of millions of dollars testing video-on-demand in the mid
1990s. (For the lowdown on TCI and AT & T, see First.) Viewers, they
found, enjoy watching whatever movie or TV show they want,
whenever they want. Unhappily, delivering video-on-demand with
VCR-like features was prohibitively expensive; video-server systems
could cost $5 million, high-powered set-top boxes $6,000 apiece, and
digitizing a movie another $4,000; writing software to make it all work
was a nightmare. Then came the explosive growth of the Internet,
which pushed interactive TV into the background.
Now - with hardware and software costs tumbling and technical
issues becoming manageable - video-on-demand is turning into a
real business. As cable operators deploy digital set-top boxes and
upgrade systems for two-way data, their enthusiasm is mounting.
Says TCI chief technology officer Tony Werner: "Three years ago,
was it a business? No. Today it's getting interesting. If you go out two
or three years from now, it looks great."
What's surprising is that the resurgence of video-on-demand is being
led not by a media, cable or telephone giant but by a little-known
Silicon Valley startup called DIVA Systems Corp. With none of the
hype associated with the prior launches of interactive TV, DIVA has
signed up 1,250 customers for its OnSet service in Pennsylvania,
New Jersey, and Georgia. So far it is working with three mid-size
cable operators and a big one, Cablevision. Four more rollouts are
planned this year.
DIVA's biggest challenge is getting its service distributed by the cable
industry's powerful gatekeepers. Big operators like TCI, Time Warner,
and Comcast are taking a wait-and-see stance. They want to be sure
the product works on a broad scale. They want to see how much
money viewers will spend. Most of all, they don't want to share what
could be a lucrative new revenue stream with DIVA, which owns and
operates OnSet even after it's rolled out by cable systems. "If you're a
small operator and you don't have much capital, DIVA might look like
a wonderful deal," says Tom Feigy, a Time Warner executive who ran
the company's flashy interactive experiment in Orlando. "But if you're
a large company like TCI or Time Warner, the DIVA model doesn't
make a lot of sense." Or as another industry insider puts it, "Our guys
always prefer to deal with people in the family. Cable is one big
The outsider leading DIVA is 73-year-old Paul Cook, a World War II
veteran, an MIT-trained chemist, and the founder of Raychem, which
he built into a $1.5-billion-a-year company before retiring in 1990.
Later, as chairman of nonprofit SRI International, a Silicon Valley
research center, Cook came upon a powerful computer called the
Sarnoff server that was built for RCA in the 1980s to stream video
into color-TV sets. Figuring the server could be rejiggered for
video-on-demand, he County, started DIVA in 1995. "The challenge of
going after this huge market was more than I could resist." says
Cook. Video rentals generated $8 billion last year.
Cook and DIVA president Alan Bushell assembled a team of 250
engineers, software programmers, and cable alumni to develop
OnSet, at a cost of about $80 million. With-out a press release, a
Web page, or even a listed phone number, DIVA began trials in
September 1996 in a Delaware county, PA cable system owned by
the Len-fest Group. "We didn't want to be part of the hype" Bushell
says. "We wanted to let results speak for themselves." DIVA raised
$75 million in equity and $250 million in high-yield debt on Wall Street
from such investors as Merrill Lynch and Putnam.
Cable customers who subscribe to OnSet pay an additional $5.95 a
month, all of which goes back to DIVA. New movies cost $3.99 each,
so-called adult titles $7 or $8, older movies $2.99, and how-to and
kids' shows as little as 99 cents. The fees are shared by DIVA, the
cable operator, and Hollywood. All the major studios except Viacom's
Para-mount (Viacom owns Blockbuster, remember?) supply content
to DIVA, and cable networks such as HBO are eager to join in. As
costs drop for real-time encoding of live sports or news events, they
too could be made available.
"We believe it's economically viable on movies alone," Bushell says.
"But the upside is sports, TV shows, music videos, infomercials to
help a consumer buy a car or plan a trip." DIVA says its typical
customer buys more than four movies a month.
Others will soon enter the arena. Sea Change International of
May-nard, Mass., is developing a video-on-demand system that,
unlike DIVA, it will sell outright to cable operators. Intertainer, a startup
in Santa Monica, Calif., has developed a service to run over cable
modems and souped-up phone lines; it will offer movies, TV shows,
music, and travel and fashion videos, with links to promote home
shopping. Formed in 1996 by Hollywood hotshots Jonathan Taplin
and Richard Baskin, Intertainer begins trials this summer. Backers
include Sony, Intel, Comcast and US West, soon to be joined by
DIVA execs say rivals will be surprised at how difficult it is to build a
video-on-demand service that can be scaled up to handle millions of
subscribers. In the meantime, Cook says, "our costs are going down
rapidly, and our capabilities are going up sharply." DIVA executives
also told FORTUNE that they're now willing to give equity to major
cable operators in exchange for carriage; that's a model the industry
knows and likes. But the strongest force that will drive cable to offer
video-on-demand is competition from satellite-TV providers and
phone companies. This summer US West will roll out a service called
Tele-Choice in Phoenix, combining Intertainer's on-demand
programming with Net access and telephony. DirecTV already offers
more than 200 channels of programming. The longer cable waits to
go interactive, the sooner its customers will look elsewhere.