THE LONGEST LAST MILE

By Robert La Franco

By the third slide of his presentation, the crowd of cable industry executives knew just what they were going to get from Jonathan Taplin. The cofounder of Intertainer, which delivers entertainment on demand over the Internet, used his keynote speech at the October Broadband Opportunity Conference in Santa Clara, California, to berate 650 cable guys. He said they were shortsighted about the potential of streaming media. He said they were creating a mess -- or a "Tower of Babel" -- with so many different decryption technologies and set-top box specifications. He said they were doing a disservice to themselves and their customers.

To Mr. Taplin and other entrepreneurs who want to package movies on demand, the future of television belongs to the Internet: consumers would get better programming and unlimited choice, and video middlemen (cable, telcos, and satellite companies) would dramatically reduce their costs. In this new entertainment world, consumers would be sent shows directly, to watch whenever they want.

But the battleground for evangelists like Mr. Taplin is that Internet delivery flies against the architecture of cable and satellite, which thrive on point-to-multipoint distribution. Not surprisingly, the industry has been slow to accept the idea.

Some of the cable marketing directors that were gathered in Santa Clara shifted restlessly in their seats while Mr. Taplin spoke. Others snorted in disapproval. A few said they detected a tone of desperation.

True, Intertainer has raised $100 million from the likes of NBC, Sony (NYSE : SNE), Comcast (Nasdaq : CMCSK), Qwest Communications (NYSE : Q), and Microsoft (Nasdaq : MSFT).. And yes, an Internet entertainment pipeline is becoming technically feasible, with enough high-bandwidth optical fiber in the ground to handle the load. Processing power of PCs and set-top boxes in homes is increasing. And companies like Enron Broadband Services, Akamai Technologies (Nasdaq : AKAM), and Inktomi (Nasdaq : INKT) are installing servers and routers all over the country to minimize the length of fiber a movie must travel to get to the living room -- the so-called last mile.

Yet the fledgling streaming video industry, which seemed so promising just a few years ago, is struggling. Reel.com, a subsidiary of Hollywood Entertainment (Nasdaq : HLYW), cancelled its trial of movies on demand in August 2000. Blockbuster.com (NYSE : BBI) still has not achieved significant distribution. Intertainer, which has been operating since 1996, remains in that backwater of home entertainment devices, the PC -- which still is the only machine with enough processing power to turn data into movies. For these companies, the most immediate hope of support comes from telephone companies, which themselves are struggling to crack the $70 billion TV distribution market.

PIE IN THE SKY?

Cable and satellite companies are the players to beat -- or partner with -- in this space. That's why Mr. Taplin wants cable TV companies, which control access to more than 70 percent of the TV households in the United States, and to a lesser extent satellite companies, which handle 15 percent, to invest more heavily in streaming-media equipment. Mr. Taplin is betting on a future where entertainment is delivered by anyone with a URL and a server.

But the cable industry already has a distribution method -- and one that allows cable companies, not consumers, to control programming. Thanks to the entrenched encoding and packet delivery standard called MPEG2, cable TV distributors send smart signals to a dumb box in the home. The box is basically a security guard, controlled by the cable distributor -- only paying subscribers may enter.

When approved a few years ago, MPEG2 changed the cable business, essentially allowing legacy analog systems to pump ten to twelve digitized TV "channels" through cables -- or "pipes" in industry parlance -- that previously carried only one analog channel. "MPEG2 is the greatest thing that ever happened to the cable industry," says Jim Wood, vice president of advanced technology at AT&T (NYSE : T). "I can see streaming video being useful on a one-to-one basis, but today it is cheaper to use MPEG2, which is more robust and more reliable."

DEPROGRAMMING

In his 1995 book, Being Digital (Alfred A. Knopf), Nicholas Negroponte, head of the Massachusetts Institute of Technology Media Lab, envisioned the day when processing power in the home, coupled with digitized programming, would eliminate traditional broadcasting. Five years later, Mr. Taplin is holding strong to this vision, and he is not alone in his quest to turn the Internet into the millennium's TV antenna. Broadwing (NYSE : BRW), a self-described "next generation communications provider," is rolling out Intertainer for its broadband consumers. Comcast, the nation's fifth-largest cable operator, has tested Intertainer in 500 homes. Cox Communications (NYSE : COX) also has Intertainer in its lab, but the trials have shown the need for more processing power -- at least 300 million instructions per second (MIPS), compared with the 108 MIPS in most set-top boxes today. Cox has rolled out its first service to 2,000 video-on-demand (VOD) clients in San Diego using the MPEG2 standard.

But since the Web exploded as a popular medium, entrepreneurs and telcos have viewed it as their way to enter the home entertainment market. Telephone service provider SBC Communications (NYSE : SBC) is spending $6 billion to upgrade its networks to ensure that each broadband consumer gets a guaranteed 1.5 MBps Internet connection all the time -- the amount of bandwidth needed today for streaming video. Last summer Blockbuster.com announced a 20-year alignment with Enron Broadband Services, which itself is spending billions of dollars to increase the bandwidth of its Internet backbone, and with it, the quality of streaming video.

In the meantime, cable companies are trying to extend their stranglehold on the 70 million homes now served with the non-Internet distributed digital-cable offerings. Digital-cable subscriptions (think of a satellite TV without the dish) doubled to 9 million in 2000, according to Merrill Lynch. By 2005, Merrill expects to see 39 million digital-cable subscribers, compared to 24 million broadband subscribers. As digital cable becomes more popular -- and as VOD services are installed as part of cable -- there will be less opportunity for companies hoping to turn the Internet into the distribution medium of choice. The window of opportunity envisioned by Mr. Taplin could be slammed shut.

"Cable has long enjoyed an enormous control over their users," says Stephen Felisan, vice president of technology and development at House of Blues Digital, the Internet arm of the House of Blues nightclub chain. "It's wrong, and it breeds inferior product."

Of course, the two delivery protocols -- MPEG2, used by programming providers like InDemand, Diva Systems, and more recently, Realnetworks (Nasdaq : RNWK), and IP, used by companies like Intertainer and Blockbuster.com -- are not mutually exclusive. But for the IP challengers, which are essentially trying to beat out VOD leaders -- wide deployment is crucial. And it's a long way off.

Most streaming media today is viewed on computers. Even people who have broadband connections can hope for nothing better than a small, jerky video with AM radio-quality sound. That limits its audience: House of Blues's HOB.com recently posted a concert by '80s rock superstars Duran Duran, which drew only 15,000 viewers.

Other companies, like Sightsound.com, see the existence of parallel businesses where consumers can download films from a server, store them, and watch them later. But in addition to the copyright issues that movie studios would have with such businesses, there are technical issues as well. The setup requires a PC and additional equipment to transport the file to a TV screen.

For cable and satellite companies, the leading distributors of television programming, current technology is working just fine. Some executives don't see adopting Internet distribution as in their interest. "We don't have a concrete strategy on how we will embrace streaming video over the Internet," says Alex Best, vice president of new technology at Cox. "Of course, it is kind of ironic; if I launch VOD like I am doing today, offering movies at 3 MBps, and then make a deal with a company to offer streaming video over the Internet, I am competing with myself."

WAKE UP STREAMING

To the consumer, the difference between streaming video and the current digital television signal is quality: streaming video looks jerky and sounds lousy; digital TV offers full-screen video with surround sound, or at least stereo. Technically, the difference comes down to bandwidth consumption. A digital TV signal beamed down to a satellite dish or through a cable wire typically takes up about 3.5 MBps. The signals are encoded by the distributor into the MPEG2 standard, sent to the home, and decoded by the set-top box. This process gives the distributors tight control over who gets what content and how much they pay for it.

In the streaming environment, the signal gets compressed to an even smaller size, using the newer MPEG4 standard. The video is then distributed as packets over IP, typically taking about 1.5 MBps of bandwidth. When decoded in the home with the right equipment, it could look and sound as good as video piped in at double the bandwidth. This point is crucial, since most consumer broadband providers promise users 1.5 MBps of piping for their monthly service fee.

Of course, cable companies, like telcos, are investing heavily in system upgrades to facilitate even greater and more predictable bandwidth usage. Charter Communications (Nasdaq : CHTR), the cable company assembled by "wired world" evangelist Paul Allen, is the most aggressive, with a three-year, $3.5 billion spending plan that started last January. Perhaps seeing the future, Seachange International (Nasdaq : SEAC), an MPEG2 hardware provider, has struck a deal that gives it entry into the streaming-video market as a supplement to its cable TV business. NCube, also a hardware provider, has alliances with streaming-media company Realnetworks and interactive TV developer Liberate Technologies (Nasdaq : LBRT).. Still, cable companies are likely to resist any change that loosens their control over access.

BOX-TOP OFFERS

Of course, a market could combine both delivery modes: digital-cable signals could be distributed as they are today, with Internet-delivered video plugged in as an overlay. That's the dream of companies like Wink Communications (Nasdaq : WINK), OpenTV (Nasdaq : OPTV) (into which Spyglass is now merged), and Liberate Technologies. Imagine watching a football game, and the TV distributor sends out an electronic ad for tickets to next week's game. The ticket offer arrives over IP, and you click on it to buy a few seats. This connects you to an Internet server where interactive video is stored. A few clicks around the TV screen and you can see the view you would have from a variety of seats. One more click and you own tickets for some of those seats.

But before that can happen, cable and satellite infrastructures need to be overhauled. More importantly, cable companies must decide that they want to change. Cable hardware makers have begun moving in that direction.

Scientific-Atlanta (NYSE : SFA), one of the two leading set-top box manufacturers in the United States, has the most powerful box headed to market, the Explorer 2010, which carries with it 130 MHz of processing power. That is a pale comparison to even the PlayStation 2, which has processing power of 300 MHz and can handle the transfer of packets into full-motion video. Comcast did a VOD trial with Intertainer in 1999 and used Gateway Destination computers with Pentium II chips and specially designed 26-inch monitors to handle the signal.

The set-top boxes also need to be equipped with a new cable modem standard, Docsis 1.1, that allows bandwidth to be used based on need. While the standard is likely to be approved, boxes capable of employing it probably won't be sold until late 2001 -- which will make the Internet-based video hill just that much steeper. Of course, the cable companies then would need to get behind the new equipment, which is the bigger worry for people like Mr. Taplin, who are betting that the Internet is the future of TV.

Mr. Taplin, 53, is no stranger to rebellion -- or rebellious entertainment. In 1965, he was a shaggy roadie for the Jim Kweskin Jug Band. He met Bob Dylan at the Newport Folk Festival, when Mr. Dylan outraged the audience with one of his first rock shows. He later worked as a road manager for Mr. Dylan and The Band. When rock lost its appeal, Mr. Taplin worked as coproducer on Martin Scorcese's first hit, Mean Streets -- the start of a brief Hollywood rebellion, when directors wrested control from the studios.

Perhaps his maverick past could help in his latest battle. But Mr. Taplin knows that cable executives are the toughest crowd he has ever tried to convert. "A bunch of people's oxes get gored if I am right," he says. "I set out to shake them up. I wanted to say, Hey, guys, wake up, this can happen, and it can save you huge amounts of money. It went right over their heads."