A battle for interactive consumers is brewing over the most popular leisure-time attractions-video games, movies, music and
select on-demand transactions (from ordering pizza to trading stocks)-and is nearly erupting into a major brawl.
But if a fight does break out, it will be due to the much bigger gamble major media and content players are taking on the future of interactive television.
AOL Time Warner fired a bold shot in the battle for interactive “customers” last week when it announced an alliance with Sony to provide some of its popular branded PlayStation 2 games directly on the Internet from a personal computer, digital cable or wireless platform.
The announcement was the opening salvo in what already looks like guerrilla warfare in the interactive game area, where Microsoft is a set to become a major player with its Xbox, which cost $5 billion to develop and will cost at least $500 million to market later this year. No. 2 Nintendo is struggling to stay in the game with its new Gamecube.
The stakes are high, reaching well beyond the average youthful game-player. Microsoft executives are vowing to transform the novelty of electronic games into a necessity.
Today it’s games and music; tomorrow it will be everything else interactive.
Indeed, the new generation of video game consoles are Trojan horses of sorts, sneaking into homes complete with modems and basic interactive entertainment from downloading to storing games and movies. So even homes without Web TV, personal computers or advanced digital cable set-top boxes are suddenly interactive.
The nonexclusive AOL and Sony deal, backed by a new RealNetworks pact, is indicative of the content and service partnerships-like those recently secured in the areas of music and movies-AOL Time Warner will need to pursue its goal of world domination.
AOL’s popular instant messaging, chat and e-mail functions will be interfaced with Sony’s PlayStation 2 games with the support of a hard drive, a mouse, a keyboard and an LCD monitor display. Sony’s 30 million PlayStation users (including 10 million worldwide PlayStation 2 units that should double in number by next spring) coupled with AOL’s 29 million online members and Time Warner Cable’s 12.8 million subscribers and its RoadRunner high-speed Internet access service collectively offer an early glimpse of what a cohesive broadband environment could be. It’s interactivity, anywhere and anytime, interfaced with consumers’ favorite pastimes and needs. That’s a clear blurring of the lines between passive and active devices.
ITV stumbling
Although the Game Show Network and online sports fantasy-team games have had relative success, there is troublesome uncertainty over just how interactive conventional television viewers want their TV sets to be.
The fact that AOL has sold fewer than 100,000 of its AOL TV set-top boxes could be an indication that viewers prefer to be interactive anywhere but their television sets.
Even Microsoft’s 1 million Web TV users aren’t impressive, considering the years the product has been on the market.
Of course the advanced digital cable set-top boxes complete with on-demand movies, music, games and other services could change all that.
Even there, Sony and AOL Time Warner have formidable footholds. Time Warner has its own cable systems while Sony-which commands 60 percent of the video game market-is manufacturing Cablevision Systems’ new advanced set-top boxes complete with support content and services. Cablevision has pushed back the rollout of those boxes and services to later this year.
Indeed, the economy has threatened to take the edge off robust forecasts for interactive digital cable services.
Cable’s mixed bag
The more aggressive deployment of video-on-demand and other on-demand services from advanced digital cable set-top boxes expected later this year may hinge more than ever on consumer willingness and Hollywood studio cooperation rather than on cable’s readiness.
Economic concerns and weakness may blunt consumers’ discretionary buying habits, leaving subscribers more likely to maintain existing services rather than spend money on new ones.
Lehman Bros. analyst Lara Warner predicts cable operators are positioned to capture 50 percent-plus growth through 2005 over its competitors, or an incremental $23 billion in revenues, driven largely by video-on-demand and pay-per-view services.
However, analysts at Merrill Lynch and ABN-AMRO recently revised their 2001 VOD forecasts to reflect a more modest deployment of 1.5 million digital cable homes.
Niraj Gupta of Salomon Smith Barney says more recession-resistant high-speed demand should more than offset a shortfall in digital subscriber growth and advertising revenues, accounting for 65 percent of larger cable multiple system operators’ cash flow growth this year.
Even if forecast digital cable subscriber growth rates are off about 10 percent because of an uncertain economy or the lack of available first-run VOD films due to tough studio negotiations, they still generally represent a 40 percent gain over the $20 per month in average cash flow per subscriber for the industry, Mr. Gupta said.
Like other forms of interactive content, VOD revenues initially are expected to grow at a compounded annual rate of at least 30 percent. Cable operators also acknowledge that VOD, games and other forms of interactivity will give them a competitive edge over satellite providers and personal video recorders.
But the advent of interactive television has even more profound implications for a hybrid giant such as AOL Time Warner.
It has the ability to offer Sony’s PlayStation 2 on its “anywhere” platform, giving the customer the opportunity to play on a personal computer, television, wireless phone or any other Internet-connected device. Bringing the games, music, movies and other universal content of Time Warner or any of its allies, AOL does not need anyone’s permission to plow interactivity’s fertile global ground-in good economic times or bad.
JPMorgan H&Q analyst Paul Noglows underscored the point in a recent report about how early-stage interactivity keeps convergence alive. “AOL Time Warner has a particular advantage in that it is also the second-largest cable operator, has a larger base of subscribers and has the technical expertise to develop compelling interactive components to add to [its] traditional media fare,” he said.
AOL Time Warner’s unparalleled command of so much content and distribution is the reason it will continue to attract allies such as Sony as it single-handedly drives the market for interactivity.
The Internet gradually is being fashioned into a more formidable entertainment and information competitor. Online gamers have been the “vanguard users” of the executable Internet” with games such as WarBirds and EverQuest, which call players on the telephone, send them faxes and interact by instant messaging.
The “X”-or “executable” Internet,” as Forrester analyst Carl Howe calls it-will boost the quality of online users’ experience and accelerate the number of connected devices.
That ultimately is where companies such as AOL Time Warner and Microsoft are headed, although Mr. Howe makes the point that Microsoft already is two years behind the competition with a line of products targeted at today’s Web instead of the X Internet.
Clearly companies such as AOL Time Warner and Barry Diller’s USA Networks believe it is not such a broad jump to there from where we are today, compared to other media giants such as The Walt Disney Co. and Viacom, which have adopted a more cautious approach to interactivity.
Viacom and Disney acknowledge they are working with third-party sources to deliver films to homes over the Internet on a subscription or pay-per-view basis. But like other conventional broadcasters with cable and studio film interests, a big part of their corporate structure continues to struggle with the ultimate broadcasters’ dilemma: securing a return path to mine their expanded digital spectrum on their own terms-without being beholden to cable must
-carry and television manufacturing standards.
Last week, Viacom and Disney were immersed in the broadcast networks’ new season upfront advertising market-which is a major contributor to their ad-supported core businesses-while AOL Time Warner was as preoccupied with nonprime-time matters, such as waging war on the interactive game front.
AOL Time Warner’s sights are set on a broadband future that looks beyond any single deal or upfront market or prime-time season-or even its own swelling $1 billion-plus restructuring charges from its $124 billion merger in January.
That’s because the returns to AOL Time Warner within five years of when broadband becomes a new, ubiquitous interactive mass-market medium will make that look like chicken feed.