New Year, New Rules: Interactive TV Investors Betting on Cable Giants' Next Move

The 2001 market for interactive television won't be as active as its supporters once believed, it appears.

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With much of the power in interactive TV shifting toward cable television system operators and with these operators cautious about pouring money into advanced TV, sell-side analysts are adding time to the clock governing how quickly they expect various interactive services will achieve widespread deployment domestically. For investors, that means paying attention to what cable operators want with digital television, perhaps lowering expectations and keeping patient.

2001 looks like just another year in the long, continuing story of interactive TV, an umbrella term used to cover a variety of services such as video on demand, interactive onscreen program guides, browsing the Web on a TV screen and interactive commercials that give viewers the opportunity to request more product data. Like other television technologies such as flat-panel, hang-on-the-wall TV sets and 3-D broadcasts, interactive TV has been long on expectations and short on mass-market deployment.

Turning Down the Volume

One of those analysts with somewhat diminished expectations is Peter Ausnit, Internet and new media analyst with Deutsche Banc Alex. Brown. Ausnit, who initiated coverage on interactive TV software firm OpenTV (OPTV) with a strong buy rating in October, downgraded the company to a buy two months later based on conversations with cable TV operators indicating that major U.S. cable interactive deployments may still be "several months or more" away. Conversations with major U.S. cable operators showed low interest in launching interactive TV in 2001, Ausnit wrote in a recent report, attributing the holdup to three different factors: one, a lack of "competitive pressure"; two, the cluttered landscape of interactive software; and three, the high costs of interactive cable television boxes.

Interactive TV, he says, is unlikely to be deployed in volume until 2002: "The groundswell that people have been expecting and been led to expect seems further off than we thought it was."

In the industry landscape that Ausnit describes -- and under the shadow of a possible 2001 recession -- interactive TV stocks have fallen hard. Gemstar-TV Guide International(GMST) closed at $38.63 Tuesday, down from its 52-week high of $107.44. Unfortunately, Gemstar is one of the stronger companies in the field.

Software company Liberate Technologies (LBRT), at $13.38, is down from $148.50. OpenTV, at $12.63, is less than 1/20 of its high of $245.75. TiVo (TIVO), which combines a set-top video recorder with a personal recording service, spiked at $78.75 in January; it's now at $6.31.

Working Together

Interactive TV developers have the technology down pat, says Jerry Bennington, an interactive TV consultant who is secretary of the Advanced TV Enhancement Forum industry trade group. What's missing, he says, are reference business models that allow everyone in the interactive TV food chain -- from ad producer to cable operator -- to all be rewarded for the value they add to interactive TV. "And all of them do add value," he says.

But what's going to revive the fallen interactive TV stocks? A major cable television operator announcing its strategy and then actually deploying the advanced set-top boxes necessary to offer the service, says Gordon Hodge, media analyst at Thomas Weisel Partners. That major cable operator was supposed to be AT&T (T), which is working with Microsoft (MSFT) and Liberate Technologies on software for advanced, interactive cable TV systems, but AT&T Broadband hasn't taken the big plunge yet. Hodge thinks the big announcement -- maybe from AT&T, maybe from some other company -- will arrive "in the back half of next year."

But Gruntal analyst Catherine Skelly is hard-pressed to think of anything that could drive the interactive TV market up anytime soon, given the indifferent reception that interactive TV software firm ACTV (IATV) got after announcing a deal early last month to deploy its interactive advertising system in an AT&T test. Since the announcement, the shares have lost half their value, not being helped by a more recent deal with Microsoft. "Everything's offset by this harsh market," Skelly says. Skelly has an outperform rating on ACTV, Gruntal's highest rating (her firm hasn't done underwriting for the company).

To play the sector in 2001, Skelly says it's key to remember that the operators of local cable TV systems have ultimate control over what the viewer sees. She looks for companies that identify a need of the cable industry, then develop an application to serve that need. That's why she's a fan of ACTV, which, in its cable-operator-friendly business model, shares revenue with local systems. And it's why she's not a fan of TiVo, which is spending millions to develop a consumer brand that may not be worth much in the end. "That service can likely be delivered through the set-top box and controlled by the cable operator," Skelly says. "Trying to be stand-alone, I think, is a losing proposition."

Ausnit suggests paying attention to basic applications for digitally transmitted television. That includes Gemstar's interactive program guide, which Ausnit says will be widely deployed in 2001: "It'll be an important year for IPGs." He has a strong buy on Gemstar, for which his firm has done underwriting.

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