For Interactive TV, Potential Remains Unfulfilled

Throughout August, Disney Internet Group (DIG Quote) was awarding Mazda sport utility vehicles to players of its interactive version of ABC's Who Wants to Be a Millionaire.

That promotion appears to be the quickest payoff anyone, investors included, will get from interactive TV.

Interactive television, brewed in different flavors by companies such as Disney Internet, WorldGate Communications (WGAT Quote), Wink Communications (WINK Quote), Liberate Technologies (LBRT Quote) and ACTV (IATV Quote), promises a huge potential market as computer networks and television networks converge. But though interactive TV is getting loads of attention these days -- thanks to deals like ReplayTV's one-year agreement to deliver personalized advertisements for Universal Pictures -- the numbers behind the interactive-TV market point to investment payoffs that are small and not likely to get big anytime soon.

Bad Show

To see disappointing numbers, all you have to do is start with the stock prices of companies in the interactive-television world, which also includes OpenTV (OPTV Quote) and TiVo (TIVO Quote). They're all well off their highs of late 1999 and early 2000.

Surfing Interactive-TV plays slide

Even so, their stock prices have plenty of optimism built in: Liberate, with a market cap of $2.6 billion, reported revenue of $28 million and an operating loss of $91.4 million in its latest fiscal year ended May 31.

Behind the financials, though, other numbers indicate how small the user base is for interactive TV nowadays. Let's use the example of what appears to be an interactive TV success -- the play-along version of Millionaire, which debuted earlier this year.

Each time ABC and Disney Internet Group (formerly known as GO.com) produce an interactive Millionaire episode -- one that allows home viewers to compete against one another by answering Regis's questions before the on-air contestant does -- they get an audience of somewhere between 150,000 and 175,000 players, according to Jonathan Leess, head of enhanced TV for Disney Internet and ABC. The game, which is synchronized to the TV broadcast, doesn't require an actual interactive TV; rather, users need an Internet-connected computer in sight of their TV.

That perhaps is a good business for Disney Internet. Leess won't disclose what kind of operating profit or loss his unit is making from its production of interactive versions of Millionaire, NFL football games and specials such as the forthcoming prime-time Emmy awards. He says the enhanced TV group, which ranges in size, depending on its workload, from 20 to 35 people, has "a very, very strong, established revenue stream for enhanced TV right now."

No Business

But the people who are playing Millionaire are a fraction of the people who could be playing Millionaire -- not necessarily an encouraging sign for the interactive medium. Leess estimates that roughly 30% of TV households have a computer in the same room as the TV set. Meanwhile, during a recent August week, about 14 million households watched each episode of Millionaire. So that means that out of all the households watching what would appear to be about as strong an interactive experience as you could get, only 1.3% were interacting. Of all the households in that group that might have a TV and computer in the same room, the participation rate is 4%.

Take those participation rates and apply them to TV programming not as much fun to play along with as a game show, and you begin to wonder how large the opportunity is in interactive TV. After all, the number of installed interactive, digital set-top cable boxes that could be used to deliver interactivity over the TV is too small to make a meaningful audience, says Leess; that's why ABC has cobbled together interactivity from separate TVs and PCs.

In the U.S., there are about 8 million digital set-top boxes and 5 million older, analog boxes that WorldGate Communications could use to deliver Web access to TV households, says WorldGate CEO Hal Krisbergh. The service is being offered in 3 million homes worldwide, he says. Both of those universes, of course, are smaller than the 30 million households in which Leess estimates people could watch TV while sitting at their PC.

Krisbergh says that WorldGate, which has 43,000 subscribers paying for its Internet-through-television services, gets a 10% to 12% penetration in areas where it markets the service. Presumably, the people who would be watching Who Wants to Be a Millionaire when it aired would be a fraction of that.

I Want My MTV

Representative of the skepticism clouding interactive TV is Bill Frezza, general partner of venture capital firm Adams Capital Management. Putting aside firms such as TiVo and ReplayTV, which Frezza characterizes as marketers of souped-up VCRs, not interactive television, Frezza says he doesn't feel that anyone has figured out a "killer app" for the system -- an application that's so appealing that users will want it in their households. "I think a lot of people who take an 'if-you-build-it-they-will-come' philosophy will lose their shirts," he says.

But Krisbergh, a longtime veteran of the cable-TV industry, says skeptics who say that people don't want to interact with their TVs are limited by their own habits and by the lessons of history. He disputes, for example, the criticism that viewers don't want to interact with their TVs, citing people's hearty embrace of remote controls as a counterexample. "When they're given any degree of freedom, they're avid interactors with their TVs," he says. He says average WorldGate subscribers spend an hour a day in their homes using the Internet via TV.

Krisbergh says he expects a major market for WorldGate's product to be in the two-thirds of American households without Internet access, and even in the homes that aren't even yet subscribing to cable TV. "It doesn't strike me that people don't want to interact with their TV set," he says.