The new alliance of AT&T (T) - Get Report and Microsoft (MSFT) - Get Report promises to speed up the delivery of broadband services to millions of American homes. But if history is a lesson, these new interactive services, piggybacked onto cable TV systems, will not come as quickly as people might think.
As part of the deal, in which Microsoft is buying $5 billion of AT&T securities, the two companies say they'll soon offer such digital cable services as Internet access, interactive television and audio programming with the help of Microsoft's Windows CE software in two showcase cities. With AT&T building a substantive cable network -- including
systems, the impending purchase of
and some side deals with
, the network will pass 25 million American homes -- the companies look poised to revolutionize TV.
But you don't have to look too far in the past to see that when a cable operator and a software developer decide to develop a new generation of broadband services in a model city, things don't always turn out as planned.
Back in late 1994,
(now known as
), showed off with great fanfare the
Full Service Network
in Orlando, Fla. A trial system for what was envisioned as the next generation of interactive television services, FSN featured movie videos on demand. Home shopping. News on demand. Downloadable video games, too.
By mid-1997, Time Warner had scrapped the system.
magazine estimated that its parent company had invested $100 million in the project. "It may have been the most expensive pizza-delivery system ever invented," the newsweekly reported.
Some things are different this time around. For a variety of reasons -- including the falling price of computer hardware -- the technology should be easier and cheaper for Microsoft and AT&T than it was for Time Warner, SGI and the other companies who worked on FSN. With the commercial incarnation of the Internet, there's a huge variety of content and services to potentially offer customers -- not just the stores, games and information services that Time Warner cobbled together for FSN. Plus, the Internet has created an audience and whetted its appetite for these services, points out Gary Arlen, president of research firm
But other things haven't changed. Executives still don't know what consumers want from these systems. As AT&T Chairman Michael Armstrong said in a conference call with reporters and analysts Thursday morning, it's one thing to sit around a conference room and decide what the service should look like. It's another for your consumers to tell you what they want. You've got to believe, Armstrong said, that AT&T will come out of the model cities "being smarter" -- armed with applications that consumers want, packages of services that work in the market and a sense of how much consumers will pay.
Also, the development will not be as fast as the hype machine proclaims. "It never happens as fast as these guys dream," says Arlen. "This is in some degree wishful thinking from Microsoft, that it speeds the process
broadband services, because it just takes time." It's unclear from Armstrong himself what the pace is. He called 1999 "our year of piloting" on the conference call, but AT&T's press release puts mid-2000 as the deadline for putting Microsoft's TV software into the two showcase cities, which the companies appear not to have selected yet. Arlen, citing logistical hurdles like getting the set-top boxes into the retail market, says it will take four or five years before AT&T's scenario becomes widespread. "I think it's going to be very small in the next two, three years," he says.
Of course, there are other factors too, such as regulatory issues, primarily concerning AT&T's acquisition of MediaOne, but Armstrong is confident that the deal will go through. "I believe, when the scrutiny is over, we will indeed pass muster," he said.
One wild card concerns the access that companies other than Microsoft will have to AT&T's cable network. In addition to the two cities relying completely on Microsoft's Windows CE platform, AT&T and Microsoft say they'll establish a third city that will rely partly on Microsoft software, but allow other companies to supply their own software to work with it.
and other Internet service providers have been pushing for open access to AT&T's cable network, and Armstrong said he'd be happy to let other subscription-based companies "ride on the interface."
"If AOL would like to sit down at the table and negotiate a commercial arrangement, we welcome that," Armstrong said. Regarding past negotiations with AOL, he said, "The truth is, every time we start, there's some event that stops us, and they get on the other side. And we have a falling-out." AOL had no comment on today's announcement by deadline.