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Can Microsoft’s WebTV handle the new competition?

America Online’s AOLTV may not have blockbuster sales out of the gate, but analysts say it will provide an immediate shake-up to the interactive TV market.

Although not clearly superior to existing interactive TV offerings, analysts say AOLTV is poised to have a significant effect on the market because of its track record with its online service for PC users and its relationship with cable provider Time Warner, as well as because no existing service has a lock on the market.

"Right now, the market is pretty wide open," said Ken Smiley, an analyst with Giga Information Group. "I think there’s plenty of room for a lot of devices from a lot of manufacturers, providing a lot of different services."

But the online service company is not assured of instant or widespread success in the market, which has thus far been marked by a complex network of relationships, delayed product launches, and products that customers and analysts say have failed to live up to the hype. Many companies are targetting the television as one of the future access points for home Internet use, along with wireless handheld devices, Web tablets and other Net appliances.

This market is expected to grow from 11 million units shipped in 1999 to 89 million units in 2004. The market will grow from revenues of $2.4 billion last year to $17.8 billion in 2004. Like Microsoft’s WebTV, AOLTV will come in the form of a set-top box manufactured by Philips Electronics and will be available at retail stores.

It will be capable of offering dial-up Internet access, online content, some enhanced TV features such as e-commerce, and some digital video recording through its partnership with TiVo. "They seem to be rolling out a product similar to what WebTV was doing a couple of years ago," said Jim Penhune, an analyst. "A standalone box with a dial-up modem built by Philips."

Eventually, both WebTV and AOLTV are expected to offer broadband, or high-speed, Internet access, in addition to more sophisticated e-commerce and interactive content features. They will face competition from upcoming and existing game consoles and from digital cable set-top boxes. "All this discussion of AOLTV is starting to reinvigorate the category," said Rob Schoeben, director of marketing for WebTV, who added that he has not yet seen AOL’s service. "There is more interest in interactive television, and as the leading product we benefit from that."

WebTV is widely seen as the market leader, but analysts say the service has made numerous missteps in the past few years and has failed to turn hype into notable subscriber growth. Its customers have complained for years about slow upgrades to support standard Web technologies such as Java and RealNetworks’ newer media players. Microsoft’s service also has dealt with an aborted attempt to include banner advertisements on email pages.

WebTV has about 1 million customers, more than any other interactive TV service, but it is clearly not living up to the hype of its initial launch -- or its 1997 acquisition by Microsoft, Giga’s Smiley said. "WebTV has the largest market share at this point, but not so large it couldn’t be overtaken by someone else," he said. "Even if WebTV has dominance in the type of set-top box they have today, there’s no indication that they’re going to dominate the market."

The Microsoft-owned service has made several attempts to reposition itself as a provider of "enhanced television" rather than as a low-cost Internet service provider, most recently with the launch of Ultimate TV, a high-end digital video recorder and satellite TV receiver offered in partnership with DirecTV, also an AOL ally.

Initially marketed as a low-end way to access limited Web content, WebTV’s early strategy was blown out of the water by dramatic price drops in computers and the resulting increase in PC purchases. "Microsoft bought WebTV when the idea of a standalone terminal seemed to be interesting," Penhune of the Yankee Group said. "But that TV-based Internet appliance model has failed to materialize because PC prices fell to comparable levels, and it wasn’t clear that being able to offer Internet over TV was a compelling service."

The software maker hasn’t placed all its bets with WebTV. It has deals with cable providers such as AT&T to put its Windows CE-based interactive TV software on upcoming digital cable set-top boxes. It also has agreements with satellite providers, including DirecTV and Echostar. "Microsoft’s whole position in this market is hard to interpret, because it crosses over a lot of services and devices," said Penhune.

The battle is not simply a contest between Microsoft and AOL. Numerous companies are vying for solid footing in the interactive TV market. Chipmaker National Semiconductor, for example, has prototype designs of all-in-one DVD and digital video recorders in the works. And Sony has said it sees its upcoming PlayStation 2 as a digital hub for its home entertainment and content products.
All of the players will need to offer more than just broadband Internet access through television, which Microsoft and AOL will be able to do through their relationships with AT&T and Time Warner, respectively. As AOL has proven in the PC market, access must be married with compelling content to draw paying subscribers.

Sony, which has a movie studio and record label, will be in an enviable position to offer such a marriage, Giga’s Smiley said, when it adds broadband Internet access to the PlayStation 2. "Access alone isn’t going to cut it -- you need content, too," he said. "What more is Sony going to start offering down that pipe in the future? It won’t just look like a game console."

Richard Doherty, president of the Envisioneering Group consultancy, also said Sony has eyes for the market but that the company has a ways to go. "Sony has been painting amazing pictures of a rich interactive world, but that’s going to take awhile to do," he said.

But according to WebTV’s Schoeben, software, not content, will make the difference in attracting people. He notes that AOLTV uses proprietary technology, which means content developers and broadcasters must develop specific versions of their services for AOLTV.

Other game console makers, including Microsoft, Sega and Nintendo, have said they will offer online access through TV game consoles, which will also compete with AOLTV, according to Doherty. He agrees that AOL will have the edge because of existing relationships with broadcasters and content providers. "Microsoft is very good with distribution, but they don’t have a fraction of the content that AOL has," he said.