Insight Analysis: Interactive TV Outlook – August 02

Perception and cost The two major problems facing the growth of iTV are perception and cost. Television is not perceived as an educational or information-providing tool, unlike computers and the internet. As a result, the information exchange and transactional elements of iTV are somewhat overlooked by users, according to UK Consumer Responses To iTV, a report from the London Business School (LBS).

Illustrating this, the report found that gaming is popular amongst users, whilst email, web browsing and t-commerce (television commerce) are not. iTV has been successful when it has been solidly anchored to entertainment: Big Brother voting, Sky Sports, Wimbledon.

Entertainment-led event services have so far proven by far the most popular iTV elements. Informational service – which the Government has hoped will be popular – do not seem to click with viewers, who prefer the internet for their interactive searching.

The second problem is cost. Gaming and betting are currently bringing in the most revenue, although there are many other areas of interactivity that could be tapped, including commerce and advertising. However, the investment is great and the return can be somewhat diluted; players must divide revenue streams between developers, brand-owners and platform providers, notes a recent Interactive TV report from netimperative.

Cable companies have begun investment in the platform, but their huge debt has somewhat hampered its full development. Both major UK cable operators, Telewest Communications and NTL, are currently restructuring their finances in order to write off this debt (see Telewest Debt Waiver Is On The Cards). Once these restructurings have been completed it is likely that the two groups will eventually merge; a united business will be better placed to exploit the cable platform’s inherent suitability to providing interactive services.

Satellite, meanwhile, has so far pretty much stolen the show. BSkyB has converted all of its customers to digital and there are currently more than six million of them. Over 40% of digital customers use iTV services, according to the LBS study. Sky Digital made £186 million from iTV revenues in its last financial year, over half of which came from the company’s interactive betting service which uses iTV, the internet and the telephone in combination.

Sky has been very successful in securing digital customers and has made headway into introducing iTV services. However, the satellite platform has technological limitations when in comes to two-way communications. As customer and operator are not physically connected (as they are via a cable in cable TV homes), a telephone connection is used for the return of data from viewer to central computer. This is slow and can only carry a relatively small amount of data, unlike cable which has a very high data bandwidth.

Consequently, the cable operators – once their finances are in order – are better placed to exploit iTV technologies. Until that point, development of the iTV market is decidedly hampered. The cable groups are effectively on hold, ITV Digital has left the picture altogether (slowing the growth of DTV in general) and the “prohibitive costs of gaining a foothold on the Sky platform have helped prevent some experimental growth,” says the netimperative study.

UK leads the way What developments do take place are likely to happen first in the UK, as it is currently the leading DTV region in Europe. Forrester Research says that the UK accounts for around 45% of all European DTV; France, Spain and Italy share another 44%, whilst the remaining 11% is spread across the rest of the continent.

DTV is now widely available in the UK, but this doesn’t necessarily mean that its services are seen as valuable, notes netimperative. The passive, entertainment-led relationship with TV means that iTV is only really being used as a programme-enhancement and not as tool in its own right. The LBS says that iTV lies conceptually between Teletext and the internet. It is seen as an enhancement to television, but not as any great innovation.

LBS found that iTV is seen as largely complementary to online PC use and not in any way a replacement of it. Consequently, the services which are proving most popular are those which do not directly compete with computer-based internet.

“The fact that most viewers regard iTV as ‘enhanced television’ rather than a completely new medium, raises the question [of] whether they are willing to pay for interactive programming,” says the LBS study.

Advertising and commerce LBS believes that as TV is associated with entertainment and not communication or transaction, advertisers should ‘soft sell’ to consumers, perhaps offering incentives in order to get users to interact. It cautions against predicting future revenues, noting that initial response, which have been positive, may be due to the novelty factor of the platform.

The netimperative research found that large-scale purchases which require some research (such as cars) may be more favourable for iTV campaigns. Fast-moving consumer goods (FMCG) are often impulse purchases and so are unlikely to benefit from an interactive element.

Forecasts Andersen forecasts that the iTV market in the UK will be worth £5.3 billion by the end of 2005. However, the gross revenue that iTV operators can expect to extract from it is predicted to remain relatively small. Proprietary systems, where the operator is at the end of the revenue chain, will generate the most money. Essentially, margins are slim on iTV.

Forrester Research predicts that there will be 10.5 million digital homes in the UK this year, leading growth in Europe; the full figures are shown below.

The chart below shows Merrill Lynch and Forrester forecasts compared. In the long-term, Merrill Lynch is more optimistic for the growth of DTV in the UK than is Forrester.