June 8, 2001 3:40 PM PDT

AT&T revamps interactive TV plans

Cable giant AT&T is changing its interactive TV plans and will now offer set-top boxes with fewer advanced services than previously planned.

AT&T, which has agreements with Microsoft and Liberate Technologies to provide interactive TV software, initially planned to launch an advanced set-top box last year with features such as high-speed Internet access and digital video recording. However, the company is now looking to offer cable subscribers two other set-top boxes with more limited capabilities.

"This takes us out of a one-size-fits-all strategy and allows us to address a wide variety of customer interests," AT&T spokeswoman Tracy Baumgartner said Thursday. "We are not exclusively focused on the advanced set-top box."

AT&T had agreed to use Microsoft TV, the software maker's server software for cable and satellite providers, after Microsoft invested $5 billion in the telecommunications company in 1999. However, Microsoft's TV group has suffered several setbacks, including delays in releasing set-top boxes in Europe and AT&T's decision last year to also work with San Carlos, Calif.-based Liberate Technologies.

AT&T's new tack is based on trials of interactive TV software, Baumgartner said. The trials have shown that many cable subscribers do not want all the advanced features the company had planned to offer.

The cable giant now has three models in mind. The basic one requires only a software upgrade to Motorola DCT-2000 set-top boxes that are already in the homes of 3 million of its digital cable subscribers. AT&T hasn't decided on the final features it wants, but they may include an interactive programming guide, pay-per-view, video on demand, e-mail and limited Internet access.

The second "enhanced" model may include the services of the more basic one, as well as digital video recording. The advanced model may include all those services, as well as a modem for high-speed Internet access.

Microsoft squeezed out?
Industry insiders say that AT&T's revised interactive TV plans may squeeze Microsoft out of the picture because the company does not have software for the set-top boxes that are already in the homes of AT&T's cable subscribers.

However, Ed Graczyk, director of the Microsoft TV Platform Group, said Friday the software giant does have software--for set-top boxes as well as servers--that can be used in AT&T's basic and enhanced boxes when AT&T decides what types of interactive features it wants.

According to sources within AT&T, there are trials in the homes of AT&T employees with the DCT-2000 set-top boxes using Liberate's software for multiple interactive features. This could be a sign that Liberate is closer to providing AT&T with software for current digital cable subscribers than is Microsoft. This would shift the competitive advantage to Liberate.

However, Baumgartner said AT&T plans to keep working with Microsoft and Liberate.

"It's never a good idea to have just one software provider, and we continue to count Microsoft and Liberate as preferred partners," Baumgartner said.

Graczyk cast AT&T's revised strategy in a positive light.

"This is an opportunity to broaden our relationship with AT&T as we become involved in providing software for the basic and enhanced models, in addition to the advanced," Graczyk said.

But Charlie Tritschler, vice president of marketing at Liberate, sees the situation as an affirmation of his company's strategy.

"AT&T's change in strategy works in our favor. We recognized that the advanced features wouldn't roll out as quickly as some in the industry thought, so we invested in software for the low-end set-top box market," he said. "Despite the investments Microsoft has made in customers (such as AT&T), those same customers have deployed our software and not theirs."

Microsoft's strategy
Darren vonBehren, an analyst at Hoak Breedlove Wesneski, also sees AT&T's decision as working in Liberate's favor.

"Unlike Liberate, Microsoft does not yet have an operational version of (interactive TV) middleware for the low-end boxes. We believe that these latest developments at the nation's largest cable operator increase the chances of larger-scale commercial deployments for Liberate with AT&T," vonBehren wrote in a research report Friday.

Before AT&T's news became public late Thursday, one of Microsoft's top interactive TV executives outlined the company's strategy in a briefing at its Mountain View, Calif., campus.

Jon DeVaan, senior vice president of the Microsoft TV division, said that revenue in this market comes from software royalties based on the number of boxes distributed to cable subscribers and that revenue from servers comes from services hosted on the servers per household per month.

He also commented on the complex nature of the TV industry.

"This is one of the most complicated markets you could ever possibly imagine in terms of number of companies involved," he said.

DeVaan noted that Microsoft's partnerships with cable companies are important in gaining a larger presence in the interactive TV industry--beyond its WebTV and UltimateTV strategies.

Picture imperfect Gartner analyst Mark Snowden said this is where Microsoft may find the TV industry's nature butting up against its ambitions.

"The culture in the TV industry is independent. No one wants to count on just one software company for all its needs, which is what Microsoft is used to being for PC companies. And if (Microsoft doesn't) get used to that, it won't last," Snowden said.

Cable operators tend to sign agreements with multiple software companies to provide different applications and services depending on what customers in a region prefer.

Regardless of AT&T's strategy change, Microsoft did mark a first on Thursday, when Portugal's TV Cabo became the first cable company to launch set-top boxes with interactive software. In addition, Microsoft said that Mexico's Cablevision and Israel's Matav Cable Systems Media will begin trials of the software.

 

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