The miracle box

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Well beyond a digital VCR, the set-top box will also allow viewers to videoconference and will be the entry point for a broad range of Internet services into a consumer's home.

Top-of-the-line models might also include what is expected to become a critical technology for bridging the gap between consumer electronics devices and computers: high-speed digital 1394-Firewire connectors. This technology can be used to hook up a television set, audio-video components such as a stereo or DVD player, and even a standalone PC so that all the devices can share data and be controlled through a central "hub."

"With that architecture, you can simultaneously watch video, simultaneoulsy surf the Internet, simultaneously receive a phone call, with four lines into your house all over this one device," Breen said. "If there's not a lot of marketing opportunity there, I don't know what is."

In addition, multiplayer gaming is expected to become more common as set-tops add more memory and advanced graphics processors, with some manufacturers looking at devices that integrate a DVD player for both loading games and playing back movies. Japanese manufacturers such as Sony, Sega, and Panasonic should do well here.

By 2005, the FCC has stated that consumers will no longer be able to lease set-top boxes and will instead have to buy them at retail stores. At this point, devices purchased in one part of the country will be interoperable with those bought in another--unlike today, where the devices have proprietary security technology specific to a particular cable network.

In conjunction with the FCC-mandated broadcast of only digital TV signals in the year 2006, more consumers are expected to upgrade old analog TV sets to high-definition digital TVs (HDTV), at which time they might be open to upgrading to new digital set-top boxes as well. By 2006, most set-top boxes will be able to decode high-definition digital TV signals, replacing the standalone decoders needed for today's first-generation digital TV sets.

American cable companies aren't the only ones planning these souped-up boxes. Worldwide, the move to digital platforms has already begun, and DTV is expected to help spur the market for advanced services such as Internet telephony and Web browsing.

From the operator's point of view, "the cost of deploying an integrated communications box that carries digital television, telephony, and interactive services makes the upgrade more attractive," said Ian Mecklanburgh of British-based Cable & Wireless.

One of the biggest costs is just sending someone out to install equipment. By offering a highly integrated device to begin with, Cable & Wireless can justify deploying these integrated devices, Mecklanburgh said.

"We felt we would lose a big opportunity by not doing both DTV and these other functions," he noted.

Industry executives expect voice recognition to be a prevalent feature of future set-top boxes, allowing for control of a wide range of household functions such as alarms, lights, and other devices through voice-activated programming.

In fact, for an extra fee, cable companies might even manage the home network through preferences and other information stored on central servers. Software programs for these boxes will be smart enough to "learn" customer preferences for TV and Web-based programming.

In reality, though, economic and regulatory conditions could potentially act as a brake on the movement toward technological convergence.

"Once the boxes go retail, it isn't clear how quickly they're going to sell," said Cynthia Brumfield, an analyst with Paul Kagan Associates. "We are expecting a slow build-up over time."

Future boxes What digital set-top boxes might do in the future
	hardware	applications
1999	Net Access via 56k dial-up modem. Some offer cable modem connections for faster access	email, Web access, electronic program guide for "browsing" TV content
2001	• Wider array of devices connecting via cable and digital subscriber line modems. Some boxes are purchased at retail, but most are leased from cable companies. • DVD drive and advanced 3D graphics	• video-on-demand • video email • teleconferencing • online banking • multi-player gaming on some models
2005	Cameras, VCRs, other A/V devices and home PCs and appliances attach to box through Firewire high-speed digital connection	• voice recognition • home network management • face recognition technology automatically calls up user preferences

In 1999, Brumfield estimates that there will be 3.95 million digital cable boxes shipped to customers, the majority based on an industry standard design called Open Cable. By 2006, there will be an estimated 35.2 million homes with digital set-top boxes and another 16.9 million users of set-tops that are receiving digital satellite signals.

Availability of services in the United States will be highly dependent on geography, as not all cable operators have upgraded their networks to be capable of sending and receiving data from set-top boxes.

But the area where most obstacles may arise is within the Beltway of Washington.

"All the applications of software, the Internet, computers, and television play to various regulatory and legislative goals," said Paul Fadelli, director of public relations for the California Cable Television Association. "Things used to be much more segmented." 

News.com's Sandeep Junnarkar in New York and Mike Yamamoto in San Francisco contributed to this report.

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