AOL works its way around cable TV

With today's announcement of an interactive television deal with satellite broadcaster DirecTV, AOL adds new reach to its high-speed Internet deals with Bell Atlantic and SBC Communications.

It's a strategy born as much out of necessity as of vision. Existing cable TV networks--which many expect to be the most popular high-speed route to the Net--remain closed to AOL and other dial-up Internet service providers.

And perhaps more threatening for the dial-up giant, these networks are serving as an incubator for the AT&T-controlled @Home Network, the Net-over-cable service that could eventually challenge AOL for consumers' broadband loyalty.

Under today's rules, most cable companies require cable Internet customers to subscribe to a company-affiliated ISP, such as @Home or Road Runner, before they can access content from other service providers like AOL. AOL and other ISPs have appealed to regulators to change the laws, requesting "open access" to the cable networks to offer their own broadband services.

While Washington regulators consider the issue, AOL is doing its best to get its brand and some version of its content onto every Net-connected consumer device possible, from televisions to PCs to wireless phones.

"What they're really trying to do is recreate the cable industry," said Zia Daniell Widger, an industry analyst with Jupiter Communications. "They're doing it piecemeal, and still trying to pull it all together."

Regardless of the widespread push for online electronic devices--able to recite AOL's "You've Got Mail" slogan or not--analysts note that television will still remain the biggest consumer entertainment device in the near future.

That may spell trouble for AOL.

"Cable is the future of interactive television," said Josh Bernoff, principal analyst for Forrester Research. "AOL's problem is how to get their boxes on top of the television."

Is second-best bet enough?
The DirecTV deal begins to satisfy that need, Bernoff said. But the satellite option has its disadvantages. Consumers so far have been slow to adopt satellite service--though AOL's marketing prowess could help turn this around, several analysts note.

The option has technological limitations as well. Most current satellite technology requires consumers to use a traditional telephone line for the upload portion of their broadband satellite access. AOL has said it would integrate its DSL access into the service--but this will likely make it more expensive, less integrated, and less "elegant" than cable modem offerings, Bernoff said.

Also, the DirecTV deal won't be the last in AOL's bid to get around the cable networks, analysts said. The company is negotiating with the remaining local telephone companies that have not yet struck DSL deals, sources say.

The company still hopes to persuade regulators or legislators to force cable companies like AT&T to open their networks and let AOL sell directly to their subscribers.

A pair of congressmen from AOL's home state of Virginia introduced a bill last week that would require cable companies to give ISPs direct access to their networks. The issue is also likely to come up as the Federal Communications Commission reviews AT&T's purchase of MediaOne Group.

But many analysts say the issue ultimately will be resolved by the market, as the cable companies realize that the draw of AOL's tens of millions of subscribers is too strong to resist.

"If AOL can prove that it can help drive [subscriber] rates up in the broadband world, eventually the cable guys will come around," said Jae Kim, an industry analyst with Paul Kagen Associates.

Content questions
AOL also has other questions to answer before it can prove it can be an attractive TV service, as well as an online leader, Bernoff added.

One of the many draws of interactive television is the promise that users will be able to record TV programs for later viewing. WebTV and EchoStar have already announced a plan that enables this function, and AOL's new partners, Hughes and Phillips Electronics, have teamed with a company called Tivo to create a hard-drive recorder.

Bernoff said he expected to see this Tivo system be integrated into AOL's system at a later date.

America Online also has to create content that fits the TV viewer--a kind of "beer in one hand, remote control in the other interactivity," Bernoff added. This will be very different from today's "lean-forward, active AOL interactivity," he said.