The battle for digital living rooms is joined

By May Wong AP Technology Writer
Monday April 30, 2001

Companies spending millions on new entertainment tech 


SAN JOSE – What do you get when you combine the features of a cable box, a VCR, a stereo and a computer? Plenty of companies are spending billions of dollars to find out. 

Many consider convergence in digital entertainment or some kind of all-in-one set-top device inevitable. Disagreement and uncertainty arise only over the business model or platform most likely to succeed. 

So reach for your remote. The battle to dominate armchair entertainment has been joined. 

From upstarts to corporate behemoths, companies across multiple industries are honing their strategies and lining up their allies, sometimes befriending opposing sides to hedge their risks. Their eyes are set on pieces of a lucrative pie — 100 million television-viewing households in the United States and millions more abroad. 

“It’s anybody’s game right now,” said Steve Perlman, the entrepreneur behind WebTV, whose latest venture, Rearden Steel Technologies, involves an as-yet undisclosed digital home entertainment product. 

WebTV, which was bought out by Microsoft Corp., allows users to surf the Internet from their televisions and play along with game shows or engage in other types of interactive TV. 

Rearden’s plans remain secret for now, but the endeavor recently won $67 million in a first round of funding — a hefty sum in today’s tight venture capital market and proof the investment throttle remains open in digital entertainment. 

“You’re talking tens of billions of dollars being thrown out there now in these new technologies,” said Sean Badding, an analyst with market research firm The Carmel Group. 

Dozens of companies from the software, hardware, cable, satellite, PC and consumer electronics industries are staking their claim for what may well be the next big digital gold rush. 

Hewlett-Packard Co. and RealNetworks Inc., for instance, announced last month they were working together to create products that will let consumers obtain digital entertainment via the Internet and experience it on their living room stereos and televisions. 

Later this year Nokia Inc. plans to start selling a so-called home infotainment center called the Media Terminal. It’s a set-top box that receives digital TV and video-on-demand, can play MP3 files or connect to a digital camera — and offers Internet access. 

The Media Terminal also will feature the latest technology in television — digital video recording, which allows users to pause live TV or record TV programming onto a hard drive, without the hassle of videotapes. 

With its recent debut of UltimateTV, Microsoft Corp. has also jumped on the DVR bandwagon to compete against sector leader TiVo Inc. UltimateTV combines WebTV with a DirecTV satellite service, DVR technology and two tuners, allowing users to watch one channel while recording another. 

Motorola Corp. and Scientific-Atlanta Inc., the top makers of U.S. cable set-top boxes, are each introducing this year advanced cable boxes featuring DVR, interactive TV, video on demand, e-mail, and high-speed Internet access. The Scientific-Atlanta Explorer 8000 also has digital music capabilities and the Motorola DCT 5000 features IP telephony. 

Traditional PC companies Compaq and Dell are also weaving home entertainment into their businesses. 

One business, SONICblue Inc., even reinvented itself a year ago to become a digital media technology company. Formerly a graphics chip maker called S3, SONICblue has positioned itself squarely in the digital convergence race. 

“We want to let people have audio, video, and information in their homes and we want it all to work together,” said Andy Wolfe, SONICblue’s chief technology officer. “We are now poised to develop that all-in-one device but there’s clearly a lot to be done first.” 

SONICblue acquired DVR pioneer ReplayTV Inc. this year, adding to its portfolio that includes Diamond Multimedia, maker of Rio digital audio players; HomeFree, a home network solutions company; and Sensory Science, a small digital entertainment products company. 

Since the company’s makeover, Wolfe has been shopping for technologies. He hasn’t had to look hard; more than 100 companies have knocked on SONICblue’s doors. 

According to Nielsen Media Research, American households spend an average of more than 8 hours a day watching television, and of the 100 million people with Internet access at home, nearly two-thirds spend at least a half hour online every other day. 

A product that successfully combines the two mediums — along with the Internet goodies people increasingly enjoy, such as e-mail, instant messaging, online shopping, downloading MP3 music files and gaming — “that’s the Holy Grail,” Badding said. 

The challenges are daunting, though. 

Previous interactive TV efforts have flopped and digital video recording has yet to prove affordable — recorders currently cost about $500 — and attractive enough for mass adoption. 

In 1997, Time Warner pulled the plug on its three-year interactive TV trial in Orlando, Fla. after spending $100 million. And over its four-year history, WebTV gained about 1 million customers — far below blockbuster market levels. 

Under Microsoft, WebTV has been folded into the MSN Web services division. 

Along with EchoStar Communications, WebTV first introduced personal video recording in 1999. The technology has only started to take off, though, reaching about 400,000 households in 2000. 

Before becoming a wholly owned subsidiary of SONICblue, ReplayTV stumbled under competitive pressure and stopped making its own personal video recorders, deciding to focus instead on licensing its technology — a move analysts say made sense. 

“Where this industry is heading is that this technology will be included in larger TV services,” said Bruce Kasrel, an analyst with Forrester Research. 

That way, consumers won’t get as many bills or need as many boxes connected to their TVs, analysts say. Consumer electronic giants Sony Corp. and Philips Electronics make the boxes that now come packaged with TiVo and DirecTV services. 

And now that AOL, which has a $200 million investment in TiVo, has merged with major cable operator Time Warner, it’s likely TiVo’s DVR services will also be bundled one day with a cable service, analysts say. 

Though specific plans have not been announced, TiVo is working with AOLTV on a joint project that would take features that have been tied to a PC, such as downloading music or managing digital photos, and putting it all on an entertainment system. 

“Some things are better suited to the PC and some things are better suited to the living room,” said Brodie Keast, TiVo’s senior vice president of marketing and sales. 

Lots of money is at stake. 

Forrester Research projects that digital video recorder sales will to reach 53 million units by 2005, making it the fastest-growing product in the personal technology sector. 

Companies and service providers that stand to profit from the converging technologies are making multiple partnerships. 

Satellite broadcast provider DirecTV, for instance, has partnered not only with TiVo, but also with UltimateTV and OpenTV, an interactive TV provider. 

And Rearden Steel’s high-profile list of investors includes AOL Time Warner, Cisco Systems, EchoStar, Microsoft co-founder Paul Allen and former Netscape chief executive Jim Barksdale. Allen’s Vulcan Ventures was also an investor in TiVo and ReplayTV. 

“There’s no clear-cut winner yet on which device will win in the homes,” said analyst Laurence Bloom of TechTrends Inc. “But our research shows that there is going to be an all-in-one set-top box. Consumers don’t want stacks of set-top boxes and they don’t want cable spaghetti behind their TVs.”