Time Warner’s Interactive TV Project Blinks

ORLANDO, Fla. —  When Time Warner Inc. chose this hotbed of entertainment diversions to launch the world’s most advanced interactive cable TV system in 1994, executives predicted residents would quickly become hooked playing the system’s video games and movies and shopping electronically from their living rooms.

But as Time Warner this year undertakes a $1-billion upgrade of its cable systems across the country, none of the entertainment giant’s cable outlets will be remade in the mold of this flashy project, known as the Full Service Network, acknowledged Joe Collins, chairman of Time Warner Cable.

With a string of missed deadlines, red ink and failure to deliver promised goods such as residential phone service over its cable lines, experts say Time Warner’s ambitious project has become a costly dinosaur that is rapidly being overtaken by a simpler but vastly more popular interactive network: the Internet. Time Warner executives have already largely consigned some FSN services, such as home shopping, to the Internet because the global network is better suited to transactional business.

As a result, there is fear among the Full Service Network’s 180 employees that Time Warner, struggling with an $18-billion debt load, will jettison the entire interactive system and downgrade it to a fancy digital production facility for other Time Warner cable systems.

“It’s been a disappointment from the standpoint that there is no conceivable level of consumer spending that would financially justify this system being rolled out nationwide,” said Tom Adams, president of Adams Media Research, a Carmel Valley, Calif., consulting firm.

“Cable operators shot themselves in the foot by bragging about what they were going to be able to do” with interactive services and then not delivering because of high costs and technical obstacles. Meanwhile, Adams said, “interactive programming has found another pipeline to the home, and that pipeline is the Internet.”

Lured by predictions that Americans would spend tens of billions of dollars annually to watch movies, tap into databanks and shop electronically from home, Time Warner and scores of other entrepreneurs began experimenting with interactive networks earlier this decade--promising consumers an era of 500-channel, two-way cable systems that would let them interact with schools, government and industry and sample entertainment fare and information databases from around the globe.

But enticing television viewers, who for the last half a century have been couch potatoes unaccustomed to interacting with their TV sets, has been a frustrating challenge.

Time Warner has struggled to transform an essentially dumb electronic device--the television set--into an Information Age appliance as agile as the personal computer. Like dozens of other interactive entrepreneurs, the company has found it rough going.

It redesigned its initial hand-held remote control to make it easier for subscribers to manipulate the system. It built and delivered a closetful of expensive and sophisticated computer equipment to each of the Full Service Network’s 4,000 customers, which enables them to interact with a network. The $30 to $75 monthly access fee those customers pay has been kept lower than even standard cable rates.

Yet despite offering a range of interactive services--from multi-player video games to movies on demand and home shopping--Time Warner has been unable to find the “killer app” or service compelling enough to make subscribers both embrace interactivity and pay a lot for it. What’s more, Time Warner failed to conceive of any service that exploits one of the hottest growth areas of interactivity: networking with friends, colleagues and neighbors through e-mail, videoconferencing or electronic chat groups.

“Achieving interactivity on a TV has some major limitations because the TV set just doesn’t have the smarts to do it,” said Richard Matthews, managing director of the broad-band business group at Adaptec Inc., a Milpitas, Calif., computer component manufacturer that is joining with software giant Microsoft Corp. and direct-broadcast satellite operator DirecTV this spring to launch a network that broadcasts content from the World Wide Web directly to home PCs.

To be sure, many Full Service Network subscribers have shown interest in multi-player interactive video games and watching movies any time they want. However, at $2.95 to $3.95 a showing, experts say, Time Warner is providing movies on demand at margins that are razor-thin--if profitable at all.

Full Service Network spokeswoman Tammy L. Lindsay said electronic home shopping is another promising area. Although she would not disclose any figures, she said FSN subscribers spend more per transaction and buy more often than consumers who order goods over the telephone.

However, FSN only has three vendors: Pizza Hut, the U.S. Postal Service and Barnett Bank. Others that once were available through FSN are now provided only through Time Warner’s Web page on the Internet.

Should Time Warner and other companies continue to retreat from plans for interactive networks, it could have significant long-term consequences for competition in the $500-billion telecommunications industry. Experts say the failure of the cable industry to fully challenge the rival telephone company communications networks could mean consumers will see less competition and higher prices.

Indeed, Vice President Al Gore, who has been a leading proponent of interactive cable networks, recently rebuked the industry for not moving swiftly enough.

“I’m a little surprised that the cable industry has not gone further than it has” to modernize its networks for high-speed interactive communications, Gore said in a recent interview with reporters.

But a tour of the Full Service Network’s facilities outside of Orlando illustrates how the daunting technical and financial aspects of building an interactive network have given many cable companies pause.

In order to serve FSN’s 4,000 subscribers, for example, Time Warner must maintain more than 200 huge hard drives, costing upward of $1,000 each. The drives, roughly nine times the size of a typical 1-gigabyte drive bundled with most multimedia personal computers, enable subscribers to watch movies any time they want and replay scenes over and over.

Supporting the hard drives are hundreds of message routers and dozens of costly high-speed computers that electronically manage subscriber requests for movies, takeout pizza, home banking and other interactive activities, said Yvette Gordon, director of interactive technologies at the Full Service Network.

The cable network’s complexity extends into the homes of subscribers, who must devote nearly a closetful of space to house a massive, high-powered custom computer, color printer, television set, video game controls and other equipment needed to interact with FSN.

“When you talk about deploying interactive service, that’s very different than setting up a business model; it wouldn’t make good business sense at this point to do a massive deployment,” said Gordon. “But the beauty of the Full Service Network is that it supports a variety of services,” including high-speed cable modem, voice telephony and other offerings that might be more cost-effective, she said.

Earlier this year Time Warner said it would halt efforts to deploy residential cable telephone service--a move that will significantly lessen the pool of potential competitors to the entrenched Baby Bell telephone monopolies.

Although Time Warner said it will proceed with plans to offer telephone service to businesses, residential phone service would be confined to the one market where the company is offering local phone service: Rochester, N.Y.

And Time Warner--which posted net income of $59 million for the quarter ended Dec. 31-- has recently moved to tighten its corporate belt, ordering companywide budget cuts of 3% to 5% over three years.

The moves don’t surprise analysts, who say cable operators have now become much more realistic about building interactive networks.

“Interactive television is going to come in small steps, not big ones,” said Robert Agee, an interactive television analyst with Cowles/Simba Information Inc. in Costa Mesa. “But the cable guys have had to go back and revisit their business plans and concentrate on their bread-and-butter business” of ordinary cable TV programming.