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Strategy and Competition in the Enhanced Television Market




Enhanced television (ETV) or interactive television (ITV) has been touted as the key to transform the television industry since the 1980s. Though the actual product offerings and consumer demand have fallen short of expectations over time and the introduction of ETV (ETV represents all relevant terms hereafter) turned out to be a slow evolution rather than a dramatic revolution, technological advances in distribution systems and computing in recent years have again put these services on the fore- front of the industry road map. Much has been written about the nature of consumer demand for ETV (Gunter, 2003; Ha & Chan-Olmsted, 2002; Vorderer, Knobloch, & Schramm, 2001), the arrays of ETV ven- tures (Kerschbaumer, 2004), and the technical aspects of these services (Martin, 2002; Ranger, 2004); however, few scholars have tackled the strategic and competitive implications of these market activities for me- dia firms. This chapter first discusses the historical development of ETV from the perspectives of strategy and competition. It then reviews the major ETV applications in recent years, discusses the strategic implica- tions of these ventures, assesses leading media firms’ strategic portfo- lios concerning ETV, and finally proposes a value chain framework that depicts the value creation process, sources of competitive advantages, and major players in the evolving ETV market.
The term enhanced television is often used to describe many soft- ware-enhanced television services from streaming online to PCs and shopping via television to video games on all platforms. The fact that the enhancement of a traditionally passive television-viewing behavior encompasses many perspectives of interactivity actually creates con- fusing definitions. Whereas some view ETV as any experience that gives viewers more programming selection, customization, and control, oth-

ers insist on certain degree of real-time interactivity in both text and video format. There is so far no clear consensus on what ETV means or what it should include. In fact, some cable operators have indicated that they shied away from the unproven ETV services because they wanted to pursue the more profitable VOD service, which is an ETV activity by some definitions. In the context of this study, ETV is defined as services that enhance an audience’s television experience by giving people more entertainment, information, and control through a mechanism capable of interaction between the audience and television (and between audi- ences) and customizing and delivering content in real time. PC-based broadband video and high-speed Internet access services, though also important for this market, is discussed mainly in next chapter.

THE DEVELOPMENT OF ENHANCED TELEVISION

The trials of ETV began in the 1970s, not by market force or consumer demand, but by a desire to improve education and community services through the newly established cable television systems from govern- mental agencies (“Symposium on Experiments,” 1978). With the intro- duction of a then new, multichannel distribution system, public institutions such as the U.S. Department of Health, Education, and Wel- fare initiated ETV tests in an attempt to realize the potential of providing health care information and worker training via this media platform. During this introductory stage (see Table 7.1), the most publicized ETV venture was QUBE, an interactive cable service offered by the then Warner Communications in Columbus, Ohio. QUBE subscribers were able to use set-top decoder boxes to participate in game shows and sur- veys, call plays in a college football game, take part in electronic town meetings, and simulate a vote for the Academy Awards (Constantakis-Valdez, 2004). In a sense, services like QUBE and other trials were driven by either a public-service mandate or technological advancement in the distribution system. Nevertheless, these early ser- vices were very expensive to maintain with little added value to the ex- isting television experience. Furthermore, the content provided was of low quality with limited repurposing utilities.
As the expensive QUBE system failed to survive, the ETV ventures in the 1980s regressed back to simplified text services on television. The videotext-like services continued to have difficulties with the expensive equipment and costly service maintenance. In addition, given the unaffordability of set-top boxes, the use of ETV services at this stage was strategically more for gaining franchising advantages than actual new-product development. Beginning in the late 1980s and into the 1990s, cable operators and telcos, in an effort to define the market of ETV, began a complex strategy of competition and cooperation (Constantakis-Valdez, 2004). AT&T and Bell Atlantic conducted interac- tive television services trials and reported strong interest in games and
educational programs for children. TCI, AT&T, and US West introduced a movies-on-demand service. TCI and Viacom even formed an alliance to lay fiber-optic lines linking cable systems to serve as a basis for inter- active services. In a sense, this stage is marked by the introduction of competitive behavior regarding ETV and market efforts (e.g., trials and alliances) to define ETV services.
As television entered the mid-1990s, in addition to the two interac- tive television full services, Interactive Network and Videoway, which were in place in different regions of the country offering somewhat different services, many trials were conducted by cable television sys- tems such as Time Warner, computer firms such as IBM, and telcos such as BellSouth and US West. The focus was to explore the most de- sirable service packages. Nevertheless, nearly all trials were either scaled back or canceled because of cost concerns over equipment and content development. Amid the arrival of compression, digitization, and early online technologies in the late 1990s, the approach at this stage was revolutionary in nature with various players aiming to be the first comer to find the holy grail of ETV that would transform tra- ditional television services.
Cautioned by the dismissal of previous trials because of laggard con- sumer demand and high costs, both telcos and cable television systems decided to switch to an evolutionary approach to ETV ventures. Under this strategy, the wannabe ETV players such as cable MSOs and telcos began to focus on developing simpler services with less costly technol- ogy, waiting for consumer demand to pick up, and investing in the nec- essary infrastructure only when the upgrade made financial sense considering these firms’ other offerings (Carey, 1997). In summary, the business of ETV today is in a stage characterized by careful cost–benefit analyses and step-by-step rollout of services in a much more matured network environment with less expensive set-top devices. Strategically, ETV is no longer a pure revenue-generating potential but also a tool to enhance the brand value of a conglomerate ETV provider.

ETV DRIVERS, VENTURES, AND THEIR STRATEGIC IMPLICATIONS

While ETV ventures offer a potential for additional revenues from new consumer services and interactive advertising, research has also shown that viewers who interact with ETV programs spent more time watch- ing the programs, paid more attention to and had better brand recall of the commercials, and in general reported having a better viewing expe- rience than with traditional passive viewing (McClellan, 2003). Such a positive effect on consumer attitude, perception, and behavior has sig- nificant strategic implications in an already competitive media market- place. Though most media firms would consider the goal of generating more revenues and/or creating intangible competitive advantages through ETV ventures worthy of investment considerations, not all

would engage in the adoption of these new media services. For those choosing to appropriate their resources in this type of new-product de- velopment, not all would invest with the same intensity. Treating the implementation of ETV ventures as firm adoptions of new media tech- nologies, we now review the factors that play a role in impacting the adoption and timing of such strategies.
Factors Influencing ETV Ventures
Figure 7.1 depicts the factors that we proposed to affect the ETV venture decisions of media firms. There are core, supporting, and environmental features with various degrees of influence on a firm’s decision whether, when, and how much to invest in an ETV venture.
The first set of factors includes the collective qualities of an organiza- tion. Similar to personality trait factors that influence individual predis- positions toward innovativeness, novelty, venturesomeness, and risk,
we believe that two sets of media firm characteristics—organizational strategic traits (which describe a firm’s strategic tendency toward a new-media product/market) and degree of entrepreneurship (which de- picts a firm’s attitude toward opportunities and risks)—play a role in the decision to implement ETV ventures. We can evaluate a firm’s stra- tegic predisposition using a strategy profile taxonomy such as Miles and Snow’s (1978) typology of firms: (a) prospectors that continuously seek and exploit new products and market opportunities and are often the first to market with a new product or service; (b) defenders that fo- cus on occupying a market segment to develop a stable set of products and customers; © analyzers that have an intermediate position be- tween prospectors and defenders by cautiously observing and following the prospectors, while at the same time monitoring and protecting a stable set of products and customers; and (d) reactors that do not have a consistent product–market orientation but act or respond to competi- tion with a more short-term focus (Zahra & Pearce, 1990). Such an or- ganizational strategic taxonomy can be applied effectively to assess how firms with different strategic predispositions approach ETV ven- tures. Another firm predisposition, degree of entrepreneurship, includ- ing a firm’s proactiveness, autonomy, innovativeness, risk-taking propensity, and competitive aggressiveness, is also likely to affect pro- pensity to invest in new media services such as ETV ventures.
It is our assertion that a media firm’s past competitive market deci- sions (i.e., competitive repertoires) and current new-media holdings would also serve as indicators of the firm’s predisposition to implement an ETV venture because the it might acquire experience that helps its fu- ture adoption decision-making process. As for the factor of historical performance, past output records are indicative of the resources a firm has available for commercializing a new ETV technology. They also point to possible directions or areas that a firm needs to enhance. Fi- nally, the firm characteristics of size and age present the fundamental attributes of a firm in terms of its available resources and experience for implementing ETV ventures.
Besides firm characteristics, the nature of a new ETV service is likely to play an instrumental role in determining a media firm’s decision re- garding such a venture. Factors like the ETV service’s technological compatibility, complementarities, and functional similarity to current media products that the firm offers; newness; utility observability; effi- ciency; content distribution or enhancement utility; lock-in potential; the need for network externalities; and technology cost are likely to shape if and how a venture will be implemented.
Specifically, the value of a new ETV service can be first assessed by the degree of disruptiveness of its integration into the existing organization. A good gauge here would be the degree of its compatibility to currently adopted media technologies. Taking a step further, complementarities refer to situations where a bundle of goods together provides more value than consuming the goods separately (Brandenburger & Nalebuff,

1996). In other words, the degree of complementarity provides insight on how a new product might add value to an organization. The last con- cept, functional similarity (i.e., how a new media service is perceived by consumers as being able to satisfy needs similar to those currently being fulfilled by an existing service), indicates the new product’s degree of substitutability as perceived by consumers. Logically, a media firm’s as- sessment of this substitutability will affect its new ETV plans. A new ETV service can also be examined by analyzing its degree of newness to the firm, newness to the market, or a combination thereof (Kotabe & Swan, 1995). Logically, the newer the related technology, the greater the uncertainty and the more hesitant a firm will be to invest in the technology. Furthermore, a media firm’s ETV decisions are also likely to be affected by the apparent utility displayed by the anticipated service and the potential for the new service to in some way improve the deliv- ery of a content product or enhance the appeal of a content product.
Lock-in refers to the ability of a service to create strong incentives for repeat transactions, thus preventing the migration of customers to competitors (Amit & Zott, 2001). A new ETV service that requires more upfront equipment investment by a consumer is likely to achieve a higher probability of lock-in and is typically regarded as more valuable. Another service characteristic, network externality, is a change in the benefit or consumer surplus that consumers derive from a product when more consumers purchase the product. Network externality might be a significant factor for many interactive services such as gam- ing and polling. Finally, the technology cost factor certainly affects a media firm’s desire to adopt a new ETV service. In fact, because of the uncertainty of returns for new media services, even firms with suffi- cient resources might choose not to adopt a particular ETV venture if it is too costly.
Besides the two core characteristics, two supporting sets of factors also impact how a media firm might consider an ETV venture. The availability of strategic networks are important because they can pro- vide a firm with access to information, resources, markets, technolo- gies, credibility, and legitimacy (Cooper, 2002; Gulati, Nohria, & Zaheer, 2000). This is especially important for many ETV ventures, which often demand more resources and carry higher risks. For established media corporations, the benefit might be access to technologies and learning and sharing of information. Alliances or strategic networks are espe- cially important for smaller innovative firms because such partnerships offer access to financial and marketing resources and economies of scale and scope. The value of a new ETV service can also be assessed by exam- ining its perceived contribution to a firm’s overall strategic posture. Por- ter (1980) suggested that there are three major strategic approaches: market segmentation, low cost, and differentiation. Depending on a media firm’s strategic goal at the time of consideration, certain ventures might provide more utility in accomplishing one objective over others. Thus, the value of a new ETV service might be evaluated by analyzing

how it helps a media firm reduce costs, increase revenue, and/or create synergistic advantage. Finally, environmental conditions such as tech- nological, economic, sociocultural, and regulatory factors all affect a firm’s ETV venture decisions.
It is important to note that the decision to offer an ETV service or en- ter an ETV venture involves multiple levels of decisions. Although the first level of a decision would be whether to adopt a new ETV service, there are also questions of timing and intensity. Timing of a business de- cision toward a new technology is often a strategic game of waiting for more information. In fact, the value of the wait might be proportional to the fixed adoption costs, potential reversal expenses, and the likeli- hood that the new technology will be unprofitable (Dong & Saha, 1998). The choice of timing is further complicated by the decision of intensity. As indicated earlier in the discussion of ETV development, many cable MSOs have chosen to approach ETV ventures with a lower, but more fo- cused intensity after previous failed trials.

ETV Ventures and Their Strategic Implications

Many business ventures have been proposed and/or implemented to en- hance consumers’ television experience. From the perspective of their strategic contributions to a firm, they can be either revenue or brand value oriented. With a goal to generate additional revenues, ETV ven- tures may include on-demand programming, enhanced advertising, and television commerce (t-commerce). On the other hand, with a goal to enhance a consumer’s television experience, thus adding value to a brand through increased audience loyalty, ETV ventures may include an electronic programming guide (EPG), a communication mechanism, and digital video recorders (DVRs). Some news, information, sports, and gaming ETV applications might even offer both benefits, depending on the degree of consumer demand and the nature of product offerings. In fact, the growth in broadband networks and decline in ETV equipment cost have accelerated the implementation of ETV infrastructures. It was estimated that ETV would be in 55 million households by 2006. The revenue potential was said to be up to $3.9 billion in t-commerce, $2.6 billion in interactive advertising, and $5 billion in ETV subscription by 2005 (Macklin, 2002). The following section reviews the ETV applica- tions adopted by media firms in recent years and scrutinizes their stra- tegic value for the firms.

Electronic Program Guide (EPG) or Interactive Program Guide (IPG).
A most basic form of ETV, EPG or IPG is an application used with digi- tal set-top boxes and newer television sets to list current and scheduled programs that are or will be available on each channel and a short sum- mary or commentary for each program. Assessed by a remote control device, a typical EPG or IPG includes options to set parental controls, or-

der pay-per-view programming, search for programs based on theme or category, and set up a video cassette or digital video recorder (VCR/DVR) to record programs. It is typically an important aspect of DTV service and is now built into a variety of consumer electronics de- vices, including digital TV sets and personal/digital video recorders (PVR/DVR). The EPG/IPG market is expected to grow at a compound an- nual growth rate of about 37% to a projected revenue of nearly $1 bil- lion by 2008, with Gemstar-TV Guide, Microsoft, and Tribune Media Services dominating the market (Kerner, 2004).
While technology has been the main driving force for the early intro- duction of EPG, the smooth incorporation of this function into many ex- isting television platforms made it the most widely used ETV feature. Because of the textual, informational nature of EPG content, the re- sources and degree of strategic entrepreneurship required from a firm to implement it is minimal. Though EPG does not really directly generate revenues, it has the potential to deliver brand awareness and serves as a tool for building brand images (see Table 7.2).
Television Commerce (T-Commerce)
Although definitions of t-commerce have sometimes included orders re- ceived via toll-free phone numbers for television offers, in the context of this chapter, we are concerned with the more advanced types of t-com- merce: (a) transactions conducted by “clicking through” with the TV re- mote control or (b) offers presented on television and completed with an actual transaction on a PC Web page. T-commerce is basically e-com- merce in a television environment. Ideally, t-commerce has the advan- tages of being placed in a comfortable home setting, garnering consumer attention through more involved content presentations, and building relationships while cutting costs. However, t-commerce is still expensive and might siphon away sales from existing sales channels, thereby adding to the cost of operations without increasing total reve- nues.
An industry study found that 46% of consumers are interested in t-commerce, but interest levels vary greatly among different applica- tions. For instance, whereas 53% of consumers are interested in printing product information or coupons from their TV set, only 33% are inter- ested in ordering restaurant meals for immediate delivery. The study also found that the most likely users for t-commerce services include premium cable and DBS subscribers, active online shoppers, and fre- quent customers of home shopping channels (Pastore, 2000). A Gal- lup-led survey found that household goods, appliances, and furniture were the most popular types of items that people wanted to purchase via t-commerce, followed by cosmetics and toiletries; clothes, movie, theater, or concert tickets; and CDs and videos. Age also plays a role in the t-commerce purchase pattern. Forty-two percent of respondents over age 50 expressed an interest in purchasing items via ETV, whereas

only 25% of those between ages 18 and 34 expressed an interest in this service (Pastore, 2001). More consumer studies found that the majority of people prefer to have t-commerce transactions billed to their monthly MVPD statements, and consumers who use the Internet on PC and TV simultaneously have different levels of interest and price sensitivity for most t-commerce applications than consumers who engage in both ac- tivities separately (ClickZ Network, 2001).
The main drivers and competencies required for t-commerce include economy, efficient operations, and a strategic network with merchandise suppliers and/or fulfillment firms. Because of the new set of skills and knowledge necessary to carry out such ventures, it also requires a higher degree of entrepreneurship and resources. T-commerce could bring strong revenue potential. Nevertheless, its success is dependent on its ability to dif- ferentiate from the more established PC-based e-commerce by the type of products offered and target groups (e.g. the aforementioned likely users) as well as customer service (e.g., billing) implementations.
On-Demand Programming. On-demand programming generally involves either VOD or subscription video on demand (SVOD). VOD is a service that enables viewers to order and watch content on demand and to pause, rewind, and fast-forward the content. It is different from pay-per-view in that it allows “anytime” flexibility, whereas PPV is con- sumed at preset times. Thus, the audience has total control over the tim- ing of the viewing and is able to pay on a per-event basis. An SVOD service offers a library of events typically from premium channel pro- viders and is accessed from either a channel-based menu or the program guide. SVOD services also do not price on a per-title basis. With a sub- scription, viewers pay a flat fee to download all the on-demand content they want, as many times as they wish, rather than having to pay for each viewing. Industry studies have shown that consumers tend to pre- fer flat or stable pricing and MVPD programmers can readily repackage content and bundle on-demand services with basic or premium cable of- ferings, providing a tangible incentive for TV consumers and lucrative revenue potentials for MVPD firms. In fact, VOD and PVRs have been identified as the most appealing of all ETV features (Pastore, 2001). The benefits of consumer control and convenience seem to be the key drivers of adoption. On-demand programming is especially popular among younger demographics. An industry survey found “order movies on de- mand” to be the most popular ETV activity, preferred by over 33% of those between ages 18 and 34 (Pastore, 2001).
VOD/SVOD is comparatively the ETV service that offers the most po- tential with the most conservative entrepreneur quality and resource re- quirement. Its key to success is in understanding consumer preferences, forming alliances with content providers, and instituting effective market- ing programs to promote on-demand programs. It is worth noting that while VOD/SVOD provides a concrete new revenue source, it can also be packaged and marketed in a way to enhance a desirable brand image.

Digital Video Recorder (DVR) or Personal Digital Recorder (PVR).
DVR or PVR is a device that records TV programs to a hard disk in digital format that also allows for “trick modes” such as pausing live TV, in- stant replay of interesting scenes, and skipping commercials. The most popular stand-alone DVRs on the market are TiVo and ReplayTV. Newer entrants into the market include products such as Digeo’s Moxi and Microsoft’s UltimateTV. Many satellite and cable companies also incor- porate PVR functions into their set-top boxes. The Yankee Group esti- mated that by 2007, nearly one fifth of all U.S. homes will have access to DVR (Greenspan, 2003). The optimistic growth rates might be attrib- uted to cable operators bundling of DVR software into their set-top boxes and the falling prices of stand-alone DVRs.
An industry study found that DVR users actively delayed watching a TV show so that they can either skip ads or save time. In essence, DVRs are used to enhance audiences’ viewing experience and to accommodate their busy schedules. In fact, DVR owners reported higher television satis- faction rates and even more viewing time (Greenspan, 2004). From an ad- vertiser’s perspective, DVRs have posed a significant a challenge because of the audience’s tendency to skip ads. To counter this problem, some ad- vertisers have resorted to certain marketing tactics such as brand integra- tion (i.e., product placement) and entertaining short films with commercial messages. For example, Best Buy sponsored a short film on TiVo to reinforce its entertainment brand image (Morrissey, 2003).
It is our assertion that the consumer’s lifestyle strongly drives the de- velopment of DVR. This type of ETV venture, while offering a good po- tential for building brand equity and generating some revenues, does not call for a high commitment of resources or entrepreneurship, thus presenting another attractive ETV business opportunity, especially for MVPD service providers.
Interactive Programming. Interactive programming here is referred to as a television program that enables broadcasters, cablecasters, and other content providers to engage viewers actively by enhancing the con- tent on multiple levels so that it creates a more engaging, personalized ex- perience for viewers. The services can include providing more information about the content a viewer is watching, allowing him or her to voice opin- ions through online voting, letting him or her choose how a content is pre- sented, and enabling him or her to play games relevant to the content, thus providing consumers a richer, more involved viewing experience.
In reality, such an interactive programming is mostly accomplished ei- ther by the single-screen (push channel) approach, which lets a viewer in- teract directly with television through a digital cable or satellite set-top box that drives interactive Internet content as an overlay on part of the TV screen, or by the two-screen (pull channel) approach, which basically combines the passive experience of TV while adding interactivity through the online medium on a PC with synchronized material. For example, ABC sports fans use their set-top boxes to scroll through real-time stats,

participate in polling, access the scores of other games, and obtain more information about different teams in a Bowl Championship Series in 2003 (Rodgers, 2003). World Wrestling Entertainment (WWE) has incor- porated synchronized TV–Web content to increase its pay-per-view viewer involvement. It was suggested that when a more engaging enter- tainment element such as extra humorous footage or games is added, the new viewing experience is likely to change the fundamentals of brand consideration and likeability measures (Grimshaw, 2004). Many indus- try analysts have concluded that sports programming seems to provide the best avenue for interactivity (Rodgers, 2003). In fact, according to many ETV users, multiple camera angles for sports events is one of the most attractive interactive applications, along with additional program- ming information (Whitney, 2004).
It is our assertion that interactive programming provides a limited reve- nue potential because of the passive nature of television viewing. Although some interactive contents (e.g., sports) are attractive to many viewers, only a limited number of people will be willing to use and pay for the en- hancement. It is more likely for a firm to use interactive features to increase audience involvement and enrich a viewer’s television experience, thus so- lidifying the value of its brand. However, because of the needs to develop strategic networks with content providers and hardware/software facili- tators and to invest in researching consumer preferences, there is a higher degree of required resources and entrepreneur mindset.
Betting and Gaming. Online gaming has become more popular as the deployment of broadband networks expanded. As ETV continues to explore the so-called “killer app” in generating revenues to sustain ETV ventures, betting or gaming through television, the center of entertain- ment in the home, is also getting noticed. In an ETV gaming environ- ment, a viewer may play along with a game show, participate in contests linked to a popular show that he or she regularly watches (the viewers might be charged a small fee to participate with the incentive of winning prizes), or place bets during a sports event. It was suggested that ETV will overtake the PC as the platform of choice for casual gam- ing and it will be imperative that games industry firms focus their strat- egy on this sector of the market (Pastore, 2001). An industry report has predicted that ETV gaming in Europe and the United States will generate revenues of almost $2.7 billion by 2006 (Pastore, 2001).
Whereas online and ETV gaming is generally more popular in Europe, the Game Show Network (GSN), a U.S. industry leader in interactivity, features 84 hours per week of interactive programming that allows viewers a chance to win prizes by playing along with GSN’s televised games via GSN.com. GSN is jointly owned by Sony Pictures Entertain- ment and Liberty Media Corporation and distributed via MVPD services. Another potential major ETV gaming player is DirecTV because its new owner, News Corp., has extensive experience with BSkyB in the U.K., whose most popular ETV feature is gambling on sporting events.

Betting and gaming ETV ventures would be heavily driven by the strategic networks ETV services and gaming content providers are able to form because of the resources needed and traditional television firms’ lack of experience in this area. While some form of gaming would be able to enhance the degree of audience involvement with certain pro- grams, betting and gaming ventures on the television platform might be able to generate significant revenues. Nevertheless, it is also limited by state gaming regulations.

Communications, Banking, Financial Services, and Other Auxiliary Services. The communication function is another important ETV ap- plication that is often integrated with other ETV services. For example, to create a sense of community, there are often interactive chat opportu- nities for viewers of an ETV program (e.g., especially for sports pro- gramming). Services like AOLTV and MSNTV with set-top boxes also allow viewers to surf the Internet and use their e-mail on TV. Neverthe- less, the e-mail and chat functions have not been cited as top ETV fea- tures consistently by most ETV industry surveys. The same situation holds true for other less TV-relevant ETV services such as banking and financial services. Whereas online banking has grown tremendously in recent years, financial management via television has seen limited inter- est in the United States, with most people unwilling to pay to access ac- counts, transfer funds, and pay bills with their TV remote controls.
E-mail and chatting ETV features are likely to enhance the brand value of a firm because of the opportunity to build relationships and user communities. Though it does not offer good revenue potential, it also does not require a tremendous amount of resource commitment. Note that the ETV communication feature is influenced greatly by con- sumer preferences for PC versus TV e-mail/chatting platforms. Cur- rently, because of the established PC-based electronic communication pattern, e-mail or chatting via television is less likely to be widely used or to become an attractive selling point for ETV. As for banking and aux- iliary services, it is our assertion that there are limited utilities for these types of ETV functions in building brand equity or generating revenues, and the resource and entrepreneurial requirements, as well as the need for forming strategic networks, are relatively high, thus making it a less popular ETV venture focus.

Enhanced Advertising. The promise of interactivity has also meant the opportunity to revamp advertising and create greater accountabil- ity. Some have even claimed that the desire to make television and televi- sion ads interactive was a way of reaching into the direct marketing budget, which is usually much bigger than advertising (Rodgers, 2003). The interactivity offered by ETV has spurred the introduction of many enhanced advertising formats on TV, including targeted advertising that enables advertisers to personalize ads with messages that are relevant to

the specific group of consumers, direct-response/addressable advertis- ing, sponsorship of ETV content, product placement in ETV program- ming, ads that are integrated into the program, ad-sponsored VOD, which is similar to the PBS model with a sponsorship message and com- mercials appearing at the beginning and the end of the program, and long-form commercials. For example, whereas Chase, Remax, and Pfizer tried the ad-sponsored VOD method, Ford Motor Co. carried a sole sponsorship of the entire interactive portion of ABC’s Bowl Champion- ship Series in 2003 as part of a multiplatform ad campaign to drive brand retention by getting people to interact with the content (McClellan, 2003). Most have cited that the biggest obstacle to advertis- ing in an ETV environment is its lack of consistent measurement, the challenge of format variance, and support from the creative community (Grimshaw, 2004). Nevertheless, Jupiter Research estimates that ETV advertising will reach $2.3 billion by 2007, representing a 39 times per-household jump from 2003 (Grimshaws, 2004).
Enhanced advertising, though challenging to implement, holds tre- mendous potential for generating more revenues for ETV service pro- viders and adding value to advertised brands. When interactive material simply provides information or entertainment, it is likely that the expe- rience facilitates a viewer’s involvement with the brand message, but when the ETV advertising feature also collects user information, it en- hances the overall branding program. To utilize the new interactive platform successfully for advertising, however, means a commitment of resources and necessary entrepreneur mindset.

MAJOR MEDIA CORPORATIONS’ ENHANCED TV VENTURES

Beginning with Time Warner in the early days of ETV, most major media corporations have tested the interactive water with various trials. Whereas cablecasters have concentrated on marketing VOD/SVOD and DVR, the recent acquisition of DirecTV by News Corp. may change the dynamics of ETV competition because News Corp. has acquired tremen- dous knowledge-based resources from its experience marketing the suc- cessful BSkyB DBS service in the U.K. To assess the recent trends of leading media firms’ ETV adoption strategies, the following section ex- amines the ETV ventures of major media corporations that have top broadcasting and/or MVPD holdings.

Time Warner

As the number one media conglomerate in the world, Time Warner has been actively searching for the right ETV mix for 30 years. AOLTV has been Time Warner’s answer for Web-based ETV applications, whereas its cable system is the base for TV-platform ETV services such as VOD and SVOD. Because of its leading position in both the online and MVPD

sector, Time Warner seems to have adopted a strategy of developing ETV services for both cable TV and broadband systems. To ensure access to content, it also has partnered with Universal Studios, Sony Pictures, MGM, and Paramount Pictures to create an on-demand movie service. To accelerate the introduction of digital entertainment at home, Time Warner also allied with the home network manufacturer D-Link to de- velop and deliver products and services that will allow broadband con- sumers to access secure high-quality VOD anywhere at home. Comcast and Time Warner, the two leading MSOs, in an attempt to enable appli- cations to be portable and interoperable across all cable networks, formed a joint venture to create an OpenCable Applications Platform (OCAP) middleware implementation. Time Warner also utilizes its ETV venture to cross-promote its broadcast brands; for example, AOLTV of- fers previews of popular WB network programming. Overall, the focus of Time Warner’s ETV investment has been on DVR and VOD via the ca- ble platform and AOLTV via the broadband platform.

News Corp.

News Corp. has become a formidable player in the ETV arena with its acquisition of DirecTV, aggressive use of vertically integrated proper- ties, and alliances with technology firms. For example, through its sub- sidiary, NDS, News Corp. has allied with Microsoft to develop ETV software for MVPD network operators. The relationship between Microsoft and News Corp. extends to another alliance for DirecTV to promote UltimateTV. News Corp. also strategically utilizes its vertically integrated assets as it decided to drop a popular set-top box middleware from OpenTV and adopted one that uses the technologies developed by its subsidiary, NDS (Kerschbaumer, 2004). To secure a position in con- tent delivery, News Corp. and Disney even established a joint broadband entertainment service called Movies.com to provide movies and other entertainment content on demand to consumers in the United States. News Corp. has also enhanced its NFL Sunday Ticket programming with advanced interactive features like the ability to watch one game and see real-time scores, yet be alerted when teams playing in other games are in scoring positions. Another new feature is “Highlights on Demand,” allowing subscribers with a DirecTV DVR or HD (high-definition) DVR receiver to view highlights of all NFL Sunday Ticket games delivered au- tomatically to their DirecTV DVR.
Comcast
Comcast has also been active in the ETV arena through acquisitions of technologies and content development. It invested in SeaChange Inter- national Inc. to develop streaming media and interactive television and launched G4, a 24-hour television network dedicated to electronic games with original programming. Its recent acquisition of TechTV Inc.,

a network that showcases highly interactive factual and late-night pro- gramming (to be merged with G4), demonstrates its focus on gaming ETV ventures. To secure its position in providing on-demand program- ming, Comcast and Starz Encore Group, the largest provider of pre- mium movie services in the United States, partnered to launch Starz On Demand on Comcast’s cable systems. To expand its VOD market, Comcast added content from selected Viacom networks such as MTV, BET, Nickelodeon, Noggin, and The N to its ON DEMAND service at no extra charge for Comcast Digital Cable customers. Comcast also part- nered with Disney in creating the Comcast Kids Channel, an interactive environment designed for broadband users with premier content from Disney Online, and with Gemstar-TV Guide International for a joint venture to develop EPG for its cable systems. Overall, Comcast is com- bining its existing ON DEMAND service with the heavily marketed DVR to deliver convenience and value for its Digital Cable, whereas it uses al- liances and acquisitions to expand into other ETV services.
Disney
Utilizing its popular sports and game show programming such as col- lege football and Who Wants to Be a Millionaire, Disney’s ABC has mar- keted its ETV with both one- and two-screen systems. Disney collaborated with Microsoft to improve the quality and security of digi- tal content, from movie clips to full-length feature films, which can be delivered to homes over the Internet. Because of the lack of a broadband distribution property, Disney has largely been exploring partnerships that could result in a deal to include the service in set-top boxes, com- puters, or other devices. Overall, ABC has been one of the most aggres- sive broadcasters to explore ETV applications (Whitney, 2004).
NBC Universal
By comparison, NBC Universal has been a less active ETV player. Besides Universal Studio’s alliance with Time Warner for an on-demand movie service, NBC Universal relies on partnered business units like MSNBC.com for ETV ventures. MSNBC.com offers free exclusive news programming from NBC News on MSN Video and helped develop the new service with MSN. Users can view breaking news and top-story videos on demand with the ability to build playlists free of charge. MSNBC.com produces nearly 60 video clips per day including programming from NBC Nightly News and the Today Show as well as video from CNBC and MSNBC TV. Again, without a distribution system property, NBC Universal has fo- cused on developing ETV content via strategic networks.
Cox Enterprises
One of the top MSOs, Cox Communications has ventured into the realm of ad-supported VOD called FreeZone for digital cable subscribers. The adver-

tising platform also includes permission-based follow-up interaction be- tween viewers and advertisers. Actively pursuing DVR and VOD services, Cox has also entered agreements with various tech firms such as Liberate Technologies, a leading provider of software for digital cable systems, and Harmonic Inc., a digital video and optical network firm, to enhance its En- tertainment on Demand branded VOD service. These deployments reflect its emphasis on delivering user-controlled on-demand services, along with a strategy of exploring interactive advertising potentials.

EchoStar

EchoStar, the owner of DISH Network, also sought strategic networks with technology firms as it formed a joint venture with OpenTV, a pro- vider of ETV software, to offer interactive set-top boxes. To beef up its VOD investment, it entered an agreement with Telecommunication Products Inc., a provider of VOD services, and BBC America for its con- tent products. DISH Network also introduced “DISH Home,” which in- cludes four ETV services: movie reviews from Zap2it Entertainment Features, games from Playin’TV, Horoscope, and DISH Network Cus- tomer Support. To further expand into the gaming arena, EchoStar partnered with Buzztime Entertainment Inc. to launch an interactive trivia multiplayer game service on its DISH Network and later with Silverstar Holdings for its Fantasy Cup Auto Racing content. In an at- tempt to be present in both wired and wireless broadband networks, EchoStar allied with SBC Communications, the nation’s second-largest phone company, to create a television set-top box that allows consum- ers to download movies over SBC’s high-speed Internet network.

Charter Communications

Charter Communications is one of the most active MSO ETV providers. It actually deployed the first multiple interactive services by integrating Wink’s Enhanced Broadcasting product with DIVA’s VOD technology, which brings Charter’s Digital Cable customers access to product infor- mation, on-demand news, coupons, and shopping on more than 20 dig- ital channels. Charter also partnered with Starz Encore Group for SVOD on Charter Digital. Continuing to focus on more than DVR and VOD, Charter allied with Digeo, “The Interactive TV Company,” in launching an ETV service that gives customers quick access to six virtual “i-chan- nels” of news, weather, sports, entertainment, money, and shopping in- formation. Charter and Digeo also introduced an interactive television channel dedicated exclusively to games. Called i-Games, the new chan- nel features games that viewers play simply by using their remotes. Fi- nally, Charter joined with QVC in a partnership for an ETV shopping application, the first real-time two-way ETV shopping option on a tele- vision channel in the United States.

Cablevision
Cablevision Systems Corp. and American Express Publishing formed an editorial, marketing, and advertising alliance to jointly develop and market VOD content. It also partnered with FOX Entertainment Group to provide Cablevision’s iO: Interactive Optimum digital VOD access to certain Fox programming. Cablevision’s ETV services include traffic, weather, games, varying camera angles for sports, and an interactive portal as well as the industry’s first interactive subscription games package and play-for-fun casino games. With a special focus on gam- ing, Cablevision continued to partner with Zodiac Gaming, a leading de- veloper of advanced interactive games for digital set-top boxes, doubling the number of interactive games available to all iO customers.
A STRATEGIC ARCHITECTURE OF THE ENHANCED TELEVISION MARKET
The aforementioned ETV ventures and their strategic implications clearly depict a complex value system of various stages and firms. To provide a framework that illustrates the value adding process and the dynamic relationships between firms at different stages, we propose a strategic architecture of the ETV market. The term strategic architecture is typically described by organizational or information systems man- agement scholars as a notion of creating an infrastructure that provides the functional foundation of an enterprise or information system (King, 1995; Nadler & Gerstein, 1992; Nadler & Tushman, 1999). In this chap- ter, strategic architecture is used as a metaphor that likens the design of social systems such as an industry to the design of physical artifacts such as a building. Just as architecture is the infrastructure that shapes physical space to meet human needs, the strategic architecture of ETV is the basic structure that shapes a firm’s behavior space in carrying out their strategic objectives in this market.
Figure 7.2 depicts the proposed strategic architecture, which is com- posed of two different infrastructures, the telephone (wire-line or wire- less) and multichannel system (wire-line or wireless). We treat these two distribution systems separately because of our belief that converg- ing activities such as telcos’ investment in the cable sector and cable’s of- fering of cable telephony are means of enhancement rather than replacement of their current core products (i.e., we subscribe to a con- fluence rather than convergence view). Note that the distinction be- tween the telephone and MVPD platforms will not be a source of product differentiation in the ETV market because rarely is the distribu- tion method of signals a major concern of consumers, assuming that there are no significant technical differences (e.g., speed, capacity, and security) between the two infrastructures in the long run.
As shown, there are three groups of content creators that produce ETV products with various degrees of interactivity components. The
online-content producers are most likely to provide textual and graphic informational content or shorter versions of entertainment video prod- ucts, whereas the video-programming producers might offer lon- ger-form content such as movies and traditional television programming. The gaming content creators such as Zodiac Gaming, on the other hand, present stand-alone or programming-linked interactive games. There are also three types of packagers: (a) Web-based video con- tent packagers that offer mostly PC-based online television like MSNTV
and AOLTV, (b) MVPD/broadcast programming packagers that assem- ble digital television programming services such as CNN, HBO, and ABC, and © MVPD-based ETV application packagers that put together ETV services such as Starz On-Demand. Because of the nature of ETV ser- vices, which often involve participant communication, polling, or gam- ing, ETV subscribers also generate part of the content, in addition to another type of content from interactive advertisers. The next group of market participants, the value-adding services, performs supporting functions to all players in the market. Value-adding services might in- clude interactive advertising agencies, audience research services, and firms that carry out branding or t-commerce support functions.
The most visible firms in the ETV market are the distributors such as the MSOs, DBSs, and telcos. These companies hold the key to introduc- ing, marketing, and managing ETV services to fulfill the different con- sumer needs for information, transaction, entertainment, and/or communication. The final group of ETV firms, the hardware facilita- tors like Scientific-Atlanta and Pioneer and software enablers like OpenTV and Microsoft, play an indirect but crucial role in the con- sumer adoption of ETV services through their design of navigating/in- terfacing software and equipment. A distributor’s success in this market is strongly influenced by its relationships with these facilita- tors, especially in areas of cost management, negotiation, and sharing of consumer knowledge. The role of these facilitators, we believe, would become even more critical when most ETV functionality mi- grates to digital television sets or more sophisticated set-top boxes. In this scenario, the packagers’ strategic role might diminish, whereas the interfacing/navigating facilitators’ role becomes more significant as consumers bypass the packagers and are directly connected with content providers because of these facilitators’ products and services. It is evident that there are more and more alliances formed between MVPD service providers and ETV software firms in recent years. Fi- nally, the end business value created by the ETV market system in- cludes a combination of brand equity and revenues from sales of fee-based content, commerce/transactions, and/or advertising.

FINAL THOUGHTS

The MVPD service providers have approached ETV with various degrees of enthusiasm. Because of numerous failed trials since the early days of ETV technology, most have chosen to introduce ETV services gradually with a current focus on DVR and VOD, ventures that are likely to create revenue or at least branding potentials with relatively less commitment of resources and entrepreneur mindset. Nevertheless, DBS service pro- viders and some leading MSOs such as Charter and Cablevision have re- cently picked up the speed of ETV implementation amid various aggressive alliances with ETV software/hardware firms. The pressure

to invest might be due to competition brought about by News Corp.’s entry into the U.S. ETV market and technological advances that make interactivity more practical and simple. The ETV market is still very fluid considering the continuous evolution of interactive technologies and changing consumer preferences. It is likely that many ETV firms will revise their business models and explore new ways of adding value to the system. For example, as TiVo faces more competition from big media companies like Comcast and EchoStar, which are incorporating nearly identical software in their cable and satellite set-top boxes and giving it to customers for free, it has to reinvent itself to identify sources of competitive advantages other than the manipulation of program- ming from traditional television broadcasts. To do so, TiVo has recently negotiated an agreement with Netflix, a mail-based DVD rental service, for TiVo subscribers to download Netflix DVDs over the Internet directly into the TiVo boxes in their homes, instead of receiving them in the mail. It is our assertion that the evolution of ETV is likely to continue with a much faster speed than in its earlier days because of the more mature broadband delivery systems, the trend toward resource/risk-sharing strategic networks, the financially sound roll-out plan, and attention paid to the nature of consumer demand.