fter a decade of false starts, interactive television may be heading into tens of millions of living rooms in the United States over the next two years. But even before most people have the chance to click their remotes to check a sports score or order a pizza, an industry battle is brewing over who will lay claim to the tens of billions of dollars in new revenue that interactive advertising is expected to yield.
So far, the contest has mainly involved quiet jockeying for position by television networks, cable and satellite television companies, and various technology vendors — all of which want to make sure that they get at least their fair share of the presumed bounty. But last week the conflict exploded into one of the central disputes in the government's review of America Online's proposed acquisition of Time Warner.
In particular, consumer groups and competitors fear that the combined AOL Time Warner, which would run television networks, own cable systems and control nearly half of the consumer market for Internet access, would be so powerful it could stifle other would-be providers of interactive television.
Interactive television is still a catch-all phrase that can cover a lot of activities, including pay-per-view movies and surfing the Web on a television screen. In fact, America Online contends that it is too early to worry about anyone dominating the interactive television market.
"You can't have a fight until you know what you are fighting for," said Barry Schuler, America Online's president for Interactive Services.
But much of the rest of the industry, including several units of Time Warner with very different points of view, are already preparing for battle.
"I think there are $10 billion to $15 billion in incremental profit from interactive television," said Steven Heyer, the president of Time Warner's Turner Broadcasting unit. "The traditional relationships between cable operators, programming networks and set-top box manufacturers is being reinvented and there is no equilibrium with how the profits will be shared."
Already on the market are stand-alone interactive systems including Microsoft's WebTV and America Online's new AOL TV. And the set-top boxes used by satellite and cable companies also have interactive features including those developed by Wink Communications and TV Guide Gemstar. Starting this fall, a new generation of even more capable boxes will be deployed by cable companies, including AT&T.
These systems have a range of features, but the big fight is over the systems that combine a broadcast or cable network signal with interactive elements on the same screen. Early examples of this sort of programming have let viewers chat online while watching episodes of "Survivor," use their remote controls to play along with "Wheel of Fortune," buy the CD of whatever band is playing on "The Tonight Show," check stock quotes while watching CNBC and order a $1 coupon for Clorox Bleach while watching a commerical.
Such flourishes, meant to make television itself more involving and responsive, are seen as potentially far more popular than turning a TV into a stripped-down Internet terminal. But they raise all sorts of issues about which company would control which element of the screen and which profits from the valuable messages sent back back by those interacting viewers.
One network's nightmare is depicted in a poster to frighten company higher-ups that was prepared by Jonathan Leess, the senior vice president for interactive television at ABC. It shows television screens, each with the image of the network's news icon, Peter Jennings, shrunk into a corner of the screen. Surrounding the newscast is interactive programming not by ABC but by CNN, Fox News, and the QVC shopping channel.
But beyond issues of screen real estate, the more provocative question is how to divide the spoils from interactive advertising. If Nike sells a pair of shoes on a CBS program, transmitted by an AT&T cable TV system to a Motorola set top box running Microsoft software and ultimately seen on a Sony television, who does Nike have to pay? Needless to say, they all want their share.
"Currently, the greed is pervasive in the industry," said Richard Fisher, president of RespondTV, which provides software for interactive advertising. "The software companies, the box makers, the cable companies and the programmers all say they want to take 12 to 15 percent of each transaction. That ads up to 50 percent of the revenue and it just can't work." (RespondTV, he said, charges a flat fee to the network which in turn can charge the advertiser whatever the market will bear.)
Networks contend that they should control the interactive programming and sell the ads — just as they do with regular television. Interactive television, said Preston Padden, the Walt Disney Company's top lobbyist, should be more like the open Internet than cable, in which the system operator picks the channels that are available.
"If I sign up for Internet service from Earthlink and I have a device, like a Compaq computer," Mr. Padden said, "I can go to any content site I want. And if I buy a sweater from Lands' End, neither Compaq nor Earthlink tries to get a percentage of that transaction. There is nothing about Interactive TV that should be any different."
Disney's view, in fact, has resonated with consumer groups.
"As a consumer you want the content owner to be rewarded for producing the most popular programming," said Gene Kimmelman, co- director of the Washington office of Consumers Union, which has objected to the AOL-Time Warner deal. "If AOL can put its box scores over Monday Night football it will deprive ABC of eyeballs, and so they won't be rewarded for producing programming that is of value to the public."
But this view is in sharp contrast to the stance taken by all of the large cable operators, including AT&T and Time Warner Cable, which maintain that because they have invested billions of dollars to rewire their systems to handle two-way communications, they should be paid by any programmer or advertiser that chooses to conduct business via those networks.
"For the next few years, what you see on our screen will be our partners," said Kevin Leddy, Time Warner Cable's senior vice president for new products. "If a programmer wants to offer its advertisers the ability to have two-way communication with viewers, the cable operator has to be part of that."
That is quite a different stance than America Online has taken with its new AOL TV product; the company has pledged to be open to any interactive programming and does not charge a fee for interactive advertising. Mr. Padden says AOL's interest in openness is new and corresponds to the merger review in Washington. AOL earlier had asked Disney to pay to create programming using AOL TV's more advanced features.
Technology firms, ranging from Microsoft to tiny startups are trying to get in the act. One, with some momentum is Wink Communications, a Silicon Valley company that has developed a system it hopes to become a standard for interactive programming and advertising. Wink is a relatively simple interactive system that works on many existing set top boxes that is being deployed on 14 million homes including the Time Warner cable in New York and nationwide with the DirecTV satellite system. So far, Wink has managed to rise above the fray by passing out money to virtually everyone in the food chain.
Advertisers can use Wink to offer customers more information or coupons, or even let viewers make credit card purchases. It charges advertisers between $1 and $6 for each customer that clicks. And it then gives some 10 percent of that fee to the network on which the interactive advertisement appears and another 5 percent to 35 percent to the cable or satellite operator.
Many in the industry argue Wink's fees are much too high.
"They want us to pass these fees through to our advertisers," said Bahns Stanley, an executive vice president of the Weather Channel, which offers programming through Wink. "Those who have a fixed budget suddenly will buy 90 commercials instead of 100."
Maggie Wilderotter, the chief executive of Wink, acknowledges that the fees to advertisers are high and will eventually fall. But they are the price of peace, she argues.
"We want all stakeholders to earn a return so they see Wink as more of a Switzerland than a threat to their business."
Meanwhile TV Guide Gemstar is developing several plans to carry out an end run entirely around all of these systems being fought over by the cable, broadcasting and technology companies.
One approach uses the TV Guide electronic program guide, a service already available to several million cable customers, that lets viewers use the remote to search through program listings. One feature of that guide is a button that lets viewers see a brief description of the program they are watching superimposed on the screen. Soon that feature will carry advertising and even enable users to make purchases.
In other words, TV Guide could superimpose an offer to sell a Tiger Woods T-shirt over the CBS broadcast of the P.G.A. tournament, entirely independent of any interactive system used by the network.
Meanwhile, the Gemstar half of the TV Guide Gemstar combination has been working on an even more audacious approach to interactive advertising that also starts out as a program guide. This one is being built into television sets directly, including most of those sold in the United States by Thomson's RCA unit, the top-selling brand.
While the current version is one- way, delivering the program guide and some advertisements over broadcast signals, a new system will be introduced next year that embeds two-way radios into each television. The viewer's response will be carried by radio wave to nationwide paging network to TV Guide Gemstar, giving it the ability to offer a service much like Wink that lets programs and advertisements offer more information or goods for sale.
But it also means that both the TV set and any interactive system in the cable box — from TV Guide, Wink or anyone else — may each try to put interactive content on a given ad.
"At the end of the day," said Henry Yuan, chief executive of TV Guide Gemstar, "it may come down to which remote the viewer picks up."
