A living room war

Everyone's waiting to see what shape Internet over the TV will take, especially in light of the pending rollouts of America Online's AOLTV and Excite@Home's ExciteTV.

Studies have produced contradictory evidence on how much people want to surf the Web over their TVs. Some show that some are most comfortable when the TV and the PC are both on, while others suggest that the passive "lean-back" nature of TV will mix well with the "lean-forward" Web surfing experience.

But research aside, the ubiquity of the TV in American living rooms and cable's front-runner position in high-speed Internet deployments - for now - probably make it inevitable that telcos will want to arm themselves with interactive video to combat cable's assault on their customers.

An agreement announced in January between interactive software supplier Liberate Technologies and very high bit-rate DSL (VDSL) networking company Next Level Communications promises to give telcos a weapon with which to fight the living room war. Liberate's client/server software will be integrated with Next Level's VDSL broadband delivery system, permitting interactive TV over standard copper and high-speed access and voice service.

Liberate's TV navigator client software will be integrated with Next Level's new Residential Gateway 2000, a single set-top box connected to the VDSL. The link can provide digital TV for three sets and, via a 10BaseT Ethernet connection linked to a home network, always-on Internet service for multiple PCs. Service providers also will be able to offer e-mail service and host chat rooms over the set.

A device sitting just in front of the gateway splits off the voice signal and sends it to the home's telephone system, allowing providers to offer telephone service also.

The gateway is expensive - around $700. But that price compares favorably with the cost of three digital set-tops and a high-speed modem.

The Liberate/Next Level link-up should produce its first results in the second half of 2000. Telcos will be able to offer combined video, Internet and phone features such as caller ID over the TV, a call log that lets the user check up to 100 calls and a "message waiting" indicator on the set-top.

"Those features, particularly the last two, have surprised us in the marketplace," said Pat Pachynski, senior vice president of marketing at Next Level. "The caller ID feature is about two lines of code and doesn't require a lot of hardware. U S West and a lot of Independents find that they can put our system in, do a little marketing and get significantly higher sign-ups than for their own caller ID product. That's incremental revenue at very little extra cost."

The U S West project is VDSL deployment in Minneapolis and Phoenix that uses Next Level gateways. The Phoenix market is now at about 15,000 subscribers, Pachynski said, and adding about 150 per day with about 200,000 homes passed.

Next Level also is involved in a Bell Canada test of VDSL video and Internet service in a Toronto high-rise, a lab trial with Telefonica in Spain and GTE trials in Clearwater, Fla., and Thousand Oaks, Calif.

"We've also got 15 Independent telcos, probably half of them doing video as well as Internet service," said Dave Malloy, assistant vice president of software development for Next Level. The Independents generally have been more aggressive about investigating VDSL's possibilities, as a competitive tactic, he said.

"Independent telcos are finding it's now economical for them to get into the video distribution business because the cost of a digital headend has come down. At those prices, they can make the case for video/voice/data deployment down at the 10,000-subscriber level, and they're making their decisions very quickly," Malloy said.

"Telcos have had a pretty bumpy history in video, and there's no reason to think the big ones are going to do much better with interactive TV," said Richard Knoepl, an analyst with Lorillard Consultants. "But the smaller, more agile guys may be able to compete quite successfully within their existing markets - especially if the price of the gateway comes down."