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annals of communications
The New Yorker - April 11, 1994

the magic box

Time Warner is testing its futuristic vision of services that will be available from the TV. But how much interaction do Americans really want?

by ken auletta

Kate seemed to be the perfect customer for what Time Warner calls its Full Service Network--the first switched, digitized, fibre-optic, multimedia, interactive TV system. She was just thirty, and so was presumed to be open to change; she was affluent, and so was presumed to be willing to pay for what she watched; and on a form she had filled out for a recent Time Warner "viability test" she had expressed a desire to be liberated from network programmers, who told her what she could watch and when. Kate (not her real name) said she viewed about seventeen hours of television a week. When she was handed an unfamiliar air mouse, or remote-control device, she was soon handling it as if she had been using it for years. And then the down button on the remote got stuck. "A pothole on the information highway," said Paul Sagan, the managing editor of Time Inc.'s embryonic News on Demand, which is one of many menu choices on the proposed Full Service Network.

Sagan, along with his project partner, Walter Isaacson, who is the editor of new media for Time Inc., and other executives, observed Kate from behind a mirrored window in the offices of a testing service in Elmsford, New York, to see how the system in progress fared in tests. Their laboratory was a makeshift living room with two Danish-modern sofas and a twenty-four-inch TV. They watched as Kate and a succession of other viewers, with the verbal assistance of Beth Blumenthal, a professional tester, toyed with the remote-control device. They watched as Kate and the others clicked icons on the screen, to call up that evening's nightly news, or weather, or sports, or in-depth accounts of President Clinton's health plan. In addition, there were icons for various other services on F.S.N.: movies on demand that could be paused or rewound; published reviews or highlights to help a viewer choose what to watch; video shopping catalogues; food services; video games; video phone calls.

"Our new electronic superhighway will change the way people use television," Time Warner's chairman and chief executive officer, Gerald M. Levin, had said when he announced the network, in January of 1993. "By having the consumer access unlimited services, the Full Service Network will render irrelevant the notion of sequential channels on a TV set."

The executives grew excited as Kate, a composed Geena Davis look-alike, said things that seemed to justify Levin's decision to invest five billion dollars over five years to create F.S.N. She told Blumenthal that she watched a lot of news, including CNN, "60 Minutes," and "20/20," and said that she liked the element of control that Time Warner's variety of news choices allowed her. If Kate got home too late to see the news show she wanted to watch, she could still see it when she--not a network--chose to schedule it. Blumenthal asked Kate what she would pay for such a news-on-demand service, and she replied, "I'm a person who would pay for convenience." Blumenthal pressed, asking Kate how much she would pay. "Comparable to whatever I pay for HBO," Kate said. Would she pay fifteen dollars a month for such a service? Certainly. Twenty? Probably.

Those who watched Kate and other test subjects from behind the glass had had a few days of audience testing so good that even Time Warner executives who were initially skeptical about news on demand got caught up in the excitement of a possible "killer app," as a breakthrough application is described in computer lingo. After Levin and other executives saw tapes of Kate and the other test viewers, Isaacson felt that they had pierced whatever clouds of gloom remained. "I now know our organization is firmly committed to it," he said of the news service. "They now feel we have a good product."

Perhaps more than any of the other cable and telephone and computer and consumer-electronics companies that are planning to test such services--they include Viacom, Hearst, Bell Atlantic, Sega, U S West, Microsoft, A.T. & T., I.B.M., Comcast, Tele-Communications, Inc., and the Discovery Channel--Time Warner is a devout believer in interactive video on demand. Last January, Levin told a television-industry convention, "The losers will be those who decide that they can wait and watch, that there is no urgency involved, that they can go on working and producing in splendid isolation from a technology that will transform the way people live, work, entertain, and educate themselves." Build it, Levin fervently believes, and they will come.

To Levin and Time Warner, people like Kate seemed to justify their faith that the Full Service Network could transform not just television-viewing but the use of all leisure time. She was a typical potential customer, they thought, a customer who would feel liberated by the new technology. After a research session of about an hour, Kate stepped outside to sign some forms, and I asked her if she would really be willing to pay as much as twenty dollars a month for news on demand. She gave an answer that suggests the limitations of anecdotal research, an answer that would probably depress Time Warner's researchers. "I live on a trust fund," she said nonchalantly. "I just tell my lawyer to pay the bills."

THREE assumptions underlie Time Warner's ambitious plans: that customers want to program for themselves, and not be merely passive viewers; that customers are willing to pay extra to be so empowered; and, finally, that in return for the convenience customers will pay as little attention to the charges as they do to their video-store bills. By the end of this year, Levin plans to have tested these assumptions in about four thousand households in Orlando, Florida. Time Warner's laboratory for those tests is in a three-story mirrored-glass building in the Maitland commercial center, about five miles north of Orlando. Sixteen executives will work there, and the brain of the Full Service Network will be contained in a twelve-hundred-square-foot operations room. The chilled room is filled with stacks of disk drives, called "servers," and is equipped with software from Silicon Graphics and an A.T. & T. switching system referred to as Asynchronous Transfer Mode, or A.T.M. The servers house a mammoth digitized library. James A. Chiddix, Time Warner Cable's senior vice-president for engineering and technology, told me that initially the library will contain more than a terabyte of memory--the equivalent of a million megabytes. (Personal computers usually have hard-disk memories of something between twenty and eighty megabytes.) That single terabyte will store the equivalent of five hundred motion pictures, and the switches will permit a thou-sand customers to access this library simultaneously.

To request a selection, a customer will click a remote-control device, sending an infrared signal to a box on top of the TV set, and the box will send it through a coaxial cable to an aluminum node box, no more than three-quarters of a mile away, which will be underground or on a telephone pole. Connected to the other end of the node box is fibre-optic cable, which is crucial to the information superhighway, because its tiny strands can carry vast quantities of information with no danger of traffic jams. This wire will speed the customer's request to the operations center, and the center will comply with the request and then route the selection back to the customer. The entire process will take a nanosecond--the time it takes a remote-control button to change channels now.

The prototype of how the Time Warner system will look to the customer sits in the Maitland office of Thomas Feige, the president of the Full Service Network; this February, Time Warner first permitted an outsider to glimpse it. The network will have the normal free-TV and regular-cable channels, and, in addition, what amounts to a shopping mall will appear on the screen. The customer will navigate through the mall by clicking any of various icons on the screen--interactive games, movies, shopping, news and sports, education (learning through interactive instruction), concierge services (food, reservations), mailbox (E-mail and video conferencing), MY TV (customized shows), telephone (videophone, long-distance, or cellular-like services). A click of the movie icon, for instance, summons to the screen a menu of choices, and then the customer can either select the desired movie or browse through movie choices by category (the movies of, say, Gregory Peck or Alfred Hitchcock) or watch promotional shorts of each film choice or call up movie reviews from Time and other sources or select from a list of new releases. The cost to the customer, Feige expects, will be three or four dollars a movie. "We're going to do an analysis of the video stores and charge close to what they charge," he says. "If we compete with hotels, we will charge their price."

Convenience is obviously a lure. Customers would not have to go to a video store to make their movie selections or to return tapes. Because the video server could duplicate unlimited copies of each movie, the customer would not encounter a situation that often arises at a video store: none of the top twenty popular titles are available. Unlike most pay-per-view movies, which must be watched at specified times and cannot be paused or rewound, the movie in this system can be turned on and off to fit the viewer's schedule over a given number of hours. The convenience of a movie on demand can be coupled with another convenience--food delivered on demand. I selected "The Fugitive" on Feige's system, and before it appeared on the screen an advertisement came on. "Hungry?" it asked. "How about trying a delicious pizza from Marcello's?" Click yes, and then select plain cheese, mushrooms, sausage, or other toppings. With the second click, the food is ordered. Human beings don't speak to consummate a transaction. Rather, the computer in the set-top box sends the order and the name and address of the customer to Marcello's. Some twenty minutes later, when the order arrives, the customer can pause the movie, go to the door, and get the pizza.

One day, Levin says, this system will offer such additional conveniences as the ability to renew a driver's license without braving long lines. Interactivity could also allow state lotteries to sell tickets more easily, and to save some of the money they now pay to retail outlets. (Of course, such a service would inevitably encourage gambling.) The long-term economic opportunities excite the business imagination, for the rewards can be stupendous. The cable and telephone businesses today generate close to two hundred billion dollars a year in revenues. Shopping by catalogue and other forms of shopping at home now constitute an eighty-billion-dollar annual business. Entertainment--video stores, movie theatres, theme parks, music, books, video games, theatre, gambling--is a three-hundred-and-forty-billion-dollar business, and is growing twice as fast as over-all consumer spending.

The Time Warner test, which was originally scheduled to begin this month, has been postponed until the fourth quarter of the year. Time Warner executives say that they had been rushing to meet an artificial deadline--one they'd imposed upon themselves. "We hyped it to motivate our people to get it done," Edward Adler, a Time Warner spokesman, concedes. The deadline also allowed Levin to demonstrate that he was a visionary in the mold of his late predecessor, Steve Ross. At the beginning of March, however, Time Warner decided that it was better to miss a deadline than to start a system that might baffle the customers, or even crash.

INSTITUTIONAL memory may have dictated the caution that Time Warner has displayed in launching its network. Back in 1977, Warner Amex Cable, which was a part of Warner Communications, touted something called QUBE, an interactive-TV system it planned to offer thirty thousand customers in Columbus, Ohio. Then, Warner Amex proclaimed, it would be extended to the entire nation. QUBE never left Columbus, and was folded in the mid-eighties. Still, Time Warner is wedded to the idea of video on demand. In late 1991, it launched a relatively simple cable service, called Quantum, for five thousand customers in Queens. Customers were offered a hundred and fifty channel choices, some fifty of which were dedicated to pay-per-view movies. Popular movies were broadcast at fifteen-minute intervals on six to ten channels simultaneously. Less popular titles were broadcast every thirty or sixty minutes on the remaining channels.

Richard Aurelio, the president of Time Warner's New York City Cable Group, says, "What we learned in Queens is: One, people will buy more if you give them more choices. Two, you can get them away from the video store; the thing that holds them is the ability to pause and resume. Three, we found that younger people find it easier to deal with technology than older people do. Four, we learned that the number of channels is immaterial. People don't think of it as a hundred and fifty channels; they think of it as the seventy-five analog channels they had before, and then they enter a new world. Five, we learned that you need a really good navigator system, where people feel they have a personal navigator to help them. We didn't have enough of that in Queens. It wasn't friendly enough."

There are a dozen or so American tests, but probably the broadest test of interactive TV is scheduled to commence in the fall of 1995 in Canada, where the Hearst Corporation has joined a consortium of five companies headed by Le Groupe Videotron, a leading cable system. When the service begins--in thirty-four thousand households in the Saguenay region of Quebec--it will offer movies on demand, home shopping, interactive banking, E-mail, and "home automation" services like energy and water management and appliance control, plus Loto-Quebec. A second phase is scheduled to begin in 1996, when the consortium plans to distribute three hundred thousand set-top terminals in Quebec City. According to Alfred C. Sikes, the president of Hearst New Media and Technology, the American tests are designed more to test the technology than to see how a mass audience reacts, which is what the Canadian test is designed to do.

ONE problem with introducing interactivity, no doubt, is that the public generally doesn't have a clue about what it all means. To ask viewers what they think of a service they can't yet comprehend is like expecting an infant to read. While no one can be sure of consumer acceptance, what is known is that the technology will soon be able to deliver nearly unlimited choices on command. And it is known that consumers want to be empowered to make choices. Cable television and the Fox network would not have appropriated a third of the three networks' nightly audience if this were not so. Nor would shopping malls and catalogues and cash machines and credit cards have become as ubiquitous. It is known that customers will pay for quality--witness the phenomenon of CDs, which in ten years have captured sixty per cent of the record market--but whether only larger networks can afford the steep cost is not known. It is known that viewers will reject technology if it is as user-unfriendly as the early VCRs. It is known that providing movies on demand is a killer app, but not whether movies alone will justify the cost of a switched, interactive network. It is known that marketing will be important, for with a plethora of choices it will be harder to learn what's available. It is possible that viewers who are confronted with a blizzard of choices will simply fall back on the familiar brand names--CBS, ABC, NBC.

Those with a commercial stake in the information superhighway share several common assumptions. They reject the couch-potato model, believing that viewers want to take an active part in programming. Time Warner's Richard Aurelio says, "I don't think there's any question that if you can provide in the home the same movie customers get in a video store, and all you have to do is press a button, and you can pause and resume, which you couldn't do in our Queens experiment, then there's really no need for them to go to the video store." Two other markets commonly thought to be vulnerable to competition are home shopping and video games. Aurelio concedes that "after these, there are legitimate questions: Will they come?"

Levin believes that two other revenue sources have been overlooked. "First is advertising," he says. Because advertisers will be able to deliver addressable messages to those targeted as current or likely customers, and can do so "in highly graphic form," he expects to open a nice revenue stream here. "The other big revenue stream is telecommunications," he says. "The plumbing we're constructing can automatically carry voice, data, and video." His first target is to snare "a piece of the telephone business." If any two of these five revenue streams succeed, Time Warner's profits will undoubtedly rise.

The average family now pays a monthly bill of about fifty dollars for local and long-distance telephone service and about twenty dollars for basic cable TV. Will people pay more? Can they afford to? W. Patrick Campbell, the executive vice-president for corporate strategy and business development for Ameritech, one of the seven Baby Bells, told an industry panel in February that Ameritech estimated that the average monthly household bill for telephone and cable and interactive services would climb to a hundred dollars within five years. Another panelist, Dennis Patrick, who is the president of Time Warner Telecommunications, guessed that the average consumer "will be paying less," largely because companies like his, he thought, could deliver movies and access to long-distance telephone service more cheaply than the combination of video store and Baby Bells.

This poses another question: Can the companies putting together pay-per-view services do a better job of camouflaging the true costs? Joseph J. Collins, the chairman and C.E.O. of Time Warner's national cable operations, says of the hundred-dollar-a-month bill, "That's the wrong way to look at it. . . . The tradition in the cable business has been to put everything on your bill. So on your bill you get billed for basic service, you get billed for a second outlet, you get billed for program guides, HBO, etc. We've done that because, historically, it's been an efficient way to do it. That's not necessarily how other businesses run their billing practices. In fact, I suspect that as we see the Full Service Network begin to operate we're going to see a very different type of billing, where some things may be billed indirectly. For example, if you go to the video shopping mall and order a new sweater from L. L. Bean, once you order it, it comes from L. L. Bean, and so does the bill." Or, he says, maybe the monthly bill will be reduced, because in return for access to customers advertisers would subsidize part of the costs.

For Time Warner and the other companies embarked on this venture, there are at least four potential sources of revenue. There is the advertising dollar. There is the charge to consumers for use of the cable/telephone wire. There is the toll to be charged to those program services which want access to this wire, such as L. L. Bean. And there is the license fee paid to the cable company as a software supplier of, say, "Murphy Brown" episodes from Warner Bros. or "The Larry Sanders Show" from HBO.

Because this is uncharted terrain, the economics are murky. Time Inc.'s Walter Isaacson concedes that it is unclear how to structure a price for a service that has yet to be distributed. Also unresolved, he says, is who should pay whom, and how to set advertising rates when the customer base isn't known, and how the distributor (the wire) and the manufacturer (the program supplier) should divide advertising revenues. The financial models are built on sand.

Another consideration is what a more assertive federal government will do. Will the Federal Communications Commission's recent decision to scale back cable prices by seven per cent really take effect, and will this slow the private construction of the superhighway? Will local broadcasters and the networks be given more channel space, so they can challenge cable? Will cable siphon off telephone business? Will telephone steal cable revenues? Will government allow it? Will the more powerful personal computer--not the television set--be the instrument for interactivity and video on demand? All these are unknowns.

Also unknown are the social consequences, which could be vast. Some predictions are relatively safe to make. One is that this pay-per-view future promises more to the haves than to the have-nots. Poorer Americans will still have access to free TV, but they will rarely be able to afford the new technologies that would permit them to make full use of interactive TV. This would be of less significance if it concerned only consumption or entertainment, but it could also deny access to potentially vital social and economic services. Will private corporations subsidize such access? Will taxpayers? "I think as we develop services they will be subsidized," Alfred Sikes, of Hearst, who was an F.C.C. chairman under President Bush, says. "They would take on more of a food-stamp quality"--would help pay for job training, perhaps, or help defray the costs of at-home medical care.

Other social consequences can be viewed like the two sides of a coin. One side maintains that this video democracy will enhance a sense of community, the other that it will fracture communities. "This provides opportunities for more communication," says Levin, who emphasizes that the TV set will still offer free TV. There will be video bulletin boards, he points out, and interactive games, and video telephone calls, and interactive tutorials, and local C-SPANs, and home movies shown to friends and family. "It will be like Internet," Levin says. "This will create a video family that enables people to share a range of experiences." But critics say that there will be fewer common experiences. Fewer citizens will be watching the same thing: rarely will two-thirds of American TV viewers be glued to a mini-series like "Roots," as they were in 1977, and inclined to talk about race rela-tions at the water cooler the next day.

Critics also point out that the news can be personalized; that is, viewers can skip important news they don't want to watch. And there is the danger that executives in the business of providing news on demand will think too much of cost and too little of journalism. Increasingly, there is a tendency in the news business to confuse "coverage" with journalism. The networks substitute pictures they buy from international services and allow a correspondent in London or Washington to supply an authoritative-sounding voice-over to pictures of, say, the latest massacre in Bosnia. It saves money, but it doesn't provide what could be provided by a reporter on the scene who speaks the language, has witnessed the event, or can draw on known and reliable sources.

On the other hand, viewers can skip the Tonya Harding stories and get more in-depth news. Instead of a low-ering of standards, Walter Isaacson says, the opposite can occur as television no longer requires homogenized, entertaining information for a mass audience. "On a service like this, a really good journalist who did a good piece on Sarajevo may have trouble getting it on a twenty-two-minute newscast," Isaacson says. "But we can give that person forty-five minutes, or whatever. You don't have to appeal to a mass market."

The good news is that this video democracy will empower citizens to choose what they want, when they want it. The bad news is that people may read less. Perhaps more Americans will shutter themselves indoors to watch TV, avoiding social intercourse. There may be more me, less we.

Perhaps a switched, interactive network is an invention that no one wants. The first of Thomas Edison's thousand and ninety-three patented inventions was an electric vote-recording machine to register the ayes and nays of legislators on a big board. When Edison travelled to Washington, congressional leaders told him they didn't want it. "It takes forty-five minutes to call the roll," a congressional sachem told him. "In that time, we can trade votes. Your machine would make that impossible." Or perhaps a switched, interactive net-work is an invention that everyone will want. There is no way to find out except to do what Time Warner is doing: build it, and hope they will come. (c)

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