Middleware Sector Leads Recent iTV M&A Activity

THE CURRENT RENAISSANCE of the interactive television industry promises valuable direct marketing opportunities over the next five years — specifically through targeted advertising and television-based commerce (t-commerce). To harness these opportunities profitably, DM firms seeking to integrate iTV into their multichannel marketing strategies must be able to assess this field’s changing landscape.

Winterberry Group’s analysis of interactive TV industry transactions — including mergers, acquisitions and venture capital investments — reveals that during 2000:

• The iTV area supported 40 transactions — 28 equity investments and 12 acquisitions.

• The value of all iTV-related business reached about $4.2 billion.

• Acquisitions of nearly $3.5 billion comprised 83.6% of all transactions, even though they were outnumbered by equity investments more than 2-1.

• Equity investments of some $684 million made up 16.4% of iTV business activity.

Sector Report

In 2000, iTV deals were fueled primarily by the middleware sector, which garnered $3.4 billion — 82.2% of the $4.2 billion transaction total. These contributions far outpaced those of the hardware, back-end software and user-level application segments (4.1%, 3.4% and 10.3% of all transactions, respectively).

Winterberry Group has identified several factors that led to such significant movement in middleware:

• Interactive television in the United States hasn’t yet attracted a critical subscriber mass, leaving industry participants jockeying for dominance via “first mover’s advantage.” Providers of middleware technology leveraged investments and acquisitions in 2000 to strengthen their positions in the still-emerging U.S. iTV market.

• The nature of interactive TV technology necessitates the emergence of a standard middleware platform before further developments in back-end software or user-level applications can occur. The proprietary technical specifications of any type of middleware dictate which types of applications it can support — including those that facilitate gaming, e-mail on TV, time-shifted programming and t-commerce, for instance. In 2000, middleware providers using competing operating platforms made acquisitions and investments in an attempt to better position their respective products as leading operating platforms.

• Industrywide regulatory standards for middleware have not yet been fully developed or promoted. With little third-party governance from industry consortia — such as the Advanced Television Enhancement Forum and the Advanced Television Systems Committee — middleware providers seized transactions in 2000. By doing so they’ll be able to promote their individual operating platforms as self-proclaimed industry standards.

Emerging Trends

• Acquisitions are driving the middleware sector, suggesting increasing consolidation across other iTV software segments. Middleware transactions in 2000 accrued about $3.4 billion, mostly through high-stakes acquisitions such as OpenTV’s purchase of Spyglass for $2.5 billion; Liberate Technologies’ pickup of MoreCom for $561 million; and Liberate’s $192.2 million purchase of SourceSuite’s VirtualModem business.

  The purchases by Liberate Technologies and OpenTV — and the way in which the deals strengthened these companies’ status as leading middleware providers — suggest that acquisition-intensive strategies may drive similar consolidation across other iTV industry segments.

  As foreshadowed by the October 1999 pickup of TV Guide by Gemstar after a lengthy technology patent battle, consolidation among competing iTV technology providers will continue until one or a few leading players dominate specific industry segments.

• Personal video recording (PVR) and Internet functionalities on television are becoming leading user-level applications. Business activity in the user-level applications segment was largely propelled by America Online’s one-time investment of $200 million in TiVo’s PVR technology. This single deal accounted for 46.3%, or $432 million, of all transactions in that sector.

  Internet functionalities on TV and video-on-demand applications followed with 30.8%, or $133 million, of business in the user-level area. The value of transactions associated with PVR and Net-on-TV technologies leads Winterberry Group to suggest that such applications may be among the first to provide revenue-generating DM opportunities in interactive television.

• Significant transaction activity, including industry consolidation, will likely bypass iTV’s hardware segment in the future. In 2000, hardware deals reached about $170 million, representing only 4.1% of all industry transactions. In addition, leading interactive TV hardware providers like Motorola and Scientific-Atlanta are already large, well-established companies with diverse offerings that extend well beyond iTV. Therefore, Winterberry Group forecasts that industry consolidation is not at all likely to occur in the hardware segment.

• Equity investments and merger-and-acquisition activity in the iTV industry will follow a technology-dictated sequence. The technical foundation of iTV content delivery requires four steps by which interactive programming, advertisements and applications are transferred from an iTV service provider to a residential viewer. Winterberry Group maintains that industry consolidation will occur principally within this four-phase process.

█ PINKI MISHRA is an analyst at direct marketing research firm Winterberry Group, New York.

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Interactive Television, DM Enabler

AFTER a rocky incubation period lasting more than two decades, interactive television (iTV) is finally coming of age.

For the more than 100 million U.S. TV-viewing households, iTV may ultimately mean ordering pizza, accessing a digital video version of “Dr. No” and voting online for one’s favorite Bond girl — all by remote control.

The possibilities are no less promising for the direct marketing industry. As the expansion of high-speed broadband networks propels the maturation of this technology, targeted iTV advertising and television-based commerce (t-commerce) will emerge as critical applications.

Interactive television bears two defining characteristics whose combination may prove potent for direct marketers: two-way communication and addressability.

With the traditional model of broadcast or cable television, a network simultaneously transmits the same body of content to many viewers. By contrast, iTV technologies — including picture-in-picture Web surfing, multiplayer gaming and t-commerce applications — allow subscribers to tailor programming to their preferences. Empowered with remote-controlled interactivity, subscribers can communicate in real time with their iTV service providers to instantly request additional information or respond to on-screen offers.

In the context of interactive television, “addressability” refers to the digital identifier that marks every iTV-enabled set-top box. This identifier uniquely tags each viewer’s household, registering each remote-control click as the person navigates interactive content or makes an on-screen purchase. The sum of this clickstream data yields individual profiles of every subscriber.

The combination of two-way communication and addressability will benefit iTV direct marketing through precise targeting and immediate, personalized viewer response.

• Precise targeting. Accurate information about each viewer — rather than sample data extrapolated from selected households — will permit marketers to deliver highly tailored offers to targeted households. This inevitably will lead to better response rates and, if the television is in fact the order channel, a complete and closed response analysis loop.

• Immediate, personalized viewer response. Interactive addressability enables iTV subscribers to respond instantly to interactive offerings by remote control. The rapid, virtually effortless nature of this response channel will increase viewers’ propensity for impulse buying while providing marketers with the feedback to assess and refine their interactive advertising campaigns with a novel degree of responsiveness.

  Direct marketers can harness iTV’s benefits by leveraging the potential of several of its user-level applications. Specifically, DMers and providers of these applications will converge in fulfilling three objectives: development of iTV user profiles; delivery and refinement of targeted ads; and t-commerce.

• User profiles. iTV technologies that will be key to responsible aggregation of user data include video-on-demand, interactive program guides and technologies that allow users to send e-mail and surf the Internet through their television. The demonstrated user appeal of video-on-demand makes it potentially the most valuable initiative for DMers seeking to better understand their iTV audiences, improve targeting of interactive offers and drive higher response rates.

• Delivery and assessment of targeted ads. The viewer-specific addressability of interactive television is ideally suited for targeted advertising and response analysis. Advertisers can work with iTV providers of digital ad insertion and assessment technologies to use viewer profiles in a privacy-sensitive manner. This could ensure that iTV subscribers are served interactive ads that are more relevant to them than those associated with broadcast media.

• T-commerce. Consumer familiarity with direct response television shopping and infomercials — together with their increasing comfort making online transactions — will speed development of t-commerce as the iTV subscriber base increases. Leading t-commerce vendors have demonstrated that simple, non-intrusive offers result in greater viewer engagement.

  The most significant near-term force that will shape development of iTV direct marketing will be increasing public broadband access via upgraded cable networks and direct satellite services. As interactive television deployment rises over the next five years, DMers must consider when and how to position themselves within the industry.

Well-capitalized business-to-consumer direct marketers should begin to explore partnerships with iTV content producers and t-commerce enablers. Traditional B-to-C DMers can capitalize on consumer familiarity with home shopping by developing iTV campaigns as a complement to their integrated marketing efforts. In the case of DRTV firms, the transition into iTV is a logical extension of the direct response methods they already employ.

Third-party fulfillment and teleservices companies should partner with iTV back-end software makers. Leading iTV technology providers have managed to set up order processing across iTV networks but haven’t developed fulfillment or customer care services for clients. This represents a valuable partnership opportunity for third-party fulfillment companies and teleservices bureaus.

Database analysis and user-profiling technology businesses should consider partnering with suppliers of iTV user-profiling applications. Addressable iTV user profiles will be valuable for precise targeting only if iTV companies can distinguish the data that’s relevant and analyze it accurately, while ensuring user anonymity. To accomplish this, these firms will try to tap established DMers’ experience in database analysis as well as the expertise of e-services companies that do real-time online profiling.

PINKI MISHRA is a research analyst at direct marketing research firm Winterberry Group, New York.