Braving the Interactive TV Concept

Now that Japan has embraced e-commerce and m-commerce, Tomen Mediacom is betting it will embrace t-commerce, too. It's quite a gamble.

The Mediatti service

"The PC has created a culture of active interaction, but people want to watch TV passively, in a relaxed mood," says Katsuyuki Shiga, an analyst with Gartner Group Japan.

"I don't think TV will be successful as an interactive media," says Toshiaki Kanda, who runs a Web-based TV station called KNN.com and spends a lot of time thinking about these things. "It is effective, but only as a passive medium. The dividing line between the TV and the Net will disappear hardware-wise, but we still won't use them in the same way."

The way J@pan Inc sees it, the problem with interactive TV is the interactive part. Watching TV serves as a break from having to interact. We interact all day. It's work. Boob-tubing is a way to unwind from that. Nevertheless, the idea of t-commerce -- electronic commerce through the TV -- is simply irresistible, and has been for decades now. We were recently shown a demo of an upcoming cable-based interactive TV service for Japan called Mediatti. It reminded us of why corporate execs keep falling in love with this idea. Observe the screenshot above left. (The following is from a beta of the Mediatti service; the final version will likely be significantly different.) The offerings (from left to right) include:

• Electronic program guide. Basically TV Guide on steroids.
• Video on demand. Viewers control when and what they watch.
• I-services. Surf, play networked games, download tunes, buy stuff.
• Email.
• Phone. You talk into the remote control, hear the other person's voice over the TV speakers.
• NOW, or Network of the World. Broadband content offered by Pacific Century Cyberworks (PCCW).

Of the offerings shown, video on demand seems the most likely winner: however much a viewer has to interact for this, it surely involves less interaction than traveling to the video store, showing a membership card, paying, getting change, saying thank you, and returning home. "VOD will be the key," agrees Shiga.

Mediatti users will eventually be able to make phone calls on their remotes. This function combines your TV, phone, and remote control. You talk into a tiny speaker on the remote and hear the other person through the TV's speakers.

For a surcharge, networked gaming will also be available, as will access to Network of the World (NOW), a broadband entertainment portal being developed by PCCW, which advanced into Japan in August by acquiring a majority stake of entertainment software maker Jaleco.

As we tried the demo, it quickly became apparent how important the remote control (see below) would be to Mediatti's fortunes. Made by a California company called Interlink Electronics (again, this is a beta), the remote has a touchpad that uses "face to face" technology, such that the area of the pad that you touch is also the area of the TV screen that you select. If you want to select EPG in the screen below, you touch the pad a little above the horizontal center and to the left. It works beautifully, and, once you know how it works, is effortless and intuitive. After you've selected your offering, you click Select.

Using a plastic pen, you sign your name on the touchpad.

Note that on the screens at right, golf equipment is being purchased while a golfing program still plays in a resized window in the upper right-hand corner. (Viewers will also be able to do things like make reservations for the golf courses being played on.)

One problem, Kanda says, is that with so many services, "monitor occupancy rate" becomes an issue. You can't, after all, have dad watching golf, mom emailing a friend, the son playing networked games, and the daughter chatting on the remote simultaneously.

The corporation behind Mediatti is Tomen Mediacom, which a few years ago was a holding company for the few cable assets owned by trading giant Tomen. The company did nothing, and the cable TV operators were independently run. Then in April 2000 Hong Kong--based private equity firm Olympus Capital Holdings Asia injected $40 million into it and the goal became building an interactive TV powerhouse. In July, PCCW took a 16 percent stake in the company, with an eye on eventually offering its broadband Net content to Tomen Mediacom's cable customers (hence the NOW choice).

Deep pockets will be needed. The venture faces numerous obstacles. First off is Japan's bizarrely fragmented cable TV landscape -- 600-plus cablecos serve a nation roughly the size of California. Most of these companies are local, small-time operators without much technical expertise. The MPT, which with its curious regulations started the mess to begin with, has recently encouraged cable operators to begin merging.

Tomen Mediacom's approach is to acquire controlling stakes in these operators one by one and then offer its service through them. The company hopes to eventually roll out Mediatti nationwide. Considering how long it takes to form relationships and conduct business in Japan, that could take a while. Currently the firm is the top shareholder in just three cable companies (in the Tokorozawa, Sayama, and Kanagawa areas around Tokyo) and the second shareholder in two (in Yokohama). That's five down, several hundred to go. In at least one of these five areas, the service is under beta testing as you read this.

Tomen Mediacom faces a serious competitor in Jupiter Telecom, which is taking a similar acquisition approach. Jupiter has 24 cable companies, and -- speaking of deep pockets -- a powerful shareholder group that includes Sumitomo, Liberty Media, Microsoft, Toshiba, and Itochu. (It absorbed a third player, Titus Communications, last year.)

"It comes down to their pockets against ours," says John Flanagan, VP of products and marketing at Tomen Mediacom. "Infrastructure plays are always long-term investments."

Another obstacle Tomen Mediacom faces is customer confusion over terminology. Interactive TV can be done via the cable TV system, as in the case of Mediatti, or via digital TV. And it's the phrase digital TV that gets many consumers hopelessly confused, with reason. On the one hand, it refers to TV sets with digital converters -- that is, equipment that converts digitized broadcasts into an analog format we humans can enjoy. On the other hand, it refers to digital broadcasting itself. In December, Japan's newspapers heralded the arrival of "digital TV" on NHK, causing millions to no doubt scratch their heads. What the media didn't make clear was the distinction between the sets and the broadcasting. What TV makers couldn't make clear was why consumers should pay ¥400,000 for a digital set when it offered little more than high-definition images and limited interactivity too pokey to be practical (and no Net access).

Not that digital broadcasting isn't significant -- it's the first major broadcasting innovation since the development of color TV in the 1960s. Because digitization allows for compression, operators can offer more channels. So if X megahertz of broadcasting bandwidth once allowed one channel to be delivered, by going digital a broadcaster can now offer 15 channels using the same resources. With the right equipment installed, it also allows TVs and set-top boxes to store users' favorite programs on hard disks, though most of the digital TVs now being sold in Japan do not yet have this component.

Interactive TV through digital broadcasting is slow because uploading -- that would be the interactive part -- goes through the phone line. This causes a noticeable delay that few channel surfers can tolerate. PC users are accustomed to annoying delays; TV viewers are not.

This is where cable TV--based services like Mediatti have the edge, at least for the moment. "Their interactivity is by the telephone; our interactivity will be by our own network, so the customer doesn't have a phone bill charge," says Flanagan.

In the future, Mediatti will use its network to offer voice-over-IP telephone service. In Japan, NTT has a monopoly on the last mile -- the connection from the home telephone to the broader network. There's no way to avoid being charged by NTT if you use this last mile. Since digital broadcasting's interactivity involves the phone line, users must pay NTT, on top of their cable bill. Mediatti's interactivity, by contrast, travels through the cable network, which NTT doesn't control. Users will be able to make phone calls over their TV remote controls, bypassing NTT completely. "We are the last mile," says Flanagan. "We're the only real competition to NTT."

Mediatti faces plenty of obstacles and competitors, though, including:

• Other cable players moving in on this space. They include Tepco, Fujitsu, Himawari Networks, and Tokyu.
• PCs increasingly have TV tuners in them, and could steal away potential Mediatti users who would rather keep their TVs passive.
• As the company tries to build out its fiber-optics network (it has to lease in places where it doesn't yet have its own fiber), it faces right-of-way and other bureaucratic obstacles set up by a confusing array of often competing government ministries.
• Clever startups coming out of nowhere. One example: StarDSL. Based in the US but run by Japanese, it's targeting the homeland with a cheap, highly efficient video-on-demand service. Trials begin in Tokyo this month. The company (www.stardsl.com) has less than 10 employees, but it's looking for VC funding and is already getting free networking gear from partner Cisco Japan. Because it's developed several low-cost methods for building out infrastructure, this smart little startup could skip ahead of Mediatti and other bigger players.
• Pricing is a challenge -- Shiga says ¥3,000 to ¥5,000per month is the optimum price point for consumer acceptance, but it's not clear that's enough to support the Mediatti service.
• The slow uplink problem faced by the digital broadcasters could soon be solved by wireless technologies, most notably by a new venture called Nihon MediaArk, in which NTT is investing.

Flanagan is confident that interactive TV in Japan will happen mainly through cable -- complemented in places by digital broadcasting. He notes, however, that at present cable penetration in Japan remains remarkably low -- just 10 percent, compared with the US's 70 percent.

Gartner Group's Shiga believes that it's not cable, but digital broadcasting that will trigger an explosion of interactive TV services. He notes that the government will abandon analog broadcasting in cities by 2003, elsewhere by 2006, and completely by 2010. "In some areas, CATV might lead the trend, but it faces a problem in apartments and other collective housing units because installing a cable system requires agreements from a certain percentage of the residents." Time will tell which approach will deliver interactive TV capability to the most Japanese homes.

Shiga predicts that in six years all of Japan will have interactive TV. "It will be successful in the long term," he says, "but it will take time." For now the biggest question is the "can -- won't do" issue. As Tomen Mediacom and its various competitors stake out their territories and build their infrastructures, hovering over their massive, complicated projects is the haunting, simple question of whether Japanese actually want to interact with their TVs. Couch potatoes and channel surfers have had decades to become set in their ways. If suddenly they can interact with their TVs, will they actually do it? In the world's second largest economy, with some 90 million TV sets and an average household savings of more than $100,000, the answer is worth tuning in for.