May 2002

In the wake of the ongoing fallout from the tech bubble and a slower advertising market, AOL Time Warner's new leader Richard Parsons believes that the centrepiece of the company's strategy should no longer be wholly focused on the promised convergence of digital technology and entertainment.

Although a break-up of the AOL Time Warner merger is not on the cards, Parsons, who officially took the reins yesterday (Thursday May 16), is said to be taking a more cautious approach (the result of a three-month strategic review) about how quickly the promised synergies that were attached to putting AOL and Time Warner together in the first place may actually happen. And well he should given the lack of bottom line up tick since the two were 'merged' a year and half ago amid starry-eyed promises of gee-whiz technology distributing Time and Warner products every which way. The fact is that the only clear direction from the merger has been a downward one for AOL Time Warner's stock, which is trading at a three-year low.

However, at the same time that Parsons is focusing more on movies and magazines, one of the world's technological visionaries John Malone seems to be heading in the opposite direction, launching his company Liberty Media into the leading interactive TV software business with the $185 million purchase of OpenTV. "Adding Liberty's financial clout (to Open TV) should only accelerate plans to hunt and buy more cool and revenue-generating iTV applications and intellectual property rights"

So who's right? Well, they both are. It's all a matter of timing.

OpenTV may have the biggest installed base of interactive TV software - some 24 million set top boxes world-wide - but its shares have gone from over $60 two years ago to around $5 today. Whereas AOL bought Time Warner in the heyday of Net hype, Liberty is buying Open in today's back-to-basics climate and at a rock bottom price. "We've looked at the interactive space for a number of years and always thought it looked good (but) it was just a question of timing," Gary Howard, COO Liberty Media told analysts.

Liberty will put OpenTV under a new umbrella company called Broadband Interactive Television or LBIT, which will use its Liberty connections and the track record of its CEO Peter Boylan (he built up what became Gemstar TV Guide) to buy more companies in the interactive applications space and pump up revenues for digital TV operators. The combination of OpenTV and Liberty will be formidable against the small, in-house interactive TV units of Vivendi Universal and News Corp. The purchase also leaves Microsoft, which has already scaled back its set top box software ambitions, and Liberate, now the only other major independent middleware provider, looking a bit on their back feet.

Squeezing more revenue out of every user is crucial to operators like BSkyB, which soon will reach a plateau for new subscribers and will depend increasingly on other revenues for growth. OpenTV's CEO James Ackerman had already started what is clearly a transition of OpenTV from being a provider of the increasingly standardised middleware business (the software platform that sits in set top boxes) to developing interactive applications for operators with the purchase of Static, the producer of Playjam, an interactive games channel that is one of the most-used services on Sky Digital.

Liberty wants to accelerate the move into more applications and interactive advertising and t-commerce. These services are seen as the Holy Grail of the next step in TV, but so far there have been few highly remunerative successes beyond betting and some pay-to-play games. The technology is costly and difficult. There are different platforms and it is unclear what people will actually pay for and how much. That said BSkyB's interactive average revenue per user (ARPU) for the nine months ended March 31 was £14, an increase of 23 per cent on the comparable period, out of total ARPU of £341.

As usual Liberty Media looks to have caught the interactive TV train, which is arguably the next big thing in TV, just as it is accelerating out of the station. OpenTV's balance sheet is in good shape with no debt and $175 million in cash. Adding Liberty's financial clout should only accelerate plans to hunt and buy more cool and revenue-generating iTV applications and intellectual property rights. And when AOL Time Warner wants to ramp up its interactive services on its cable systems, guess who it's probably gonna call?