To catch a glimpse of interactive TV's future, go to Woodbury, N.Y. Cablevision is using this Long Island suburb as the beachhead for iO, its long-awaited interactive TV service.

The iO system has no equal in the interactive TV realm. In addition to delivering hundreds of channels of conventional programming and on-demand movies and music, iO offers subscribers a personal photo service, e-mail, instant messaging, news-on-demand, local restaurant guides, up-to-the-minute traffic and weather, even direct control of camera angles for sporting events carried by Cablevision's MSG Network.

For more insight into interactive TV's future, talk to Paul Cuthbert. Cuthbert is president of L.I. 1st, a local Web content developer on Long Island. He took a test-drive of iO when he helped his father learn how to use the system.

"The system is amazing," Cuthbert says. "I love it."

Then Cuthbert drops the other shoe: "But for what I get, I'm sticking with my DVDs."

Early numbers show that Cuthbert isn't alone in that assessment. In its financial guidance for 2002, Cablevision admitted that only 17,200 subscribers have signed up for iO as of the end of 2001, far short of the 40,000 subs the cable operator expected to have by that point. More ominously, the company said it has "held off on accelerating the rollout [of iO] as it worked to further enhance the product's performance." Although Cablevision did not say so, those recent developments suggest it will not meet its goal of having 2 million iO subscribers by the end of 2002. (Cablevision declined comment for this story.)

Up until now, the main problems that broadband network operators have had to face in dealing with advanced services like interactive TV have been technical. Revamping installed networks with the intelligence needed to deliver advanced services is expensive, and the technology still isn't perfected.

But network operators like Cablevision now have a new, uncontrollable force to contend with: the sudden and remarkable arrival of inexpensive digital video disc players. In what is turning out to be one of the biggest twists in the saga of mass-market entertainment, freestanding disc-based consumer electronics devices are fast becoming the media delivery method of choice for consumers.

International Data Corp. estimates that 28 million DVD players are already in U.S. consumers' hands, and it expects 51 million households to be DVD-equipped by 2003. DVD players are now widely recognized as being the fastest-selling consumer electronics product of all time.

Cause for Concern

Why should network operators be worried about this? Because DVDs are now in position to set the standard not only for content interactivity but also (and more importantly) for user expectations about the interactive content experience. By packing an extraordinary amount of intelligence into relatively cheap boxes, makers of DVD players essentially will allow consumers to make an end run around more expensive network-based services to get the interactive experience.

That end run could prove to be disastrously costly to network operators. "Some video services like VOD will not cannibalize disc-based distribution for at least eight years," says Lydia Loizides, a senior analyst who covers DVDs and interactive TV at Jupiter Media Metrix.

Translation: Network operators are going to have a hard time convincing subscribers that interactive service is worth anywhere near the prices now envisioned for such offerings. "Cablevision wants $150 a month for iO," says Cuthbert. "That's $1,800 a year. For that, I can get all the DVDs I want, a huge home entertainment system and still have money left over. It's just not worth it."

And as consumers get used to putting more device intelligence in their homes — and then pool that intelligence with stand-alone home networks — the role of network-based advanced services becomes less certain. As next-gen DVD players, game systems and other consumer electronics boxes become even more sophisticated, the coveted broadband pipe into the home could be rendered dumber, less valuable and in some cases totally irrelevant.

The First Mover Advantage

Another huge problem for network operators is that content developers are taking to disc-based distribution in a big way. "We absolutely see the value of this media now, and we expect to see this value basically forever," says Michael Mulvihill, who as VP of content development at New Line Cinema manages the DVD content development for that independent film studio.

Some analysts have gone as far as to say the DVD platform is coalescing into a network-free virtual content delivery system that is beating similar networked products to market. "DVDs have gotten here first and they have already set up shop," says Kathleen Maher, VP at John Peddie Research, which tracks the consumer electronics market. "So the operator will have to be very careful about gearing up for new services. It's easy to imagine certain offerings just not selling into a market dominated by DVDs."

Network operators must now come to grips with the fact that consumer electronics makers are now their competitors for content delivery. Although CE makers have stolen an early march on network operators, the battle isn't over. There are huge chunks of content — live programming, for instance — that can't be delivered via canned media like discs. But for network operators to stand a fighting chance in the interactive content battle, they will need to understand what they are up against.