The Internet. The TV.

Here's how to finally bring them together.

By NICK WINGFIELD
December 11, 2007 Page R1

Millions of people love watching Internet video on their PCs. So why can't the technology industry figure out how to get them to watch Internet video on their television sets?

It isn't for lack of trying. For several years, Silicon Valley has bombarded the market with gadgets that let you tune into online video in your living room. Plug one of these set-top boxes into your TV, and you can download a selection of movies and TV shows, or perhaps browse video sites like YouTube.

It seems like a no-brainer: Consumers get a greater breadth of on-demand content than cable offers, and in the comfort of their living room or bedroom, the industry argues.

Yet consumers aren't buying. Internet video players like Apple Inc.'s Apple TV and Akimbo Systems Inc.'s Akimbo Player haven't managed to reach an audience beyond the early-adopter crowd. And multipurpose devices that let you watch Internet video -- such as TiVo Inc.'s digital video recorders -- haven't found a mass market either, analysts say.

"The issue with these next-generation set-top boxes is they're hard to use, hard to install and the return on investment isn't particularly large because the content is available elsewhere," says Mike Volpi, CEO of Joost NV, a London-based Internet television service available through PCs.

Still, tech companies can't stay away from the idea, because of the booming popularity of Internet video. In August, Internet users in the U.S. viewed 9.13 billion online videos, up 26% from 7.24 billion in January, estimates research firm comScore Inc.

Users watched more than a quarter of those videos on Google Inc.'s YouTube, but online video from traditional entertainment companies is exploding, too. Over the past two years, broadcasters have begun streaming nearly all of their most popular shows free with advertisements on their Web sites. (A stream doesn't allow users to keep a permanent copy of the show.) NBC alone says it streamed 50 million shows from its site during October.

How can tech companies get consumers to take the next step and start watching Internet video on their TVs? We interviewed more than a dozen executives in the technology and entertainment industries, analysts and others. What follows are five reasons Internet video players haven't taken off -- and five broad changes that could help their chances of reshaping the television landscape:

THE PROBLEM: Too Many Boxes

Let's start with one of the most basic problems: clutter. Consumers simply don't want to add a new box to their home-entertainment centers. Consumers made exceptions, of course, for DVD players and VCRs. But the benefits of stand-alone Internet video players have been too weak to make people clear space in their homes.

Akimbo, of San Mateo, Calif., earlier this year gave up selling its $99 Internet video player, which let users download cooking shows, anime and other niche programming from the Internet. The company is now focusing on offering its video-on-demand service through PCs and multipurpose set-top boxes like AT&T Inc.'s Homezone, which contain a satellite-television tuner and digital video recorder.

"I love toys, but a stand-alone box needs to give me something I can't get anywhere else," says Thomas Frank, CEO of Akimbo.

Even Apple, despite its smashing success in digital entertainment with the iPod, hasn't seen a big success with Apple TV, which went on sale early this year. Forrester Research Inc. of Cambridge, Mass., estimates Apple has sold fewer than 400,000 Apple TVs. An Apple spokeswoman declined to comment. Apple CEO Steve Jobs has tried to downplay expectations for the product by calling Apple TV a "hobby" for the company.

THE SOLUTION: Blend Boxes

Many technology and entertainment executives now believe the surest path for Internet video is through an existing device in the living room -- though there are lots of guesses about what that device is.

Jason Kilar, CEO of Hulu, an online video site that's a joint venture of News Corp.'s Fox and General Electric Co.'s NBC Universal, believes the device will be a specially equipped television set, because while people may not buy any more boxes, they might be willing to upgrade to a new TV. Jeremy Allaire, chairman and CEO of video-delivery service Brightcove Inc., of Cambridge, Mass., thinks high-definition DVD players are likely candidates; he believes lots of consumers already plan to replace existing players with ones capable of playing high-definition movies.

Some companies, like Akimbo, are already taking steps in this direction. Sony Corp. this year began selling a $300 adapter for its Bravia high-definition television sets that tunes into Internet video. The company eventually plans to let users download television shows and movies to its PlayStation 3 game console, as Microsoft Corp. already does with its Xbox 360 game console. Microsoft says about a third of its more than seven million Xbox 360 users in the U.S. have downloaded television shows and movies through the company's Xbox Live online service.

Meanwhile, Tom Rogers, CEO of TiVo, is betting his company's DVRs are the best system for downloading Internet video. TiVo, of Alviso, Calif., already lets its users download television shows and movies through a partnership with Amazon.com Inc.

Cable and satellite set-top boxes might be in a strong position to become Internet video players, in part because of their history of copying innovations and bringing them to a mass market. For example, the vast majority of the roughly 22 million DVRs in U.S. households are part of TV tuners from cable and satellite companies; fewer than two million are stand-alone TiVo models.

Kip Compton, general manager of the video and content networking unit at Cisco Systems Inc., which owns cable set-top box maker Scientific Atlanta, predicts cable companies will begin rolling out the first cable boxes that can access Internet video next year. "People are buying, testing and getting ready to deploy them," Mr. Compton says.

Some tech executives believe the cable industry will drag its feet rolling out Internet-based video because it could represent a long-term threat to its traditional subscription-television business. The fear: Will people be willing to pay for traditional cable service if they can watch lots of TV shows free of charge from the Internet, on their regular TV sets?

On the other hand, wide acceptance of Internet video would likely be a huge boon for cable companies' broadband Internet-access businesses. "We're going to go where the customer takes us," says an executive at one cable company.

Some analysts predict new entrants to the pay-television market, Verizon Communications Inc.'s FiOS TV and AT&T's U-verse, will be the first to open their set-top boxes to video from the Internet. That's because their services already use the same underlying communications technologies as the Internet. (For now, video on those services is delivered over the telecom companies' private networks, not the public Internet.)

THE PROBLEM: Too Complicated

Besides the hassles of getting Internet video players hooked up to television sets, most of them also need to be configured to connect to the Internet over a wired or wireless home network. And that process can be daunting. Wireless access points often require users to remember and enter a password before adding any new devices to the network, which hinders the "plug and play" experience many consumers expect from entertainment systems. Some devices like Apple TV force users to take an awkward first step: Users must purchase movies and TV shows on their PCs before they can access them in the living room. (Though Apple TV users can access YouTube videos on the Internet directly from their devices.)

THE SOLUTION: Keep it simple

First, home networks and Internet video players will have to play more nicely with each other. Cisco's Linksys division, which makes home-networking equipment, has made it easier to add new computers to a wireless network by pushing a button on the devices, eliminating the need to enter a security password. Makers of Internet video players will need to integrate support for such features into their products to make setup easier.

Cable, satellite and telecommunications companies entering the video market may, again, have a leg up on rivals because they have fleets of technicians who handle the installation of new gear in living rooms.

Another way to make things simpler is to give the set-top box its own Internet connection. Building B Inc., a Belmont, Calif., company developing an Internet video player, uses long-range wireless Internet technologies to send video directly to television sets, so users don't necessarily have to connect the box to their home network.

THE PROBLEM: Sticker Shock

Compared with other methods of getting entertainment, Internet video devices are often pricey. The movie box from Vudu Inc., of Santa Clara, Calif., costs $399 and Apple TV starts at $299, hundreds of dollars more than a DVD player. TiVos sell for as low as $100, but users must subscribe to a service that costs between $8.31 and $12.95 a month, plus rental or purchase fees for downloading videos from Amazon.

And that's on top of the monthly cable and satellite subscription fees users typically pay. "Additive bills create frustration," says Bruno Pati, CEO of Building B.

Consumers have also shown a limited appetite for buying TV shows for $1.99 an episode on Apple's iTunes Store and Amazon Unbox, when so much of the content is available free on their PCs or cable systems. NBC, for one, says online purchases of its shows represent less than 10% of the volume of the free, ad-supported shows it offers online.

THE SOLUTION: Set Video Free

Some industry executives say Internet video players need to get cheaper. If they become part of cable set-top boxes, some executives believe they should convert to a modest monthly charge, with no up-front fee to the consumer -- much like cable DVRs.

If tech companies stick with the current pricing for their boxes, there is one thing that could help customers stomach the cost: a rich supply of free video supported by advertising. Which brings us to our next point.

THE PROBLEM: Limited Selection

Today, most Internet video players are tightly linked with the hardware makers' own online video service or those they've cut deals with. Selection isn't comprehensive on most of these services, limiting their appeal. Often, the services don't have deals with all the Hollywood studios and television producers, don't get the best mainstream titles fast enough, or don't offer YouTube and other sources of user-generated video.

The great attraction of the Internet, after all, is the breadth of content. Take away that breadth, and you take away a lot of the allure.

Xbox 360, for instance, works only with Microsoft's Xbox Live video service, which is stocked with content from Comedy Central, Warner Bros. and Paramount. Apple TV plays video purchased on iTunes, including movies from Walt Disney Co. and television shows from CBS Corp., as well as YouTube clips.

"All of the companies seem to be building entertainment silos," says Jerry Pierce, former senior vice president of technology at Universal Pictures, the movie studio owned by NBC Universal. But "consumers don't play in silos."

Reed Hastings, CEO of Netflix Inc., says Internet video players also haven't benefited from something that helped propel iPods into the mainstream: content copied from physical media or downloaded from illicit online sources. Nor is that likely to change soon, since DVDs are tougher to copy than CDs, and online piracy of video -- while worrisome to entertainment companies -- isn't nearly as widespread as it is for music, Mr. Hastings says.

THE SOLUTION: Open up the Boxes

Brightcove's Mr. Allaire believes hardware makers should open their Internet video players to anyone who wants to deliver entertainment to them. To ensure Internet video players work smoothly with multiple sources of online video, Mr. Allaire believes a good model to follow is really simple syndication, or RSS. This technology allows users to create Web pages that automatically receive headlines and other updates whenever their favorite news sites, blogs and other Web pages add new content.

Mr. Allaire says Internet video players could open themselves up to online video providers through a similar technology. For instance, users might go to a central Web page and browse constantly updated catalogs of offerings from various video services.

For their part, broadcasters say they're willing to cut deals to bring their free, advertising-supported television shows -- which are already on the Internet -- to Internet video players. Such deals could take a while, though, since entertainment companies are trying to avoid cutting deals with technology partners that create powerful new online gatekeepers. Earlier this year, Apple stopped selling NBC TV shows on iTunes after the two camps couldn't reach an agreement on pricing and other terms.

THE PROBLEM: Slow Downloads

Watching a television show or movie through some Internet video players can be an exercise in delayed gratification. Some boxes, like the Xbox 360, can begin playing videos purchased or rented online after only a few minutes, depending on the speed of a user's broadband connection. In other cases, users often have to wait hours to watch a movie until it has fully downloaded, as with videos purchased from Amazon through TiVo's older digital video recorders. (Newer TiVo boxes let users watch videos as they're downloading.)

"Until they make it easier to do than to simply get into a car and drive to the Blockbuster, these boxes aren't going to take off," says James McQuivey, an analyst at Forrester Research.

THE SOLUTION: Faster, Smarter

As a first step, makers of Internet video players could learn from a clever trick that Vudu employs. The company automatically stores the first few seconds of every movie it offers online -- more than 5,000 titles currently -- on Vudu users' boxes. When customers select a movie to watch, the video begins playing immediately while the rest of it downloads in the background.

Ultimately, though, Internet infrastructure is going to need to get faster. Residential broadband connections are already getting zippier, with speeds in some parts of the country of 30 to 50 megabits per second through services like Verizon's FiOS. For those faster speeds to matter, though, providers of Internet video will also need to boost the speeds at which they deliver content on their end, especially if that includes high-definition video aimed at big-screen televisions.

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