volume 4
march 2002

The potential of the return path

Or why interactive television in the UK is making money

by Robert Henderson

In the UK Sky Digital is making a success of interactive television with its digibox which incorporates a phoneline connection for a return path. Elaborating on this example Robert Henderson, who is working as an Interactive TV Analyst for NDS, explains why launching an interactive service on a platform without a such a return path strategy doesn't make business sense.

It is an expressed opinion at conferences and in journals, that the UK leads Europe in the development of successful interactive television services. Although it is easy to spot trends, for example the revenue generating capabilities of betting, games and voting, it is surprising to note that a number of other essential factors seem to be ignored and of these, one of the most important is the use of the return path.

The main reason why interactivity in the UK is making money, especially in the case of Sky digital, is the fact that of the 5.7 million installed Sky digital set-top-boxes, all are connected to a phone line return path. This enables Sky to generate what it calls "interconnect" revenues — premium-rate telephony charges when the set-top-box dials up to enable voting, competitions and pay-per-play games and charges when the return path is used for t-commerce and interactive advertising fulfillment. However, it doesn't only benefit BSkyB. Through the return path, TV channels and content producers can establish one-to-one relationships with their viewers and therefore the ability to generate direct revenue from them. This much needed revenue can then be used to fund future interactive development or to prove the viability of interactive and therefore elicit more funding from management.

At a recent conference in Hamburg, German media companies extolled the virtue of deploying the Multimedia Home Platform (MHP). In Germany, without the support of the cable operators, the viable option for MHP deployment appears to be satellite. However only a small percentage of German satellite set-top-boxes are return path connected, a factor common to other parts of Europe, including the Nordic region. This is acceptable for the delivery of forward-path enhanced television services, such as news and weather, but not so when you need to generate direct revenue to help cover interactive development costs. What is even more astonishing is the plan of some operators to "simulcast" new interactive services in both MHP and their legacy system, so as not to alienate current subscribers. Good news for viewers, but who is going to pay the doubled development costs of an interactive application on a platform with only a small percentage of return path connections? Not to mention the additional bandwidth costs. Clearly the business model for MHP is yet to be fully explored.

In the UK, BSkyB understood the interactive business model and commercial potential of the return path. It realised it had to persuade its customers to connect the set-top-box to the phone line and did so by offering a subsidised (free) set-top-box to customers who agreed to connect the box for a twelve-month period. Early competitor arguments suggesting difficulties with phone line usage and ability to connect the box to a fixed line were disregarded as 5.7 million customers took the free set-top-box option. BSkyB then used revenue generated from interactive services to recover its investment in set-top-box subsidy.

Thanks to this strategy, channels including Channel 4, MTV and Nickelodeon are able to generate additional revenue from their viewers — voting for instance has shown response rates of up to 60%. QVC, the home shopping channel, is able to take 10% of its total orders through QVC Active, it's interactive television service, and advertisers, such as Rimmel Lipstick, are able to see response rates of 3.2% from their interactive advertising campaigns.

So, if there is one lesson to be learnt from the UK, it's this. Make sure the platform you are launching an interactive service on has the vast majority, if not all, of its set-top-boxes connected to a phone line return path. If the platform is cable, make sure the operator has headend technology in place, which measures all interactive requests, flags those requests which are premium, such as voting, and passes those requests to a unified billing system. If you don't, the path to profitability will be a very long and arduous one.

NDS are hosting a keynote and exhibiting at Mediacast from 21 to 23 May 2002 at the ExCeL, London. For free tickets call +44(0) 870 429 4422.