THE CUTTING EDGE : Ready for Prime Time? : Intertainer, an Interactive TV Start-Up, Set the Scene. Are Viewers and Infrastructure Tuned In to Plans?

Jonathan Taplin and Richard Baskin persuaded well-heeled companies to invest in their idea. Built their server. Signed content partners and conducted trials. But their toughest challenge lies ahead: convincing consumers and distributors to buy their interactive TV service.

The duo founded Intertainer three years ago to provide programming for the high-speed broadband networks that cable and phone companies are developing to cash in on increasing demand for sophisticated Internet services. Taplin and Baskin plan to offer about 700 hours of movies, music, games and other content that can be accessed for a fee from a PC or a TV set that’s linked to a high-speed network.

“Our partners said only lunatics could have done what we did--which was basically cash in all our chips and invest everything we had in an idea that had not only no distribution, but no customers,” Baskin said.

So far the Culver City-based company’s staff has grown to more than 100 and it’s garnered $37 million in financing from industry heavyweights such as Comcast, Sony, Intel, NBC and US West, each of which owns a small equity stake. The Disney Channel, PBS, ESPN, Warner Bros. and Sony, among others, have agreed to provide content to Intertainer.

To date, Intertainer has had only a few small trials of its service, including several conducted by US West with digital subscriber line (DSL) customers in Boulder, Colo., and current trials operated by RCN in New York City and Comcast in Willow Grove, Pa.

This fall, Intertainer plans to deploy its service in a handful of markets, including Denver, New York City and St. Cloud, Minn. And it hopes to have about 100,000 households signed up for its service by the end of next year. Still, its founders don’t expect their company to break even until at least 2002, when they hope to sign up “millions” of customers.

But analysts wonder whether cable and phone companies will deploy high-speed networks fast enough to fulfill Intertainer’s ambitious goals. At present only one in five cable subscribers has access to such networks and only one in 25 phone customers does. Network growth is expected to be slow because expensive equipment upgrades force companies to charge consumers higher monthly service fees.

“What it all comes down to is making the service available to consumers,” said Kevin Hause, an analyst with International Data Corp., a Framingham, Mass.-based market research firm. “[Intertainer] can have all the content partners they want, but if the service providers don’t sign on then it’s not going to be available to consumers to see.”

Taplin, 52, and Baskin, 50, who are entertainment industry veterans, say millions of Americans are ready to buy handbags, play video games or demo new CDs on their TV sets. Taplin is a former tour manager for Bob Dylan, and Baskin directed music videos for Barbra Streisand and Elton John.

But the fast-growing start-up is at a crossroads in its quest to become the interactive TV service of choice.

The company must now set itself apart from myriad competitors, such as video-on-demand provider Diva and enhanced-TV specialists Wink, WebTV, WorldGate and others. All of these are jostling to tap into the still untested market for such services as video on demand, surfing the Internet on a TV set, electronic programming guides and interactive advertising.

Interactive TV start-ups face an uphill battle with cable operators, who in some cases are planning to offer their own enhanced programming through ventures such as Excite@Home. Cable companies also act as gatekeepers by deciding which of these services they will offer consumers on their digital set-top boxes.

“A lot of cable providers are hesitating to order any of these services. That’s why we see a lot of announcements about trial deployments,” Hause said. “It’s a ‘we’ll dabble here and there and wait and see what works’ attitude.”

Intertainer currently has deals with set-top box makers Scientific-Atlanta and General Instrument to offer its service to cable companies.

Once enhanced TV is available, consumers must be persuaded to install digital set-top boxes. About half of the nation’s 66 million cable subscribers don’t even use simple decoder boxes that are required to receive extra movie channels such as HBO. If these consumers don’t already subscribe to premium movie channels, analysts say, they may hesitate to pay for movies via Intertainer. First-run movies on Intertainer will cost $3.95, with library films from $1.95 to $2.95 and TV shows for about $1.

Several things set Intertainer apart from its competitors. Investments from industry heavyweights lend credibility to their service. And Taplin and Baskin, along with a third founder, Jeremiah Chechik, have received praise for Intertainer’s easy-to-use home page, which features a wheel of content choices like movies, music and TV. The company has also designed its server to work on a number of platforms, unlike several of its competitors.

But distributors are concerned about how well this server would handle an avalanche of requests from users, analysts say.

“Intertainer requires a fairly robust infrastructure relative to some of the other offerings,” Hause said. “This investment has to be considered by the service provider.”

Intertainer hopes to profit through video on demand, e-commerce offerings, subscriber fees from distributors and advertising. One hallmark of Intertainer’s service is video on demand, which allows customers with digital set-top boxes to pay a fee for 24 hours of access to movies and shows they can pause and rewind at will.

To beef up its e-commerce offerings and build customer loyalty, Intertainer uses a “personal assistant” that allows users to create individual profiles that can be saved and accessed later with a password. The assistant uses this information to present a user with movies and TV shows, music, books and games geared to his or her interests.

“It’s about weaving e-commerce through movies, TV, music and games in a way that’s targeted and focused and makes a real connection,” said Bob Kaminsky, Intertainer’s senior vice president of programming. “If you’re watching the ‘City of Angels’ you might also like to buy the album. If you’re watching ‘A Room With a View,’ you might want to click over to a Tuscan cooking show and click on a link and buy a cookbook.”

As technology improves, the company plans to expand the number of hours of programming offered on its server.

E-commerce opportunities will also be embedded in ads that ill pop up every eight minutes on Intertainer if the consumer hasn’t purchased anything. (Ads won’t appear during movies or other shows ordered and paid for by the consumer.) “Hypervideo” technology from San Francisco-based Veon allows Intertainer consumers to click on products displayed in the ad and order them.

Intertainer’s high-profile backers are using the service as a laboratory to test how interactive TV might look and act.

Sony will use the service to test “different types of movies and TV shows and to target different audiences,” said Cheryl Koll, vice president of sales and marketing for pay television and airlines for Sony Pictures Entertainment.

“We’re really looking for information about who is using it, how they use it and why they are using it, so we can better position our product in video on demand,” Koll added.

During US West’s test run that ended in April, the Baby Bell found that consumers--who used Intertainer on their PCs--bought two to five movies per month on the service.

US West households in the trial reported that boredom with broadcast and cable offerings motivated them to use the service. These households also watched less TV and rented movies half as often when they were using Intertainer, said Audrey Thompson, director of innovations for Internet protocol services for US West.

But during this transition period for Intertainer, analysts say, it’s also likely that Taplin and Baskin will field offers to sell the company to a hungry cable or telecom player looking to beef up its high-speed programming slate.

If that’s true, the founders aren’t talking.

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Intertaining Possibilities

Intertainer offers video on demand and e-commerce to consumers via a TV or PC hooked into a high-speed network. The video on demand market is expected to grow as those networks proliferate. Projected video on demand revenue in the United States, in billions:

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Video on demand revenue, in billions: 2005: $3.1 billion

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Broadban Market

Broadband networks offer high-speed connections that make video on demand practical. Consumers can get broadband primarily through cable modems or digital subscriber line service.

Cable modems

Household connections, in millions: 2002: 13.6 million

Digital subscriber line

Household connections, in millions: 2002: 2.2 million

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Source: Forrester Research