Interactive multimedia is contagious. The trajectory and timing of its development will transform not only technology providers, but an increasingly broad range of other industries as well, including retailing, advertising, and financial services. The key agents of this transformation will be so-called "gateway businesses"—the suppliers, like CompuServe or Prodigy or America Online, of navigation assistance to end users seeking to locate resources available through the electronic network.

Although standalone gateways today are largely limited to computers, they will soon be widely available on other platforms such as TVs, set-top boxes, portable access devices, and even screen-based telephones. At present, these gateways represent a fairly small revenue stream—less than US$800 million in 1994. Most of that revenue is concentrated in the United States, with a few notable exceptions such as the Minitel network in France. Nonetheless, the choices that the managers of these businesses make today will deeply enhance—or erode—the opportunities that managers of other businesses will have to create value in the future.

Today a gateway is often tightly bundled with another business. The dial tone you hear when you pick up a phone and the number you enter on a telephone key pad represent elements of a simple but powerful gateway to the telephone network. Similarly, the on-screen program guides starting to appear on cable networks represent a gateway to the universe of cable. Over time, as the diversity of electronic networks and the resources they offer grow exponentially, so will the navigational value of a gateway service. The much-vaunted 500 channels on a full-service broadband network, for instance, would be useless without effective navigation assistance—and that is only one among the many networks that are likely to be available.

Providers of all kinds recognize this opportunity and are maneuvering to become the gateway of choice for end users. Some—such as telephone and cable companies—assume that gateways will be tightly bundled with the networks themselves. Others—such as Microsoft and Delphi—are working to build standalone gateways that will operate across many networks. Both groups are eagerly pitching their gateways to multifarious content and service providers in an effort to expand the resources that their gateway can supply—and, if possible, to offer things not available elsewhere.

A question of outcomes

A retail gateway service business could well become a distribution bottleneck

How will all this evolve? Many different outcomes are both possible and plausible. The potential revenue of the retail gateway service business in the United States in the year 2000, for example, could be anywhere from zero (if these services become tightly bundled with the communications network), to as much as $13 billion (if independent gateways succeed in capturing subscribers and delivering advertising to them). Moreover, the roles that such a service might play also vary widely. It could become no more than an interesting packaged software business or a "loss leader" to generate traffic on communications networks. But it could equally well become a critical distribution bottleneck through which content providers must pass to reach their audience—and through which advertisers must pass to deliver their messages.

The challenge for managers is to understand the range of possible outcomes and assess the implications of each one for their particular business

The challenge for senior managers, therefore, is to understand the range of possible outcomes and assess the implications of each one for their particular business. This challenge applies not only to companies that aspire to become gateways themselves, but also to those that are being courted by the gateways. Traditional media companies, such as magazine and newspaper publishers, are already being approached to adapt their content for specific gateways; so are retailers and banks. The choices these companies make in the next 12 to 18 months will have a profound effect on their own futures—as well as on how gateway businesses will themselves evolve.

To simplify an already complex area, this article will focus on gateway services targeted to residential customers in the US. There are two reasons for this. First, given the proliferation of network capacity during the next few years, these customers are likely to be the core test-bed market for the emergence of gateway service businesses. And second, the gateway strategies pursued in other countries will likely be shaped by early events in the United States.

Scenario 1: Old content wins

Most observers of the chaotic multimedia landscape believe that owners of unique and engaging content will capture significant value. Intriguing movies, distinctive editorial content, exciting interactive games, hot musicians, major league sports franchises, difficult-to-replicate reference databases—these are the assets that nearly everyone assumes will capture value, no matter what else happens.

Why should this be the case? The logic appears compelling. The new fiber optic networks now being deployed represent an order-of-magnitude increase in capacity. Instead of the limited number of channels available today on a typical cable network, a potential capacity exists for 500 channels as these networks are upgraded with fiber optics.

These developments will produce enormous overcapacity in "transport" facilities and a bruising battle among transport providers for consumer usage

At the same time, the US government’s regulatory agenda is shifting to encourage competition. This means that telephone companies will move to upgrade their networks to offer similar capacity. The result: a 1,000-channel-capacity "pipe" coming into the average household. Add to that still more channels from direct broadcast satellites. Taken together, these developments will produce enormous overcapacity in telecommunications "transport" facilities and a bruising battle among transport providers for consumer usage of their networks.

The key to value

In such an environment, runs the argument, the key to winning consumer allegiance will be unique and engaging content. Relative to the capacity of transport networks, high-quality content will be in very short supply. Having invested heavily in building their networks, transport providers will pay top dollar to attract such content. And as a scarce resource, it will be bid up in value as demand for it grows. This is why Michael Eisner at Disney has repeatedly declared his intention to remain focused on the content business, rather than investing in building or acquiring transport facilities.

Although this line of argument has been most explicitly developed with reference to movies, newspapers, and video games, its logic applies equally well to any business with a strong brand franchise that can help to boost network usage. A branded goods retailer with broad customer appeal should be in a powerful position to negotiate with owners of transport facilities. The same is true of a bank or securities firm with a strong retail franchise.

At the heart of this scenario is the assumption that gateway services will be tightly bundled with residential telecommunications services by the transport provider—that is, the telephone company, cable company, or satellite broadcast company. One consequence of this arrangement is that the economics of gateway services will be overwhelmed by the economics of transport. Since every transport provider will develop these services as a way to differentiate and add value to its basic transport facilities, overcapacity or the prospect of an empty pipe will lead transport providers to pay high fees to content owners and virtually give away the gateway services in order to promote usage.

It follows that if independent gateway services exist, they will remain weak and marginal. Forced to compete with the deep pockets and aggressively low prices of transport providers, independents will be able neither to charge much for their services, especially if they provide navigation assistance that is easily copied, nor to provide multiple specialized services if, as is likely, gateways increasingly cater for specific consumer needs like financial services or movies on demand.

Scenario 2: Mega-gateways win

A different possibility, however, is that gateways come to play so crucial a role that, at the extreme, they acquire a stranglehold on inter-

active multimedia networks. If this happens, they could extract value at the expense of transport and content providers, as well as owners of consumer brand franchises.

This scenario assumes that consumers want the convenience of a highly-bundled gateway service so badly that they will pay a premium for it

This scenario begins with the assumption that consumers want the convenience of a highly-bundled gateway service—the proverbial "one-stop shop"—so badly that they will pay a premium for it. If so, broad-based gateways—with financial transactions and movies on demand—are likely to prevail over those that are narrow in focus. Rather than seeking just navigation assistance from a gateway, consumers will look for the convenience of integrated billing, transaction facilitation, customer support, and service provisioning from a single vendor.

Advantages and barriers

As early movers build up a large subscriber base, they will also gain greater negotiating power

These broad-based gateways will gradually consolidate into a limited number of national, or even global, full-service "mega-gateways." This is because increasing returns will accrue to early entrants, which will accumulate a much richer set of "one-stop shopping" resources—content, transaction services, communication facilities—than later entrants will be able to acquire, at least initially. Similarly, as early movers build up a large subscriber base, they will also gain greater negotiating power with content and transaction service providers. And that, in turn, means they will pay lower fees than later entrants.

Early entrants, moreover, with their more attractive audiences, will also be well positioned to capture a disproportionate share of interactive advertising revenues. In addition, they will not have to spend as much on subscriber acquisition as later entrants because they will have better-established brand identities and a wider array of resources to offer.

Under this scenario, then, a powerful "virtuous cycle" will be set in motion, one that continually strengthens the position of early entrants and confronts later entrants with high barriers to entry. Indeed, if consumers really want full-service gateways, the initial investment to set up a gateway business becomes substantial.

There may also be large switching barriers, which will make it difficult for new entrants to "raid" existing gateways for subscribers. These barriers could take several forms. Subscribers may, for instance, become so attached to their e-mail addresses, particularly after they have shared them widely, that they resist switching gateways if doing so entails a change of address. Far more important, however, are communities of interest. Once a subscriber becomes a participant in a community of interest—let’s say a gardening or sports forum—it will be very difficult to get him or her to switch to a competing gateway. Even if it offers a community of interest on the same topic, it will not have the same subscribers.

Another switching barrier has to do with the "intelligent agents" that will become a prominent feature of a gateway’s navigation tools. Intelligent agents are, in fact, software programs that can transparently execute a user’s instructions on the network—and learn a user’s preferences over time. For example, a software agent could be used to find and book an available seat on a flight from London to Munich on March 12—knowing that the user prefers to fly on certain airlines, generally wants to fly in the morning, and typically seeks an aisle seat. For some time, they will not really be all that intelligent: they will need "training" before they can fully do their job. Thus, after subscribers have invested time in this training, they will be reluctant to shift to another gateway service and have to start the training process all over again.

First-mover advantages may help to explain why Microsoft offered $1.5 billion for a software company called Intuit with less than $200 million in revenues—but with a loyal base of 6 million users for its Quicken personal finances software package. Because these users have invested time in entering detailed personal financial information and organized their personal finances around this software, they have, in effect, become "locked in": they will not want to learn a new software package and enter all that data again. Moreover, as the dominant software package in this category, Quicken benefits greatly from references by existing users to generate new sales.

Intuit had, in fact, already begun to exploit this installed base by offering related applications and services, including tax preparation, electronic check writing, personal credit cards, brokerage services, and financial news. Thus, what Microsoft bought was not only a content owner with a strong brand franchise, but also a captive user base for one of the largest potential communities of interest.

The importance of advertising

If this logic of consolidation holds, gateways will be well positioned to become the primary channel for interactive advertising

If this logic of consolidation holds, gateways will be well positioned to become the primary channel for interactive advertising. To date, much of the debate about residential multimedia has focused on whether customers will be willing to pay for new and substitute services. For example, will consumers be prepared to pay $3 to see a movie on demand from a full-service network, rather than renting the movie from a local video store for the same fee? Now, although the revenues from video rental and cinema tickets in the United States are substantial, they pale in comparison to the $200 billion spent on consumer advertising and point-of-sale promotion. The issue, therefore, is really less about consumer willingness to spend on interactive services and more about advertiser readiness to shift from traditional media to new networks.

Given their multi-faceted relationship with each subscriber, broad-based gateways would be able to develop a deep understanding of their subscribers’ information needs, the interest groups they frequent, the transaction services they use, the entertainment they prefer, and how they have reacted to advertising and marketing programs in the past. The gateways could then use this information to offer precisely targeted advertising—with, of course, a high degree of interactivity. On seeing an ad, a viewer would be able to press an icon to request more information or to order the product or service. Finally, gateways could monitor all such activity to assess which kinds of advertising in which kinds of venues work best with which kinds of subscribers.

Winners and losers

Consolidation would create a powerful set of intermediaries between content and transport providers

If all these assumptions play out, the implications will be profound. Such consolidation would create a powerful set of intermediaries between content and transport providers, able to attract substantial fees. Depending on penetration rates during the next 10 to 15 years, a relatively small number of mega-gateways could become the primary network access points for 50 to 70 million households.

There would be secondary effects, too. Content providers that depend on advertising for a substantial portion of their revenue stream, like newspapers, magazines, and television networks, could see much of that revenue disappear as gateways become more attractive channels for advertisers. Similarly, service providers that play an intermediary role, like retail banks and retailers, face a risk of displacement as gateways develop the ability to take on this role themselves. In general, as the consumer brand franchises of the mega-gateways strengthen, those of the content and service providers that rely on these gateways for customer access will fade.

These providers will not be the only ones to get hurt. If consolidation does happen, the shakeout is likely to be painful for all but a lucky few. Current best estimates suggest that there will be as many as 15 to 20 entrants spending heavily in the gateway service business during the next two years. If only three or four of them survive the shakeout, the potential for net value destruction is immense.

Scenario 3: New—and some old—content wins

There is yet another possible outcome: one that focuses on the Internet as a model for a new type of non-command-and-control network environment. The design of today’s gateways assumes that consumers want a highly integrated, user-friendly environment that must be centrally organized and managed. The Internet, by contrast, is a highly decentralized network environment, which provides open access to anyone who observes certain basic protocols that ensure connectivity. Historically, however, the Internet has required a degree of technical proficiency that makes it accessible only to the computer whiz able to master Unix command structures.

Changing incentives

If content and service providers become sufficiently concerned about the power that mega-gateways could develop, they may turn to the Internet as their primary platform for delivering interactive services. Rather than signing exclusive deals with broad-based gateway providers, they would make their offerings widely accessible on the Internet. If they did, given the openness of the Internet and the relatively low cost of setting up on it, there could be a wild proliferation of content and services. This would, in turn, accelerate the development of innovative tools and support services to make the Internet a more inviting environment for ordinary consumers.

Already, more than fifteen startups have licensed—and are enhancing—a powerful Internet navigation tool known as Mosaic. These startups do not view a gateway business as a service business involved in managing the resources on a network. Instead, they view it as a product business—specifically, a shrinkwrap software product business. They believe that navigation tools can be sold as software products to be installed on a user’s PC, and that a growing number of people will be comfortable "surfing the Net" with the aid of these tools. Other companies are investing to provide such capabilities as security, reliability, billing services, and transaction and payment facilitation on the Internet.

Economic incentives for making the Internet even more secure and user-friendly are increasing

As more and more resources become available, the economic incentives for making the Internet even more secure and user-friendly increase. And the more secure and user-friendly it becomes, the greater the incentive for content and service providers to offer their products on it. This different virtuous cycle favors three kinds of players: those whose tools and user interface technologies get adopted as the de facto standards; those that establish a leadership position in providing certain kinds of support services, like billing and transaction facilitation; and those content and service providers that dynamically build communities of interest.

Necessary adaptations

Content and services that have been successful on a traditional platform cannot just be mechanically shifted to a new one. They must be adapted. A newspaper, for example, is unlikely to prosper simply by putting its text and photos on the Internet. Instead, it needs to adapt its material—for example, by making it more searchable with "zoom in, zoom out" capabilities. If you read a story about the latest referendum on public school funding, can you quickly access background information on education budgets for the past five years, compare that with student test scores and college admission patterns over the same period, and then move on to other issues?

In the brave new Internet world, distribution is not a bottleneck. Quite the opposite; it is in oversupply

Not only that, but the role of the content packager will shift radically. In traditional media, the content packager is often successful in part through gaining access to scarce distribution networks like movie studios, theaters, book publishers, book stores, newspapers and newsstands, or home delivery networks. In the brave new Internet world, distribution is not a bottleneck. Quite the opposite; it is in oversupply. Thus, the distinctive value of the content packager shifts from possessing access to distribution to understanding—and marketing effectively to—the target audience.

In many cases, traditional content and service providers—both creators and packagers—will have difficulty making the transition to new network platforms. This will create an opportunity for new players, unburdened by old approaches and assumptions, to establish businesses on the network and reap the benefits of a preemptive position.

One set of traditional providers, however, will bring a major asset to the network: unusually strong consumer brand franchises. These companies can stand above the clutter of the Internet and "pull" users to their offerings. But their franchise will get them only as far as a trial. If they do not creatively adapt their content and packaging to the requirements of this new platform, their franchises will erode.

A final note: the Internet is at present unable to handle real-time voice and video traffic with consistently high quality. Thus, this scenario may apply only to text and graphics or image-based content and traffic. On the other hand, strenuous efforts are under way to upgrade the capability of the Internet in this area, and it may eventually become a much more viable environment for such applications as movies on demand and video conferencing. Alternatively, the Internet model of open architecture may shape the broadband networks of traditional telecom providers and set in motion a comparable scenario for voice- and video-based content.

Looking for trigger points

These three scenarios illustrate three very different directions that the future of multimedia might take. Faced with such uncertainty, the temptation is to procrastinate. But to do so may involve even greater risk. Under at least two of the three scenarios, substantial preemptive value is likely to accrue to early movers. The winners will probably be determined quite quickly, even though the "win" may not be apparent for years to come.

So, what to do? First, senior managers should carefully monitor industry developments, with a particular eye to the "trigger points" that will do much to determine potential outcomes and, therefore, narrow the range of uncertainty. These trigger points fall into several categories, among them:

Market adoption

The pace of market adoption for specific technology platforms sets in motion the increasing returns that help "lock in" certain platforms rather than others. The choice of platform then influences the type of gateway service business that prevails. If network service providers are to be successful with gateways that they own and operate, for example, they will need rapidly to build full-service broadband networks, since third-party gateway services are already well established on existing telephone networks.

Trigger points to look for include:

• How many multimedia- or modem-equipped PCs will be shipped into homes this year? If the number exceeds 7 million units, the lead that PCs have already developed as a primary access device into the home will be strengthened. So will the lead of third-party gateway vendors, making the second scenario more plausible.
• How many Internet subscriptions will be sold this year to non-corporate users? If the Internet quickly develops a subscriber profile that transcends technojocks and university students, it will attract the kind of content that appeals to ordinary consumers, making the third scenario more likely.
• How many households will actually be served by full-service broadband networks by the year’s end? If major transport providers deploy these networks quickly, their potential role in the gateway business will expand, making the first scenario more likely.

Technology innovation

Hardware price/performance trends are well understood; software performance is much harder to predict

Technological uncertainties will also play a role in shaping outcomes. Although hardware price/performance trends are well understood, many of the key technologies involved in the gateway service business are software based—for example, security functions and search capabilities such as intelligent agents or directories. And software performance is much harder to predict.

Adding to the uncertainty is the fact that we are on the cusp of several simultaneous technological discontinuities—the shift from relational to object-oriented database management systems, the advent of higher bandwidth switching technologies that can handle video-based traffic, and so on. When and how these discontinuities play out will determine the kinds of applications that become feasible for gateway services to offer, which will in turn influence the economics of the gateway business.

Here, the trigger points include:

• When will someone come up with a secure billing and transaction support capability on the Internet and persuade five leading content or transaction service vendors to adopt the technology? If this happens in the next 12 months, the third scenario becomes more plausible.
• How fast will cable modems under $100 become available? This technology has the potential to hold back the deployment of full-service broadband networks, increasing the probability of the second and third scenarios.
• How rapidly will video server costs fall? If large-scale server facilities can be designed to significantly reduce the cost per video stream delivered by the year’s end, then movies on demand becomes a much more viable application in the near term, thus spurring deployment of broadband networks and making the first scenario more plausible.

Competitive behavior

The future is not predetermined. It will be molded by the choices made by major (and sometimes minor) players. How various companies elect to position themselves over the next 12 to 18 months will start to fore-

close some options while expanding others. It is difficult enough to predict these choices; it is even more difficult to predict how others will respond to them.

In this context, look carefully at:

• How many major content providers will establish substantial Internet server sites by the year’s end, and how many will also withhold their content from broad-based gateway providers? Choices made by these providers in the near term will play a big part in shaping outcomes. An early focus on the Internet could favor the third scenario.
• How quickly will existing broad-based gateway service providers structure alliances to accelerate resource development and subscriber acquisition? Aggressive early moves may help to reinforce their initial lead in the gateway business and make the second scenario more plausible.
• Will major transport providers launch their own proprietary gateway services for their broadband networks, or will they develop relationships with major third-party gateway services? If they launch their own services, the first scenario becomes more likely.

Economic performance

Near-term economics will also begin to open up some options while foreclosing others. Several early indicators will shape competitive strategies and responses:

• Will subscription fees drop by more than 25 percent this year for broad-based gateway services? If they do, the key question will be how much of the loss in revenue is offset by subscriber and usage growth. Without such growth, broad-based gateway service providers could experience a profitability squeeze that weakens their ability to expand offerings compared with the Internet, thereby making the third scenario more plausible.
• Will broad-based gateway services offer much higher royalties to content providers? Competitive pressures may increase usage fees for content providers from the 10 to 20 percent typical today to as much as 80 to 90 percent. If this occurs, the incentive to leave gateway services and set up Internet facilities may fade, thus increasing the probability of the second scenario.
• Will overcapacity in broadband networks in the early areas of deployment lead to the discounting of basic network services (telephony and standard cable) by more than 20 percent? If it does, the first scenario may play out, with enhanced bargaining power for content providers.

Choices to be made

Despite deep uncertainty over outcomes, the senior managers of companies involved in transport networks and content or service businesses must start—now—to address certain choices. So large are the potential first-mover advantages that those who wait on the sidelines run the risk of being left out of the game. Among those choices are:

What role do we want to play in the gateway services business? At the first level, the choice is whether or not to be a retail gateway service provider. At the next, it is about the level and breadth of content to offer.

Which specific network and access device platforms should we choose for our gateway services? Many players are waiting for full-service broadband networks and digital set-top boxes to be deployed before they introduce their services. Others are moving now to build positions on existing telephone networks with the PC as the primary access device. Still others are focusing on the Internet as their preferred network platform, with the PC again as the access device. These choices will dictate not only the likely timing of market penetration, but also the kinds of applications offered through the gateway services.

What kind of alliance would be most helpful in strengthening our position as a gateway? So great is the range of capabilities needed—superb user-interface software skills, for example, but also expertise in building and manipulating huge databases—that there are few, if any, companies that currently possess all of them. Success is likely to depend on the ability to assess current skill levels and to mobilize alliances or consortia in order to assemble and integrate the necessary capabilities.

How will our core business be affected by the growth of the gateway service business, and what steps must we take to adapt to its various possible outcomes? What is the risk that gateway providers will emerge as an alternative channel, or that they will come between us and our customers? If gateway services are supplied by independent third parties, what should network service providers like telephone and cable companies do to guard against the risk of becoming commodity transport providers?

The art that must be mastered is that of placing big bets in complex and highly uncertain environments, while at the same time managing the downside aggressively. Those who achieve this will be the future leaders in residential multimedia networks.