Malcolm Miller, CEO of innovative set-top box-maker Pace Micro Technology, speaking to a group of industry investors in June, summed up the problem facing his market sector, "There are people out there who are buying smart new silver [cellular] phones at "350 each with [little extra benefits] over a 10 model." But, he added, set-top boxes (STBs) risk being sold and given away to customers as commodity items, indeed, with the viewer/subscriber frequently having no choice in the brand thats delivered.

Fran Wood, who heads up Nokias box-efforts in the UK, talks a similar message; "The business model of giving away equipment is one we fully understand at Nokia, but we have still invested above and below the line in the core brand, promoting the brand. If you fail to do that there is no implied value in the product. Sadly, todays STB is not as sexy as a cellular phone, they are commodity products. We will endeavour to keep the brand alive on boxes but unless you can build a brand-name that is trustworthy it is very difficult to sell a premium STB. The box is just a link in the chain to content."

Abe Peled, CEO at NDS (News Corps digital technology arm) describes "the sleeper of technology" as growth of local storage in the STB. "When the PC first came out, in the early 1980s, it came with 10 Mb of local storage. Today you would be hard pressed to find anything with less than 2Gb of storage. Thats an improvement factor of 200 times. The modem at that time was about 2400 b/s, today the equivalent would be a 28.8 Kb/s, another significant growth factor."

Peled says "the prospects for a 10 Gb hard drive becomes interesting when linked to compression and inserted into a STB. It can expand the content window. With cable and analogue by satellite you have a 40 channel content window, more in the USA, perhaps 80. With digital the content window expands to nearer 200. Todays improved compression could give us today 400 channels of content without a problem. But if you add 10 Gb into the STB now, costing around $100 in the year 2000, that would add another 50-80 virtual channels. But go just a little further, and add 100 Gb of hard drive would mean 800 virtual channels. And 100 Gb is suggested for within the next 5 years. So we think the biggest revolution as far as the consumer is concerned will be local storage, which will completely change the paradigm for viewers, which is currently based on time. We ask whats on now. And local storage changes that, and we can start asking what would I like to watch. It is going to be content-driven from your local disk, with maybe 1000 hours of choice, and not necessarily the 200 hours of broadcast channel choice."

When BSkyB started giving boxes away to UK subscribers in May (and followed within hours by rival ONdigital) they started a new business model, at least in the STB arena. Inevitably the experiment is being watched with considerable interest by fellow broadcasters across the world. Indeed, in the USA Charlie Ergens Echostar DISH satellite system is closest to the Sky model with free base-level products and a massive subsidy on his latest creation, a combo STB that incorporates a computer-type hard disc drive that acts like a VCR and is called the DISHPlayer.

Now, in partnership with Microsoft's WebTV (who are probably the source of the subsidy) Echostar has launched DISHPlayer at an introductory price of $199, some $300 off the recommended retail price of $499. DISHPlayer combines a TV tuner, satellite receiver, WebTV video/data modem and VCR features into a single set-top box. Echostar explain the low pricing is possible because satellite receivers, the WebTV circuitry and VCR capabilities share some common components, such as MPEG decoding, RAM processing and memory, power supply, hard drive and tuner. Echostar is growing at more than 100,000 subscribers a month, and as Number 2 satellite broadcaster in the US is—like AVIS—working just that bit harder to grow and pass market-leader DirecTV.

Echostar is also supplying its Digital STBs to overseas markets, notably Spain's Via Digital system, although it will be Via Digital which decides whether to begin offering DISHPlayers to its subscribers.

Investment in these new-generation boxes isn't limited to technology companies. Mainstream network broadcaster NBC bought a multimillion dollar equity stake in TiVo in June, becoming the first broadcaster to invest in TiVo's personal TV recorder model. NBC didn't divulge sums involved in the deal, but said it obtained a less than 50% stake in the personal video recorder manufacturer. Under terms of the deal, NBC will use TiVo's tech to promote NBC shows that TiVo customers can record in a digital format, among other programming "enhancements."

Though NBC, like its broadcasting brethren, continues to lose eyeballs to cable nets, the company believes getting on board with TiVo will help it generate viewers. "There are so many TV options today—TiVo is about organizing choice and empowering the viewer in a way that creates a constantly changing personal video library that will most benefit first-run programming like NBC by increasing the viewership of programs," says NBC president Tom Rogers. NBC joins a large cast of TiVo investors, including Philips Electronics, DirecTV, Viacom's Showtime Net, and Paul Allen's Vulcan Ventures.

However, the United States is by no means making all the running in developing new generation digi-boxes, although its TV audience remains the target for just about every box-maker on the planet, not least Pace: "One can easily see 10 to 20 million [US cable analogue] subscribers converting to digital over the next few years and by 2003 one could easily forecast 17 to 18 million boxes [being needed] by the United States," according to Malcolm Miller.

Miller says Pace had delivered "close to 2.5m digital boxes to [end of June]," but were now looking to improve their own manufacturing margins and would start introducing higher end boxes with "extra added value for the consumer. Even in a market where boxes are being given away free there is room for an enhanced product at a higher price." Miller adds that Paces R&D team were focusing on added value and innovative services into their next generation boxes including local storage on integrated hard discs.

Miller's view is that in the battle between the personal computer and TV, "television will eventually become the dominant delivery mechanism for online and interactive services. The TV will become the major access point." Miller says the modern "intelligent" digital set-top box is the first-ever such device in the home which has the processing power, memory, versatility and return path capability "and [broadcasters are] giving it to you for nothing," he added.

Nokia also see scope for a value-added STB selling at a premium. "We are looking at some Open-standard and Home-gateway products and have some presentations coming up in the autumn, and these movements are about making the STB a premium box, but it will no longer be just a STB. It will have the ability to record, and we are looking at devices that range in size and functionality from a [Nokia] communicator to a laptop-sized device with a screen. Development costs for these products are huge, and we may be in a lean period for a year or two, seen as late to the market, especially a vertical market where the broadcaster is in charge like the UK, elsewhere we are doing very well thanks to Open standards and we are working very closely with Mindport and OpenTV."

STB Market Potential Worldwide
1999	18 million
2000	24 m
2001	30 m
2002	35 m
2003	41 m
2004	46 m
2005	53 m
Data: Pace Micro Technology

Mindport owns 80% of OpenTV (with Sun Microsystems owing the remaining 20%), and is in the forefront of these technologies. Its CEO, Steve Oldfield, is buoyant about the impact OpenTV is making, and Mindports own STB developments in preparation for what Oldfield sees as an explosion in TV-based interactivity. "I do not think the interactive explosion has happened. Its going to. [French satellite broadcaster] TPS have fiddled in this area, but the big swing will come from BSkyB and Echostar. Sky are growing at around 100,000 a month and thats impressive. Echostar the same. People have been burnt by the premature launches of interactivity three or four years ago, and are hanging back waiting to see what happens."

Oldfield says the future for the STB is with built-in storage. "I absolutely believe in storage. The next step in the evolution of the STB is storage. On [recordable] DVD the problem is you can only store about 2.7 G/bites on a DVD. The major problem is the laser light cannot be created at a high enough frequency. The second problem is that a standard has yet to be agreed [for DVD]." Oldfield predicts that during a 12-18 months time scale a DVD standard will emerge and the technology problems solved.

"In the meantime," says Oldfield, "you can pick up a hard disc of 9.6Gb today of for about $110, and theres a supplier promising a 17.2 Gb drive for $120 by this summer. Compared with DVD which will give you one movie, a hard disc will give you four movies. The disadvantage is the movie is on the hard disc and its difficult to hold it for a long time unless you set aside that portion of the drive. But the nice thing is you can marry that disc to your TV signal exceptionally well. You no longer face the traditional VCR problem of having to get your kids to set the VCR. It will be a simple problem to solve because we can add learning into the STB with the STB knowing that you like to view this or that programme and pre-recording it for you. Youll be faced with an EPG that gives you all the live to air choices plus a list of material it has recorded and cached for you and you can replay."

Oldfield says Mindport will be ready with this sort of device this winter, "and I am trying for the 17Gb device. But lets get away from the STB, it is just about personalizing the TV.

A Warning 
It's a view NDS Peled echoes, and he issues a warning: "Viewers can come home and watch Friends or Eastenders, whether it is on the air or not. Because [the next generation box] will be a content-based paradigm, not a time-based paradigm. Programme schedulers get paid a lot of money to package together an interesting evening of material. They will vanish. And advertisers will need to look again, perhaps even paying us to view their ads. They will either have to be very entertaining or give us a reward, perhaps a prize, for watching them."

Asked whether these new storage developments will lead to the death of what has been described as collective TV and Peled is unequivocal. "Big events, sports, news stories and other key programming will still attract viewers. But the fact is that in the USA some 40 percent of viewers dont bother to watch these big events. They tune away. My answer is yes, there will be a some boring people who want to talk about last nights big event. And my TV friends say they are still in the majority. But there will be another group of people who might see it an hour later, or the next day, or the following week. They want the content, not the time."

Television has always been about content, and these new developments will make it easier for savvy viewers to choose their content. Most people (suppliers and end users) say that a 200/500/1000 channel universe is far too complex a model to navigating through. The intelligent set-top box has to be the answer.