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Robert Kavner, Executive Vice- President of AT&T, o
HOTT -- Hot Off The Tree electronic serial
Issue 94.01.26 (pre-relaunch)
WINTER CONSUMER ELECTRONICS SHOW 1994 KEYNOTE SPEECH
Thursday, 6 January 1994
Speaker: Robert Kavner, Executive Vice President and
Chief Executive Officer for Multimedia Products and Services,
AT&T
Thank you, Gary (Gary J. Shapiro, Group Vice President, Electronic
Industries Association/Consumer Electronics Group). I'm honored to be
here.
Being given the opportunity to be the keynote speaker at the Winter CES
is truly humbling.
I've thought long and hard about what would be an appropriate topic for
today.
And as I considered alternatives, I kept coming back to wanting to talk
about intelligence -- intelligence that is being put into networks and
intelligence that is being put into consumer electronics.
The marriage of that intelligence will give new meaning to freedom,
personal choice and individuality.
Because the microprocessor and software is proliferating from $25 devices
to million dollar network switches, and from a tool at the office to
appliances in our kitchen, to learning in our den and to entertainment in
our living room.
What I'd like to do with the brief time we have together, is to describe
the reality of the new network world, what AT&T is doing to show
leadership in helping to bring order to this revolution, and to point out
threats to the future health of our industry.
Some refer to the marriage of intelligence in networks and the
intelligence in devices as the interactive multimedia revolution.
I ask your permission to use that expression, even though it is over used
and little-understood.
There are two opposing business models for interactive multimedia. One
model -- a customer-focused model to which AT&T subscribes -- sees an
open access, competitive marketplace that promotes people connecting with
people.
A prototype for thinking about this "open access" model is the enormous
success generated by today's communications networks. When the new
interactive networks enable anybody to reach any content and anyone else,
anywhere in the world, it will stimulate a bigger artistic, scientific,
and economic revolution for the 21st century than the industrial
revolution did for the 20th century.
But there is another business model.
We call it the "gatekeeping" model: a closed access, non-competitive
marketplace that looks an awful lot like the model prevailing today in
the cable industry.
A good way to understand the ramifications of the gatekeeping model is to
talk to TV producers, as I have, who've tried for the past 20 years to
get their ideas and programs through the cable industry's gate. It's
roughly akin to picnicking with a tiger. You might enjoy the meal, but
the tiger always eats last.
We believe today's cable industry gatekeeping model would stifle
commercial and creative potential *if* it were recreated in the new
interactive multimedia world. We believe it's a threat to the very
survival of the consumer electronics industry. And that's why I'm
bringing it up today.
The questions I will try to illuminate are two: First, will the company
that owns the local cable or local telephone distribution have the right
to be the gatekeeper in deciding what interactive content will be made
available into American homes?
And second, will the gatekeeper use the rental set-top box model as a way
to dictate what type of intelligent terminals and software the consumer
must use to access interactive content -- and push the consumer
electronics industry into making low margin monitors and accessory
devices?
Those are very live and unanswered questions. The people in this room
have a great deal of ability to influence the answers.
I'm going to come back to these questions because I would like you to
think about the answers and the *urgency* for us to act on them.
Everywhere we turn these days we hear about convergence. We began to
plan for the convergence of computers and communications several years
ago. For example, AT&T has a large consumer electronics business, and
lately, we're finding more and more need to walk across the hall to talk
with those who run our network.
Why is that? Because a lot of our consumer electronics are becoming
increasingly intelligent terminals on the network. The telephone is not
just a consumer electronics device. It is a gateway to the network; and
we and others will be improving the intelligence of these terminals to
include the functionality of PCs, game machines, faxes, cameras, TV
monitors, and more.
(PAUSE HERE)
The power of networking reaches every home and office. The world of
interactive multimedia will reveal networking in its most liberating and
fertile new persona -- finding vast potential latent in older concepts
like "neighborhood" and "meeting" and "relationships" and "information"
and "news."
The new networked electronics devices are global; they're democratic;
they're the central agent of change in our changing sense of community --
offering tremendous potential to bring people together to build bridges
and break down barriers. In a moment, I'll give examples of how our
sense of community could be enhanced.
First, let's take a look at the communications side of the business.
The current communications industry in the United States looks like this:
a ubiquitous telephone service supporting a wide variety of end devices.
It enables anyone to reach anyone else, anywhere in the world -- wired or
wireless.
Though its infrastructure is complex, access is simple -- a touch-tone
pad. And access is open.
Running parallel is the entertainment side, whose distribution into the
home is the purview of the cable companies -- today bolted to end users.
Consumer access to entertainment content is rigidly orchestrated. To
get content onto cables, content owners must cut a deal with the powerful
tigers of the cable industry.
The consumers' access terminal is the set-top box, which they must rent
from the cable company. Consumers cannot buy the box from the consumer
electronics distributors.
In the cable companies' current business model, they are the only retail
distributor to the consumer. This enables the cable company to maximize
profits by taking margins from content, from distribution of that
content, and from renting the set-top box.
(PAUSE HERE)
A fairly recent and promising development is the new interactive
narrowband services through the public switched network. These
information, game, and "chat" services are gaining subscribers daily. We
believe they're the Neanderthal men of the interactive multimedia world,
because you will soon see more sophisticated and user-friendly versions
of these services. They will be designed to take advantage of the higher
digital bandwidths that are becoming available.
(PAUSE HERE)
As everyone knows, some local exchange carriers have been forming
strategic alliances with cable companies. They have been very vocal
about big plans to deploy interactive networks -- to make cable systems
two-way and local phone systems broadband. We encourage them to avoid
the "gatekeeping" model and to adopt the open access, competitive
marketplace model.
Some of these mergers and alliances have generated great optimism and
public attention. Since then, many articles have been written about this
new world -- asking how much is hype, and how much is reality. I thought
it would be useful for us to have some facts. Because there is reality
in the opportunity and reality in the threat.
Which makes the business model question an extremely important one. AT&T
knows the buildout is real because, as a systems integrator and
technology provider, we're a leading supplier and moving force in that
buildout -- in our own networks as well as those belonging to the cable
and local telephone companies.
As we continue our public debate on the business model issue, AT&T is
vigorously helping network providers -- of all kinds -- to plan and build
networks that can begin to capture the opportunities. A year from now,
we'll see them appearing in a number of communities across the United
States.
Let's start with AT&T's network, with more than two billion circuit miles
of digital transmission today -- more than 90% on fiber optics with
multiple-gigabit capacities. Our network's brains are distributed in
more than 130 digital switches, as well as hundreds of computers that
carry signaling traffic, store data bases, and manage a growing variety
of customized business and residential services.
Another vivid example is what Pacific Telephone announced with AT&T in
November: a $16 billion capital investment to upgrade five million
subscribers to broadband capabilities by the end of the decade. The
buildout begins this year in four high-density regions of California. We
know that other telephone companies are actively planning similar
buildouts.
There's no doubt that, by the end of the decade, we'll have networks in
many cities capable of going broadband, two-way video, in and out of
millions of homes.
As the broadband systems go in, existing infrastructures are getting a
new lease on life through Integrated Services Digital Network, or ISDN.
Since 1988, AT&T has deployed wideband ISDN -- which can deliver high-
quality, color images simultaneously with voice and data -- at more than
300 locations in America, and in a dozen countries abroad. AT&T is a
major supplier of ISDN to the local exchange carriers.
The seven Regional Bell Operating Companies and the largest independent
telephone companies have filed more than 200 ISDN tariffs in 46 states,
the majority already in effect. By the end of this year there will be 66
million ISDN-capable local access lines -- which could support
simultaneous voice, data, and image services. In a little more than
three years, 70% of all access lines in this country will be ISDN-
capable.
These new digital capabilities are affecting businesses in a big way --
right now. The majority of medium- and large-size businesses in this
country today have access to high capacity networks that carry video --
and that's two-way video! Let me repeat that, because it's not well
known. Businesses can go two-way video today. And, interactive, two-way
entertainment, information, and education services for business will be
coming fast in the next several years.
Now let me talk about networking for consumers. It's going to be a big
addressable market in this decade. Fiber deployment, ISDN deployment,
some of the initiatives I just mentioned all point to one reality: In a
short time we will see a vast improvement in local access capability.
Look at the investments some cable companies and local access companies
are putting in: Within five years, Bell Atlantic anticipates delivering
video services to the top twenty markets in the U.S. U.S. West in
conjunction with Time-Warner recently announced a $5 billion plan to
upgrade their cable network.
The race towards interactive multimedia into the home has begun in a big
way. Not every home in America will be able to carry two-way video by
the end of the decade. But there's no doubt that in high-population
areas we're going to see rapid deployment of two-way video networks.
What is the DNA driving the interactive multimedia evolution? You can
say it really began 26 years ago with another Neanderthal man of
interactive multimedia, 800 toll-free service. You may not know this,
but AT&T's 800-number business represents 40% of total calls made last
year -- that's 12 billion 800 calls.
The success of 800 toll-free service shows that Americans have learned to
use the network for more than voice conversation. It shows that
Americans have learned to use the network for transactions -- that's why
it is a precursor for interactive multimedia.
We gave consumers and content providers easy access to the network; they
used it creatively and passionately, with great entrepreneurial spirit.
And faster than we ever expected, the technology changed the way humans
behaved and interacted.
The growth of on-line hosting services is another example of DNA. There
are more than 50 on-line services available today, with seven million
subscribers -- not including the fast-growing Internet, which is
subsidized by the government. And the highest growth segment is
consumers!
Over four million consumers use on-line network services from their home:
gaming networks, chatlines, discussion groups, marketing workshops,
libraries, graphics, shopping and travel services, a panoply of
interactivity. They're attracting entrepreneurs, artists, engineers, and
visionaries who draw inspiration from this new form of interaction.
They're using it to enhance their knowledge and to satisfy their desire
for relationships. And this is happening even though these services are
somewhat crude today with limited interactive capabilities. Yet it's an
open access model -- that's why they're growing.
You can get content variety by choosing, and you don't have to rent the
modem or PC. It is important for us to understand why these services are
growing in popularity: They give people what they want without
interference. As we look ahead to interactive multimedia, we must ask
ourselves: Isn't easy access to content what we really want? And if
that's true, how can we make it happen?
Who will bring the thousands of formats and programs and relationship-
enhancers into millions of consumer's homes? Who will convert this
content from analog to digital, make it secure, and deliver it rapidly
upon request?
And who will perform the back-office work -- recording the transactions,
reporting them, billing for them -- the myriad detail needed to support
such complexity? It's what we at AT&T call "the missing industry" --
converting content into digital form and distributing it to customers
through networks.
It is an attractive market opportunity because this missing industry will
evolve into a "hosting industry" that creates a global market for full-
motion video, interactive multimedia services. Let me give you a
primitive yet exciting example of hosting that's available today.
The only dedicated gaming network in today's narrowband world is
ImagiNation Network, in which we are a part-owner -- and, more
importantly, with whom we are working to develop new services. It has
advanced graphics and lots of interactive flexibility. As people use
this communications-intensive service, they're seeing its potential and
adapting it to their life-styles.
We are often asked why are we working with this small, online network?
We are working with ImagiNation Network to find ways that people can use
the network to strengthen their sense of community. And games are a big
application area.
As networks grow more capable and as people use them in different ways,
another interesting thing happens: the products and devices attached to
them also evolve.
A new generation of intelligent, highly-functional terminals -- is being
shaped, pushing our creative energies to give the consumer more than a
telephone or a modem to access the network. To give you a taste of
what's in store, I'll take a peek at one service we will announce in the
next hour, and three new multimedia network products we have at the show.
This morning we're announcing a cornerstone of AT&T's evolving multimedia
family. It's called AT&T PersonaLink Services. And it uses General
Magic's breakthrough technology Telescript to create "intelligent
assistants" (Editor's note: Usually referred to as "Intelligent Agents".)
that allow individual customers to personalize the network.
PersonaLink combines our services and those from third parties with
products from companies such as Sony, Motorola, Apple, Matsushita,
Phillips, and EO to make possible these new communications opportunities.
The press conference announcing PersonaLink will start soon after I'm
done here. (Editor's note: The General Magic press release and related
articles in Fortune and Newsweek will be highlighted as the lead feature
in the first issue of the reinvented HOTT electronic serial.)
AT&T is also showing three important new multimedia products in our
booth. The first is a breakthrough technology, VoiceSpan. "AT&T
VoiceSpan" is a standard-setting brand you'll be seeing in a variety of
new business and communications applications from both AT&T and other
companies. With VoiceSpan we can use a regular analog telephone line and
talk and fax to each other simultaneously. With VoiceSpan we can talk to
each other and manipulate the data on each other's computer screens
without needing another connection. With VoiceSpan kids can play an
interactive game on the network and talk to each other at the same time!
This technological achievement is part of the DNA driving the interactive
multimedia revolution.
A natural fit with VoiceSpan is our Edge-16 communications device. It's
a specialized modem that turns a home videogame into a terminal on the
network. With Edge-16, players in separate parts of the world can play a
video game with each other. Today we think of telephones, PCs, and fax
machines as networked -- now, with Edge-16, game machines are connected
home to home and player to player. On the show floor, I'm playing an
interactive game over the public switched network using an Edge-16 with
the President of Sega (of America), Tom Kalinske.
Another piece of the DNA is our EO personal communicators. EO is a
portable, hand-held multimedia "appliance" that is really a remote
controller to the network, accessing a variety of information and
transaction services, games and messages. You can write on its screen
with an electronic pen, and send handwritten notes through the network.
EO sends and receives faxes and e-mail. You can even use it to make a
phone call. EO is another example of how the telephone is putting the
computer into service as its accessory, not the other way around.
To create the finest interactive networking applications, we must be
attuned to the needs of the consumer. You may not know that we are
providing the underlying technology, products and systems integration for
a ground breaking test of interactive services that will begin tying into
thousands of households on Viacom's cable system in Castro Valley,
California.
The benefits of these new networks are found in the ability of kids in
different cities to call each other on a rainy day and play a game
together over the network using VoiceSpan technology.
They don't just play the game -- they visit -- they find what is
emotionally nourishing and build their relationship. The game just
facilitates their interaction.
It's the ability for me to call my daughter who lives in San Francisco
and spend an hour with her shopping in the network. We don't just shop;
we talk -- we give opinions. When you walk in the mall you pay as much
attention to each other as you do the stores -- the social experience
makes it rich. And so you'd have that in the network, with simultaneous
voice and video, and all the merchandising services, in color, with full-
motion video, and excellent sound quality.
It's the ability of amateur filmmakers to hire an instructor who gives
lessons, allowing the group to ask questions and see graphic examples of
subject matter -- a dynamic learning experience on the network.
Or maybe it's language lessons, or a stock market group, or gardeners, or
people who love to gossip -- all highly communications intensive. That's
AT&T's vision. New relationships -- A new sense of community -- A social
experience not just a technology experience. As you see, the potential
of interactive networks is not found in 500 pre-programmed channels. The
beauty is that consumers have the freedom to choose any subject or
service from the intelligent terminal in their homes.
And instantly the terminal understands what they want, finds that content
wherever it is, and delivers it to their homes, or to their cars, or to a
train or a mall -- wherever they want it delivered. And they can do that
with their own fingers or, ideally, with their own voice.
The companies that create a rich, innovative and open marketplace for
content providers and end customers comprise what we call "the missing
industry", AT&T's concept of hosting. The consumer's choice of a host is
important, because it creates a bonded relationship. Consumers will
subscribe to a particular host because they feel it gives them the
easiest access to the people and applications they want, and provides
excellent service and convenience at an affordable price. The point is:
It's a competitive, intelligent hosting environment, with the consumer in
control.
Now let me go back to the other business model: the "gatekeeping" model.
Under this model, the gatekeeper is the consumer's host -- end of story.
And the user interface that goes into the consumer's home will belong to
the gatekeeper -- end of story. Under the gatekeeping model,
effectively, there isn't any hosting industry. When they put their
multimedia servers on the head-end of the local distribution, it cuts out
competitive servers from delivering content retail.
This is why I posed my first question: Will the company that owns the
wires into homes have the right to be the sole gatekeeper in deciding
what interactive content will be made available to those homes? AT&T
believes there's a better way, and we want you to think about it. *We*
want to treat content providers as customers -- we'll host content in a
non-discriminatory way.
There's another issue that strikes to the heart of the consumer
electronics industry, the other question I asked before: Will vertically
integrated gatekeepers have the right to dictate the kind of intelligent
terminal the consumer will use to access interactive content -- the
rental "set-top box" issue.
Designing the "set-top box" or "intelligent terminal" is a big
opportunity for all of us here to build exciting future generations of
TVs, VCRs, telephones, game machines, faxes, PCs, and personal
communicators each of which has intelligence and memory, is
reprogrammable and software-driven, and that connects to a network.
We believe that cable and local telephone companies should have the
authority to define the interface protocols for their networks -- for
security, encryption, compressions, and authentication. But they should
stop there.
I started this talk discussing intelligence, both in networks and in
networked consumer devices. It is very important that those of us who
agree on open competitive principles stay focused in 1994 on what we do
best: assuring that our customers have more innovation, more choice, more
value from us. I can tell you that we at AT&T are committed to that.
In 1994 I ask you to put energy into making sure that all of us are full
participants in the revolution of interactive multimedia.
I thank you and invite you to join me in the unveiling of our new
PersonaLink Service -- an important step toward open hosting.
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