Will interactive TV stocks ever come back?

In early 2000, interactive TV shares were soaring along with the Nasdaq Composite Index, reaching new highs seemingly every day. Then, when ITV deployments failed to materialize, the stocks crashed ? hard. The sector has meandered downward ever since.

At its peak in early 2000, the market capitalization of companies in the ITV sector, which includes middleware, applications, content and interactive guide companies, hit $40 billion, according to Kagan World Media, which held its annual Interactive TV Summit in New York last week. At the end of January, the market cap of the sector's major players, a group that includes TiVo, Concurrent Computer, SeaChange International, Wink Communications, SonicBlue, OpenTV, WorldGate, ACTV, Liberate Technologies and Gemstar International, was just below $12 billion.

?This space has a bit of a toxic glow to it,? said John Corcoran, executive director-equity research at CIBC World Markets, a participant in a panel discussion on ITV stock valuations. Institutional investors are nervous about the space, he added, and bearish on the prospect of ?the next killer app.? As an example, he cited personal video recorder company TiVo, which is seeing lackluster unit deployments despite customer enthusiasm. Shares of TiVo traded at $47 one day in early March 2000; lately they have hovered near $5.

While the interactive TV market overseas is burgeoning, in part due to the U.S.'s lack of competing technologies, such as the PC, the domestic ITV scene ? with the possible exception of video-on-demand ? is far from hitting its stride. But that hasn't stopped broadband distributors and platform, content and technology providers from trying to get their wares to market.

?There are a tremendous number of companies that have impressive technologies but are having trouble getting deployed,? said Allan Thygesen, a managing director at private equity firm the Carlyle Group and a former Wink executive. He cited OpenTV's troubles: In January the company cut its revenue forecasts for the year and announced a restructuring and job cuts. If companies can't rely on revenue per household, they need to find revenue from other sources, such as advertising, Thygesen said, but the problem is that advertisers don't yet view interactive as a core part of a media buy.

The number of companies in the group coupled with a lack of interest from the capital markets is sure to shake out the entire sector, noted Tom Blakey, senior equity analyst in the technology group at Gerard Klauer Mattison, who predicted another wave of consolidation in 2002 and beyond.

Strong unit growth leading to strong revenue growth will be crucial to attracting investors, Corcoran at CIBC noted.

Some niches in the sector are showing progress on those fronts, namely the companies involved in video-on-demand and program guides, said Blakey, but overall it's difficult to evaluate the group from a stock perspective on traditional valuations metrics.

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