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Almost Famous Interactive television company ACTV has been the next big thing in the entertainment field for 18 years. Here's how the startup has managed to keep the dream alive. Sort of.
By George Mannes

(FORTUNE Small Business) – Back in September 1987, inventor Michael Freeman got the kind of phone call that most entrepreneurs can only dream about. Freeman, head of a struggling interactive television company called ACTV, picked up the phone at his New York City office to learn that John Malone--head of Tele-Communications Inc., then the biggest cable TV company in the U.S.--wanted a close look at Freeman's brainchild. "I'm bringing Malone up to lunch," an excited investment banker told Freeman. "I want him to see this. He's got to see it." Talk about opportunity pounding on the door. Because Freeman wanted to sell his interactive TV system to cable operators, Malone was the most powerful customer he could possibly hope for. It was as if Chicago Cubs slugger Sammy Sosa called up a bat factory to ask if he could take a tour.

Freeman, of course, said no.

No? It wasn't as if Freeman, who had already demonstrated the system for filmmaker George Lucas, was working in secret. Certainly, if Malone liked what he saw, Freeman was on his way to a major sale--perhaps of ACTV itself. But what if Malone was unimpressed by Freeman's system? "If he didn't like it, the company was out of business," Freeman says.

Though one might second-guess Freeman's caution, the episode crystallizes ACTV's singular achievement. Founded in 1983, the company is still going strong 18 years later, without ever actually having turned a profit and with its original vision of interactive television still just over the horizon. There may be a time and a place to ask why ACTV isn't a success, but the more valuable lesson comes from asking why it isn't a failure. "How can you be a startup for 18 years?" asks John Carey, a telecommunications industry consultant who teaches new media at Columbia University's graduate business school.

How, indeed?

ACTV's history reveals a few crucial ingredients that have kept the company alive. Vision: Freeman's original idea for delivering mass-market interactivity on the cheap still represents a guiding principle for ACTV in the face of changing times and shifting business strategies. Technology: ACTV has a portfolio of interactivity-related patents that it hopes to turn into lucrative licensing revenues, one that is the center of a lawsuit with Disney. Passion: Craig Ullman, ACTV's chief creative officer, tells a story that typifies ACTV's allure for employees. "I was talking to a friend about if we could do anything, what would we do?" says Ullman. "I said the thing I'd want to do would be working to define media for this century. And then I realized, Oh, yeah, that's my job." Salesmanship: On wings, prayers, and the industry contacts of top execs, the company has managed to close deals that have provided much-needed cash. Thrift: Though ACTV has racked up $138 million in losses over the past decade, it has found ways to squeeze by on revenues that wouldn't cover a dot-com's foosball budget. Flexibility: The company has tinkered with its core technology, expanded into related ones, and jumped into new businesses to follow demand. And, finally, a will to survive--a quality not as celebrated in the business world as a drive to conquer, but often more important.

In the beginning, ACTV's core asset was Freeman. The inventor of 2-XL, an educational robot that became a hit toy in the late 1970s, Freeman launched ACTV with the aim of transplanting interactivity from the battery-operated universe to cable television. What he eventually developed, with the help of engineer and executive Lenny Schaier, was a cable TV system that let audiences at home interact with action onscreen. This was pretty heady stuff in ACTV's early days, even when all Freeman could show people was a diagram of his system on paper, a cheaply produced demonstration game show called Hollywood Triangles, or a promotional video narrated by a sage from the future, Star Trek's Leonard Nimoy. This was a decade before the Internet invaded the civilian world, so to play cards with a real person--an actual blackjack dealer who smiled and asked if you were going to hold at 15--was as magical as watching a statue come to life.

However, ACTV had a catch. A big catch. The interactive TV system required as many as four different channels on each cable system. When a person watching a football game, for example, decided to switch camera angles, he wasn't switching the signal from the broadcaster but merely switching the channel on his cable box among four different video feeds of the game. Four channels was a deal killer, considered by cable operators to be an outrageous demand. In the mid-1980s, 20% of cable customers didn't have even 13 channels. Drop MTV for ACTV? No way. Higher production costs, the expense of a special ACTV set-top box, plus the nagging question of how cable companies could make money from it, made ACTV a tough sell. "Everybody has always loved ACTV," says Freeman. "The problem has always been, Can you really make this happen at a reasonable cost to the consumer?"

Though the answer has largely been no, ACTV, luckily, has always been able to find a true believer when it needed one. In late 1987, about the time that Freeman blew off John Malone, a CEO of a Canadian cable operator called Le Groupe Videotron named Andre Chagnon started calling Freeman and insisting they meet. Freeman kept putting him off. "He barely spoke English," says Freeman of the French Canadian. "I didn't understand him." Chagnon, like Freeman, was a passionate believer in interactivity, and once he got his meeting, he ponied up $6 million as a down payment for half the U.S. rights to the system.

Like Tom Sawyer, who convinced the neighborhood kids that it was a privilege for them to whitewash his fence, ACTV continued to find companies to fund its research and development. Freeman recruited Diana Gagnon (now Diana Gagnon Hawkins), who'd been researching and writing about interactive television at the Massachusetts Institute of Technology's Media Lab. She and Tim Browne, a friend at the lab, came up with the idea of a research project to study TV viewers' interest in interactive sports broadcasts. Browne landed a Media Lab sponsor, the advertising agency McCann-Erickson, to back the trial; the agency, in turn, brought in three major advertisers--Coca-Cola, General Motors, and AT&T--which not only paid for the project but also opened doors at ABC and NBC, eventual participants in the test.

What resulted was a high-profile experiment for ACTV in 1990 in Springfield, Mass., one that let ACTV, for example, produce an interactive version of ABC's Monday Night Football. Research results indicated people were clearly interested in ACTV. But the benefits for ACTV went beyond the proof they weren't crazy. "They were no longer somebody working out of Michael Freeman's garage," says Hawkins. "They had big partners." The Springfield project and the Groupe Videotron relationship supported a compelling story for ACTV's initial public offering of stock, which netted the company $4.3 million in May 1990.

But with channels still at a premium, the interactive TV project had little hope. It was time to move the battle elsewhere, and the person who led it was Bill Samuels. After a worker-training company he'd run for years was sold off, Samuels joined ACTV in 1989. Captivated by the idea of using Freeman's technology for interactive, individualized education, Samuels, a tireless salesman, went after old friends and colleagues in search of deals. First came a $650,000 adult-education contract with his former firm. The second came through Jim Crook, who had worked for Samuels in the mid-1970s. Samuels asked Crook to run the educational division. The only condition was that Crook first had to make a sale, because otherwise Samuels had no money to hire him. Crook, a veteran of the educational market, got ACTV an in with the Newark school system, which signed a contract worth $440,000. ACTV's educational efforts also led it to its next cash infusion, a $1.5 million loan from the Washington Post Co. in return for a 15% stake.

The rise of digital broadcasting and the commercial Internet led ACTV to mine for opportunities along these frontiers. Certain efforts met with success, such as patent filings that covered digital TV and information synchronized to video programming (leading to ACTV's current lawsuit targeting Disney's play-along version of Who Wants to Be a Millionaire). Other ballyhooed deals--interactive hotel-room TVs and movie theaters--went nowhere.

All along, ACTV never gave up on the dream of interactive TV. Back in 1989, Samuels, who eventually became ACTV's chairman and CEO, says he was sure the interactive TV business would take root by 1995. It was hard not to believe that the channel-capacity bottleneck that plagued ACTV's prospects would soon be broken; after all, in 1992, TCI's Malone publicly promised a 500-channel cable system.

So ACTV pinched its pennies and scrounged for attention as it waited for TV technology to catch up to its idea. In 1995 the company launched another trial of the system, this time near Los Angeles. It was a low-budget affair and, despite ACTV's many press releases, much less visible than a lavish interactive TV trial Time Warner (FSB's parent) ran in Orlando at the same time. But ACTV's shoestring project, which happened to be running on a system owned by TCI, led to the deal that, in hindsight, turned ACTV's finances around. When TCI's then-CEO, Leo Hindery Jr., visited the project at the request of ACTV's entertainment chief, David Reese, Hindery was sufficiently intrigued to set up ACTV with TCI's programming arm, Liberty Media--the chairman of which was none other than John Malone, the man who had been a phone call away from looking at ACTV in 1987. In 1998, Liberty Media invested $5 million in ACTV. Boosted in part by that deal, as well as by the bullish tech market, ACTV netted $113 million in a February 2000 stock offering, just before the Nasdaq soured.

Though ACTV is hopeful that targeted advertising, descended from its 15-year-old blackjack games, will be a killer app, ACTV no longer thinks of itself as an interactive content company. Rather, it's trying to become what Reese, recently named CEO, calls a tools and services company. Nonetheless, its mid-1980s vision remains intact: The words on ACTV's Internet home page are the same ones that Leonard Nimoy spoke on a demo tape more than a dozen years ago. With $101 million in its treasury as of the end of March, ACTV has time to wait for the future to arrive, whenever that will be. "It's hard to really put a time frame on technology," says Freeman. "Would I have liked it to come sooner? Of course. But we're still in the ball game. And it'll happen. It's just a question of exactly when."

For ACTV's sake, let's hope it's not another 18 years.