(FORTUNE Magazine) – IF YOU THINK TV sets and computers dominate our lives already, wait till you see Andy Hertzfeld's new toy. The impish computer hacker, pictured here with his latest creation, is best known as a key software designer for Apple's innovative Macintosh personal computer. Now he works for a Silicon Valley startup company called Frox. He is one of a group of engineers who have built a prototype of what he calls ''an information center for your house that also happens to be the world's greatest TV and stereo.'' Frox's home entertainment system is clever enough to read the TV listings and pick out and record programs Hertzfeld might want to watch later -- and it can edit out the commercials to boot. It also catalogues and plays his CDs on command and shows on the TV screen the cover art and liner notes for each disc. The TV is the focal point of the system, but what makes it all work is a built-in computer as powerful as an engineering workstation. Soon the machine will simultaneously monitor electronic databases for news or other information of particular interest, answer the telephone, watch for incoming electronic mail, and control additional home appliances even as it runs the TV or stereo. In essence, the Frox machine is an ambitious effort to give the boob tube some real smarts. Don't rush out to buy one for Christmas. The Frox system isn't supposed to make it to market for two years. If and when it does, at first it will probably cost -- gasp -- $10,000. (As with most electronic marvels, the price is sure to head downward if it catches on.) It's a harbinger of a whole new genre of electronic devices arriving in the next few years that will blend the realistic, compelling moving imagery of TV with the brains of computers. Already, titans of both the computer and consumer electronics industries -- as well as hungry smaller companies like Frox -- are plotting what shapes these new machines will take. The big lure is the prospect that the new hybrid technology will bring powerful computers into the home at long last. Like Frox, other consumer electronics companies, most of them Japanese, are working on ways to make TVs more intelligent and versatile so the viewer can take better advantage of the plethora of programming available through the airwaves, over cable, and on tape and laser disk. Both IBM and Apple, the PC kings, are already touting ''multimedia'' -- the combination of text, sound, and graphics -- as the wave of the future in personal computers. They are working on the TV-PC matchup from the opposite direction by putting full- motion digital video into their already brainy machines in order to make them more engaging and entertaining. The goal: desktop video computers that users interact with, not merely another box for couch potatoes to sit and stare at. These video computers would usher in video encyclopedias and other interactive educational and training tools. They could read and display patterns of stock price quotes, and would make possible hundreds of new and elaborate computer games. Ultimately just about anybody will be able to create electronic productions that mix snippets of moving video and sound with conventional text and computer graphics. FOR EXAMPLE, you could write your mother a letter including video highlights of your daughter's birthday party or your trip to Europe, with commentary dubbed in. You would mail it to her on a single computer disk -- or, better yet, transmit it to her computer almost instantly over telephone lines. One day, video computers may even act as the futuristic ''videophones'' that telecommunications companies have promised for decades but never really delivered. ''It's time to change the face of information in the home,'' declares Nicholas Negroponte, director of the Media Laboratory at the Massachusetts Institute of Technology. The Media Lab, the world leader in research on the technology of mixed media, is organizing an American, European, and Japanese consortium of big-name computer, consumer electronics, and telecommunications concerns to set standards for the television of tomorrow. Says Negroponte: ''Our ultimate goal is to make personal computers and televisions as one.''

Plenty of technological and marketing hurdles must be jumped for Negroponte to realize his grand vision, or for IBM, Apple, and the TV makers to carry out their more modest plans. For one thing, the nature of video imagery requires vast amounts of data storage space, computing power, and memory. That means video computers or smart TVs will be frighteningly expensive at first, and hence will probably be aimed initially at business and education rather than home users. Moreover, many experts aren't so sure that ordinary people can master the exacting techniques necessary to put together a comprehensible video program, even if it's just an edited home movie. Indeed, some contend that most people would really only need or want a ''multimedia player'' -- a TV or computer that allows them more control over prerecorded, professionally produced interactive video programming. Despite the technical obstacles and marketing debates, manufacturers are pressing ahead. IBM and Apple are already sniping at each other over what form desktop video will take. Big Blue contends that people mainly want players for preprogrammed material, while Apple believes that computer users will want to ''roll their own.'' IBM, which entered the PC business only after Apple pioneered it, badly wants to be first out of the chute with PCs that offer digital video. Analysts expect the company to unveil a production model as soon as next summer. Big Blue isn't discussing its plans for a multimedia computer in any detail yet but concedes it is working closely with Intel Corp., maker of the microprocessor chips that are the brains of IBM's previous PCs, and Microsoft Corp., designer of the operating system software that controls them. The initial goal, according to Intel and Microsoft officials, is to build a computer costing less than $3,000 that functions as a conventional PC but incorporates color graphics, stereo sound, and loads of memory. It would include a special disk drive that can read CD-ROMs -- compact discs permanently etched with sound, still images, or ordinary words and numbers. Intel is also developing a technology called DVI, for Digital Video Interactive, that will allow IBM's computers to convert video images from cameras, tapes, or laser disks into digital data that can be speedily edited, enhanced, and manipulated. It will be added late next year, or as soon as Intel gets costs down and performance up. THIS MEANS that at first the IBM machine will be primarily a player of interactive media, allowing the viewer to choose among programming from many sources but not to produce his own. It will display only still images, but the user will be able to make them expand, contract, move across the screen, and generally do visual cartwheels. ''People will find that they couldn't care less about full-motion video, and that still video images will give them a lot to work with,'' insists William Spaller, director of advanced planning for IBM's entry systems division and the man in charge of developing the new machines. Consequently, he says, at the outset full-motion video will be optional. The dawn of this new industry shows IBM and Apple awakening to oddly unfamiliar roles. IBM has the home as much as the office in mind as the primary market for its new machines. That's something of a switch, given the company's original name and historical orientation. Conversely, Apple, which started out building PCs for hobbyists, sees desktop video as strictly for business and schools, at least until late in the 1990s, mainly because of cost. EVEN THEN, Apple officials don't seem quite so optimistic as IBM's that video computers will displace conventional TVs. ''The desktop video computers will require a completely new media form that is very different from passive TV,'' says Apple Chairman John Sculley. He adds, however, that the marriage of computers and TV could give television ''a second chance to live up to its potential.'' Apple remains skeptical that digital video technology in its present form is particularly useful. ''We don't want to make the equivalent of a Swiss army knife with nifty, underpowered features that can't do any real work,'' says Jean-Louis Gassee, president of Apple's product division. ''We'll give people an affordable way to send Mom a video letter, but not until the technology is good enough.'' The trick to making digital video work in a personal computer is a technique called video compression. The process relies on complex mathematical formulas and special high-powered processor chips that reduce the amount of raw data needed to draw video images. Compression systems look at video pictures frame by frame to identify consistent shapes and patches of uniform color that don't move much, and then ignore the redundant data in each frame. Without compression a standard compact disc, which holds 75 minutes of music or 30,000 pages of text, can store only seven minutes of full-motion video. A floppy disk holds only a fraction of that. Without compression, too, most PC memories would choke while processing only a few seconds of video. ''Whoever said a picture is worth a thousand words didn't know how right he was,'' says Nolan Bushnell, the roller coaster high-tech entrepreneur who founded Atari Corp. Bushnell now heads privately held Aapps Corp., which makes $400 add-on boards enabling Macintosh computers to display live television images. Intel's DVI technology uses one form of compression; Apple is working with Sony and other companies to develop another. To get what Intel calls ''presentation quality'' video out of a DVI-equipped PC, the user must send his original videotapes to Intel to be compressed into digital form compact enough for the desktop video computer to edit. The process takes three or four days. (In a year or so, the DVI boards for PCs will do it all themselves, Intel officials promise.) Apple hopes that its approach, still under development, will yield faster, tighter compression. One of the biggest skeptics about digital video computing is Steven P. Jobs, the Apple co-founder who now is chairman of Next Inc., a workstation maker. Says he: ''In order to compress and manipulate video images you have to throw away a bunch of data, and with it much of the picture quality.'' That leaves the images fuzzy and jerky. ''As regular TV viewers,'' Jobs argues, ''we all have high standards for what this stuff should look like. So unless you solve the compression issue in a serious way, it's all just fluff.'' WHILE THEY WAIT for compression technology to evolve, companies like Apple and Commodore, maker of the Amiga personal computer, are devising ways to connect their computers to laser disk players. That makes possible interactive viewing of prerecorded video through a conventional TV monitor without first converting the data into digital form. These systems don't allow editing on the computer, but they make good multimedia players for use in instruction. ) At Apple's multimedia laboratory in San Francisco, researchers have developed an elementary-school teaching aid called the Visual Almanac, an interactive encyclopedia illustrated with both still pictures and moving video clips. Students can browse through the almanac at their own pace, jumping instantly from subject to subject. The system isn't cheap. It requires a computer, a separate television monitor, a laser disk player, stereo speakers, and a large hard disk -- for a total cost of more than $6,000. (Commodore sells something similar for around $4,000.) IN JAPAN, Fujitsu is a leading experimenter with multimedia. This year the company started selling the FM Towns computer. Like the forthcoming IBM multimedia PC, it has a built-in CD-ROM drive for displaying still images. The machine is available only in Japan. So far the consumer electronics industry's move into smart TV isn't as well focused as the PC industry's. The various manufacturers seem content to add one feature at a time to their existing TV sets. Now, for example, VCR manufacturers are building in circuits that will allow PCs to control them. Magnavox, a brand of N.V. Philips, the Dutch electronics conglomerate, has a TV that allows viewers to display a small black-and-white version of a broadcast or cable TV program in one corner of the screen while playing a tape or laser disk recording in full color on the rest of the screen. Sony is experimenting with a computerized home entertainment system called Avina that controls a roomful of audio-visual equipment. Because the consumer electronics companies' efforts are so diffuse, video technology experts think the PC makers have the inside track on making truly intelligent and interactive video devices. ''The challenge isn't making smart televisions, but how to create an environment that allows people to manipulate images as easily as words,'' says Kristina Hooper, a former MIT Media Lab researcher who now heads Apple's multimedia laboratory. ''It's one of the great business issues for both the PC and consumer electronics industries. I'm betting the PC companies will figure it out first, mainly because we know so much more about what makes computers easier for people to use. After all, how easy is it even today to program a VCR?'' BECAUSE ITS ROOTS are in the computer business, Frox thinks it can provide the know-how the consumer electronics industry lacks. Frox was founded last year by Hartmut Esslinger, a West German whose Frogdesign firm helped devise the striking ergonomic look of most of Apple's personal computers and the Next machine. He hatched the plans for Frox a couple of years ago; the privately held company is backed by Frogdesign and several other European investors. Steve Jobs helped Esslinger refine the idea last year but had to back out to devote full time to Next. Esslinger continued on his own. To build the prototype he enlisted the help of Andreas Bechtolsheim, one of Sun Microsystems' founders; Peter Costello, another top Sun engineer; and Hertzfeld. Despite all that impressive engineering talent, so far Esslinger has been unable to win financial backing from an American computer or electronics company. Now he is attempting to market the technology himself but may have to try to interest foreign manufacturers as partners. ''It has been very frustrating,'' he says. ''We wanted to help America reinvent the consumer electronics business, and they treat us like donkeys.'' MIT's Negroponte sees technological nationalism and the fractiousness of the consumer electronics, telecommunications, and computer industries as the biggest obstacles to realizing the promise of smarter televisions and video computers. ''These industries and technologies have been moving toward each other for more than two decades, and the closer they get, the bigger the stakes become,'' he observes. With the backing of his main sponsor, the government's Defense Advanced Research Projects Agency, Negroponte is trying to impose some order on the blending of the technologies, partly by encouraging agreement on standards. He's not finding it easy. While the big names and big industries duke it out, some little guys are discovering ways to bring video and computers together on the cheap. A good example: Bushnell, the Atari founder. ''This new market is a mishmash of lots of old markets and carries with it all that extra baggage, so introducing the new technology seems kind of like herding ducks,'' Bushnell says. Even so, he adds, ''this is one of those special moments when several pieces of technology have gotten good enough all at the same time to make a quantum leap at affordable prices.'' Just like when Atari introduced Pong, the first videogame -- and look at the lasting impact mere videogames have had. Smart TVs and video computers, by contrast, will be useful tools as well as playthings. They may take a few years to get established in the marketplace, but once they do they aren't likely to pass quickly from the scene. They'll probably be among the most important innovations of the 1990s, simply because they are the offspring of two of the most pervasive and powerful electronic technologies man has yet devised.