Through the partnership, Microsoft said it will incorporate Predictive's software into its ITV operating system to create profiles based on subscribers' viewing habits--but without collecting personally identifiable data. The viewer profiles are used to target advertising, match and recommend programming, and conduct market research.
Financial terms of the deal were not disclosed.
By incorporating Predictive's software, Microsoft hopes to make its technology more attractive to advertisers and consumers, who will be able to view advertising, content and programming tailored to a composite identity based on a history of viewing patterns. Ideally, this type of targeted information will give cable companies the chance to charge a premium for marketing placements on the service.
But analysts say that while promising, this market has yet to take off on the Internet, let alone on interactive TV. They also caution that profiling often comes with negative perceptions of privacy infringement.
"The biggest uphill battle is to show the value to consumers by avoiding the perception that consumer privacy is compromised," said Adam Sarner, an analyst at research company Gartner.
The move comes as Microsoft struggles to prepare its software for a new generation of set-top boxes that can offer interactive TV. To incorporate profiling technology in its operating system, the company competes with a host of software platform providers including Liberate Technologies and OpenTV, which signed a deal this summer, as well as with Predictive. Last month, Liberate signed a deal with ad technology provider DoubleClick to deliver targeted ads via interactive TV.
Technology providers are jockeying for dominance in a market poised for mass adoption. Gartner predicts that by 2003, more than 20 million households will have adopted interactive TV.
Because the set-top box is much like a PC, capable of storing information on consumer habits and viewing, there have been concerns that personal data will be used to create elaborate databases on consumer profiles and then sold to third parties. Earlier this year, a well-known privacy advocate accused digital video recording company TiVo of misleading subscribers, saying it can gather more information about its individuals' viewing habits than the company revealed.
Predictive's software, previously used on the Net by Internet service providers PSINet and AT&T WorldNet, collects data about consumers based on Web sites they visit or TV programs they watch and delivers targeted ads to those viewers. The technology, called a "Digital Silhouette," uses artificial intelligence to guess someone's tastes and the kinds of ads that person might want to see.
Last month, AT&T said it would shutter its low-cost ISP that used Predictive software because the advertising dollars couldn't subsidize the access costs.
Personalized interactive TV could prove lucrative, however, if providers can successfully mind consumer concerns about privacy. According to Forrester Research, interactive TV advertisers plan to quadruple their budgets for the medium by 2003. But the researcher said the market still has its drawbacks, including a lack of standards.
Sarner said that targeted marketing would be valuable to companies aiming to spend budgets more wisely. Given that 20 percent to 30 percent of a company's revenue is spent on marketing, with nearly half wasted on misdirected promotions, he said, profiling reduces the waste by targeting the right message to the right people at the right time.
Microsoft and Predictive plan to demonstrate the technology May 5 to May 8 at cable industry show NCTA Convention in New Orleans.
Reuters contributed to this report.