I'm seeing the exact same behaviour. After it got the "unable to connect" error message I picked the phone up and heard modems conversing. It IS dialing and connecting to something, but not accomplishing much.
I'm also wondering what my "4-digit password" is 'cause I've never created one, and besides the space for it is 5 digits!
Finally, regarding the implementation of the "red" button on the remote, this should be the default PIP behaviour, minus the little icon on the screen. Why did they not just replace the old non-buffered PIP with the new PIP? That button doesn't even exist on the "1" IR remote I'm using in the family room since I moved the UHF remote to the bedroom.