Technology

Divergence Rises As New Buzzword

8/26/2005 8:00 PM Eastern

As the millennium dawned, the buzz was all about convergence. Companies merged and products were packaged into bundles, offering consumers more products that operators hoped they would buy from a single provider.

But as telecom experts look out toward the end of the decade, they see the speed of change accelerating and state the new buzzword: divergence. It’s all about even more products, from new providers and devices.

On the horizon, traditional wireline telephone carriers will ramp up for video delivery. Power companies want to piggyback broadband onto the electric lines coming into the home. Private firms are promoting wireless-fidelity (Wi-Fi) projects, and they’re being adopted by public entities such as the citywide network recently put out to bid by the city of Philadelphia.

Platforms of the Future
Mobile Video: Currently, 2/3 of cell phone users don’t have video-enabled hand sets. The predicted penetration is expected to jump drastically in the next year and a half, hitting a penetration rate of 30 million video phones in use in 2010.
Broadband from telephone providers: Companies such as Verizon and SBC have currently penetrated roughly 28.6% of the market for broadband services.
Fiber-to-the-Premises: FTTP penetration reached 1.9 million homes at the end of 2004. That penetration is anticipated to reach 11.8 million homes by the end of 2009, half of which buy their services from Verizon.
Source: In-Stat/MDR market analyses

PHONES WILL EXPLODE

Wireless access using microwave technology (Wi-MAX) is also at the starting gate.

Then there’s that delivery device already in most consumers’ pockets and purses: the cell phone. Video delivery to handsets is in its nascent stages, with an estimated 1.1 million users this year, according to a recent survey by the market research firm In-Stat/MDR (a sister company to Multichannel News). Video phones are about to explode, according to that survey, which predicts the service will reach about 30 million subscribers by 2010.

In addition to content delivered by the cellular providers themselves, companies like Qualcomm Inc. are investing in video delivery, bypassing cellular carriers. That company announced earlier this year it would invest $800 million in a technology to broadcast 15 live video channels directly to cell phones, sidestepping traditional networks.

The industry is moving so fast, “things have changed since we started this conversation,” said Robert Thompson, a professor at Syracuse University with the Center for the Study of Popular Television.

Technologies such as cable and direct-broadcast satellite suddenly find themselves among older media, examining how they can “surf the wave of change,” said one programming executive.

The most watched emerging competitor appears to be telco TV, whether it’s the fiber-to-the-premises transport system being deployed across the 29 states served by Verizon Communications Inc.; or the Internet-protocol service promised by SBC Communications Inc.

Verizon is currently testing its product in Keller, Texas, scheduled to be its first commercial market later this year. Executives said the plant has high-speed data service with downstream speeds of 30 Mbps and upstream speeds of 5 Mbps. This company should pass 3 million homes with its FTTP plant by the end of 2005.

SBC has invested $400 million on IPTV software from Microsoft Corp. and the company anticipates launching its video-delivery service by the end of this year or early 2006, according to published reports.

There’s no question the telcos will have a position in the multimedia marketplace over the next decade, said Sanford Bernstein & Co. cable and satellite analyst Craig Moffett.

“I’m skeptical of the long-term impact,” he said, questioning whether the Internet speeds promised will be sufficient to compete with cable modems and whether the whole business model works. He also questioned how telephone companies would compete with current providers, as telcos are, in his estimation, at a cost disadvantage in programming and labor.

Both telcos have been especially aggressive competing for high-speed Internet customers, substantially dropping their monthly fees for digital-subscriber line service. Venture capitalists had a hard time making the economics work when the monthly fee averaged $25, Moffett said.

“It will be even harder at $15 a month, under DSL’s current pricing plan,” he said.

CABLE’S CONFIDENT

Cable executives are confident they have the plant and the product to survive the telco challenge. As an industry, cable has spent $80 billion over the last five years on its hybrid fiber-coax plant, bringing fiber closer to the home and raising the quality of the plant to 750-MHz, according to Comcast chief technology officer David Fellows. As a result, that plant is better suited to creating the personalized experience experts predict will be demanded by consumers over the next decade.

Engineers have determined how to take 115 6-MHz channels and multiply them into 5,000 potential channels, he said. Currently, 90% of capacity is broadcast and 10% is switched, utilized to provide on-demand services. But the scalability allows operators to adjust that percentage to take advantage of viewers’ changing tastes, Fellows said.

STAYING ON TOP

Cable is currently No. 1, he said. To defend that position, executives should constantly attack their own corporate status quo by developing and refining new products. Digital cable will be enhanced with video-on-demand content such as switched broadcast channels, which look like linear channels but don’t exist until consumers summon the content; “start-over services,” which allow viewers to return to the beginning of a program, even if they entered the show with only one minute left; and cable’s own Internet-protocol TV service.

Compared to potential competitors, “We’re out ahead, riding our own surfboards, not spending time furiously trying to catch the wave,” he said.

Dallas Clement, senior vice president of strategy and development for Cox Communications Inc., said, “Realistically, I absolutely believe, in the next five years, alternative technologies will be available to customers to provide comparable services to us.”

That said, he questions the viability of Verizon’s strategy (“Will Wall Street reward them for this investment?”), broadband over power lines (he predicts companies will conclude that its unwise to make huge broadband investments when they have a safe rate of return in a noncompetitive energy market) and wireless technologies (lack of security, high investment to reach the last mile).

Cox’s competitive edge will be “bundle 2.0,” Clement said, including applications that cross platform boundaries, such as the ability to display caller-ID information from Cox phone products on home TV screens and the ability to remotely program the home digital video recorder.

Executives at Cox and Time Warner Cable predict a wireless application in their companies’ futures, but added that the technology is in its infancy so the form of the product is hard to predict.

Telephone companies have about three years until build-out, said Mike LaJoie, executive vice president and CTO for Time Warner Cable. “We can leapfrog them,” he predicted. “We’re trying to innovate … they’re building to a moving target.”

As many as 108 projects are listed on a bulletin board in the halls of the development group’s offices, LaJoie said, though not all of them will be come to fruition. Customer input will tell the company what subscribers want.

While cable providers may warily monitor new devices and platforms, programmers see them in a different light. Innovation brings new ways of delivering content, which extends core network brands.

For example, ESPN, with experience in mobile content dating back 10 years to a pager service for sports scores, plans to become a “virtual cellular carrier” within the next years, selling network-branded cell phones and content, according to Manish Jha, senior vice president at ESPN Mobile. This will be in addition to the sports content currently licensed to other cellular carriers, such as Verizon Wireless.

Jha wouldn’t talk about the revenue anticipated from the sector other than to say the sports network is very excited about the potential.

Other networks have tested new platforms as promotional vehicles. Showtime Networks Inc. expanded awareness of its Fat Actress series earlier this year by letting Internet users download episodes.

Showtime chairman Matt Blank said the premium service will experiment in the cell phone arena, but the programmer will have to think about shorter forms of entertainment. Right now, he sees the alternative platforms as “promotional vehicles” rather than separate businesses.

But because of the boom in devices and technologies, “It’s a good time to be in the business of having a lot of proprietary product,” he said.

Programmers are dealing with methods to use new platforms to provide added value to consumers paying to watch their core networks on cable and satellite services.

SCRIPPS SUPPLEMENTS

For instance, Scripps Networks is developing 10 broadband channels at their Web sites over the next year. They will provide information and entertainment that is supplemental to the programming on its cable networks.

“Each [future] platform needs to live by itself. If it’s healthy, it makes both platforms strong,” said Channing Dawson, senior vice president of emerging media for Scripps.

Analysts and executives agree that content suppliers will have to keep up with trends on how people want to consume media. Most believe that viewers will still embrace the at-home, lying-on-the-couch, big-screen TV experience, but will also be open to killing time in line at the DMV by watching clips on their cell phones.

“In the short term, we’ll still move from device to device,” said Thompson, adding that video providers have to remember that “80% of viewing is something you can view while on the couch, half asleep after using the keyboard all day at work.” In the long run, what consumers love about television is not interactivity but passivity, the professor said.

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