Telco TV

Placing Bets In the Bandwidth Battle

6/15/2007 8:00 PM Eastern

When more than 20,000 executives from telephone companies and vendors converge in Chicago for this year’s NXTcomm conference, there will once again be a lot of talk about the revolutionary impact of Internet protocol TV on the multichannel business. But a closer look indicates that the rollout of new product is likely to be more evolutionary, according to analysts and vendors.

“The telcos are taking a very evolutionary approach,” said Lynda Starr, senior analyst for IP communications at the Frost & Sullivan, which predicts IPTV subscribers will hit 38 million by 2013. “They’ve taken a good first step with their video and on-demand offerings but it is not all that different from what customers are currently getting.”

That doesn’t mean that the telcos or their cable competitors are taking a go-slow approach to their upgrades, with Verizon Communications deploying fiber to the home (FTTH) and cable operators such as Comcast touting the ability of Data Over Cable Service Interface Specification 3.0 to deliver blinding Internet access speeds.

“It is an arms race, a speed race, that will require significant capital investments on the outside plant by both telcos and cable,” said Dave Schaeffer, CEO of Cogent, a tier 1 Internet service provider. “It will come down to whose balance sheet is deeper and who has the most resolve.”

VERIZON’S PUSH

Verizon has been the most aggressive. The telco is spending $23 billion between 2004 and 2010 to build a fiber-to-the-home network that will pass some 18 million homes by 2010. The company hopes to sign some 3 million to 4 million FiOS TV customers and another 7 million FiOS Internet customers, a long way from the 348,000 FiOS TV subscribers and 864,000 FiOS Internet customers Verizon had at the end of the first quarter.

Brian Whitton, Verizon executive director of broadband access technologies, said when the company was planning its network upgrades in 2002 and 2003, it concluded that FTTH would allow for a triple-play of video, voice and data, and eventually quad-play with wireless phone, while meeting future consumer needs for bandwidth. Ultimately, FTTH would produce some savings in terms of managing their network and improving customer service, he said.

“We decided that if we are going through the expense and investment necessary to upgrade the outside plant, do it once,” Whitton said. “We don’t want to be doing this every year. With fiber to the home, we can evolve to lead the industry, not just compete. When we need greater speed and more bandwidth, all we have to do is change the optics.”

Verizon’s FTTH network, which passed nearly 6.8 million homes and businesses at the end of March 2007, allows the company to offer several hundred standard-definition linear networks, a large slate of high-definition channels and VOD. Currently, its fastest Internet product is 50 Megabits per second.

This summer, Verizon will upgrade to a gigabit-passive-optical-network (G-PON) technology that will allow it to further boost bandwidth to 2.4 Gigabytes per second downstream and 1.2 Gbps upstream for every 32 customers, Whitton said. “We are engineering for the next 10 years of bandwidth needs.”

But Verizon has taken a more cautious approach with IPTV, creating a hybrid network that uses IP delivery for VOD, HD and premium services and a more traditional cable multicasting architecture for linear channels.

That allows them to better manage their bandwidth and avoid some of the delays and difficulties that have plagued pure IPTV networks, Whitton explained. “It is a new technology that makes a lot of sense for some services but it has to go through a maturing cycle,” he said. “Today, I’m not sure I’d want to be managing an all IP network.”

Tom Rosenstein, vice president of product marketing and alliances at SeaChange International, which is working with Verizon on its on-demand product, noted that pure IPTV deployments currently face some enormous “integration challenges. Verizon made a very pragmatic decision to adopt a technology that works today that they can easily upgrade in the future.”

AT&T’s U-VERSE

In contrast, AT&T is using all IP delivery but is deploying fiber to the node with copper into the home for its U-verse TV service.

AT&T recently announced that it is increasing its investment in rolling out IPTV services from $6 billion to $6.5 billion by 2008, when it hopes to pass about 13 million homes with U-verse. Those figures do not include costs for upgrades in BellSouth’s former 9 state footprint. When AT&T releases its plans for those areas this summer, the cost is likely to significantly increase, though the telco is sticking with its guidance that capital expenditures as a percentage of total revenue will remain in the mid-teens.

So far, rollouts have gone slower than expected. U-verse has deployed in about 11 markets at the end of 2006, short of the planned 15, said Frost & Sullivan’s Starr.

Still, the service is currently available in about 20 markets, and AT&T expects to expect to pass 8 million homes by the end of 2007.

“FTTN [fiber to the node] coupled with IP gives us a faster speed to market and we can do it for a fraction of the cost of FTTP [fiber to the premises],” AT&T executive vice president Dan York said.

Currently, AT&T has about 30,000 U-verse subscribers, up from 13,000 at the end of the first quarter and is installing about 500 new customers per day — the most new installs the company can handle.

“We have a product that is competitive in most regards and exceeds what is available in other regards and we are just scratching the surface of what an IP based television network can do,” he said.

One potential area of development is AT&T’s three-screen strategy of programming on the TV, PC and mobile phone. Its IP network already allows triple-play subscribers to program their digital video recorders from a PC or mobile phone.

Microsoft TV director of marketing Ed Graczyk believes these converged services will play a key role in the future of IPTV. “The industry has been talking about triple play or the quad play as the end game, and there are certainly a lot of benefits to bundles,” he said. “But we think the bigger opportunity will be what you can do when you have multiple services delivered over a common network.”

At NXTcomm, Microsoft, which is working with 18 major telcos around the world on IPTV deployments, will unveil its latest software platform.

New features will allow users to seamlessly integrate other devices on their home network and move content from device to device. The software will also feature support for digital terrestrial TV and a browser that will dramatically improve interactive experiences.

Aslam Khadar, vice president of marketing and strategy for Ensequence, believes those interactive services will be particularly important for telcos as a way to differentiate their products and produce new revenue from interactive advertising.

York declined to comment on which of these features AT&T plans to deploy or its timetable.

But he and Graczyk argued that they have enough bandwidth. “The fact that we are the No. 1 broadband provider [with 12.9 million subscribers] is proof we have all the speed we need,” he said, adding that the video product includes more than 300 linear channels, over two dozen HD channels, over 1,000 on-demand titles and a DVR that records 4 streams.

FIBER FACEOFF

Fiber to the home could force AT&T and cable operators to boost bandwidth.

“When [Comcast CEO] Brian Roberts made that demonstration of DOCSIS 3.0 at the Cable Show, he was acknowledging how FiOS and Verizon’s FTTP network is really setting the industry’s pace for high-speed Internet services,” Verizon’s Whitton said.

He added, “We do not believe it is a competitive response.”

That’s because DOCSIS 3.0 bonds together 6-Megahertz quadrature amplitude modulation (QAM) channels to provide faster Internet speeds. “They have to rob Peter to pay Paul because they have a finite number of QAMs to fit in all their services — analog TV, HD, VOD, [pay per view], high-speed Internet and their [voice over Internet Protocol]. To bond channels, they have to terminate and deactivate services and channels to free up QAMs,” Whitton said.

“If the marketplace continues to demand faster services, as we expect it will at Verizon,” he continued, “they will be ultimately robbing Paul so much that Paul will leave as a paying customer. We don’t have that problem with our FTTP network.”

Sacramento-based SureWest Communications also isn’t worried about bandwidth issues, having deployed FTTH and full IP delivery, said company senior vice president and chief technology officer Bill DeMuth.

SureWest began deploying IPTV service in early 2004 and currently passes about 100,000 homes, with close to 20,000 video subscribers.

The FTTH IP network allows SureWest to provide Internet access speeds of up to 50Mbps both upstream and downstream. Its IPTV service includes 306 linear channels, video on demand, PPV and 19 HD channels. “The data speed is really what gets us in the door,” he said.

But the picture quality of SureWest’s MPEG 2-delivered HD channels has also been a major selling point, added Carl Murray, director of strategic technologies. Since those HD channels eat up 19.2 Megabits of bandwidth in MPEG-2, SureWest would not be able to offer such a high-quality HD picture without an FTTH network that delivers 100 Megabytes into the home.

“It was a significant capital investment to do fiber to the home but we feel that the long term returns are very viable,” said DeMuth, who added that the company can easily upgrade the network with new optics if it needs more bandwidth.

DeMuth admitted rolling out IPTV poses difficult challenges, particularly with integrating products from various vendors.

To help overcome those issues, SES Americom has teamed up with Cisco Systems to offer a complete package — from content that includes nearly 300 channels to equipment and services — to rural telcos, according to Cisco senior manager of global IPTV marketing Pankaj Gupta.

Paul Connolly, vice president of business development at Scientific Atlanta, which is working with AT&T, SES Americom and other telcos, said that “whether you have 10,000 customers or 10 million you need the same amount of national content to be competitive. This allows them to roll out a triple play.”

Investing in network upgrades to offer a triple play can shore up more lucrative products, added Rick Sailor, vice president of sales for the Americas at Amino, which has shipped over 1 million IPTV boxes worldwide. “If they can break even on video, they can shore up their fixed line business and [the network upgrade] will help them make some very good money on high-speed Internet,” he said.

SOME SKEPTICS

Brian Morrow, chief operating office and general manager of IPTV at Eagle Broadband said telcos attempting to roll out video over a copper network face some huge technical problems. “Copper has some very unattractive features in the last miles and you hear a lot of stories about problems,” he said.

Morrow is also skeptical about AT&T and Verizon’s ability to get a return on their massive investments in wiring most of their footprint for video. “It is a massive investment without offering any specific competitive advantage,” he said.

In contrast, Eagle has chosen to target affluent customers in high-rise apartment buildings in the Miami area and is working with ANEW Broadband and FrontGate Broadband to provide an IPTV service over fiber to complete their triple-play offerings. “It is a much more attractive business model,” he said.

But one that the largest telcos would have a hard time selling to regulators.

September