In Video, Telcos Are Coming, Responding to Cable Threat

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A surge in vendor initiatives aimed at enabling the delivery of TV services by telcos signals that the carriers are coming back to the market.

The telcos are driven in part by the competitive threat from cable companies and in part by the much improved business case for entry into the business.

Underscoring telco interest in TV services, Next Level Communications Inc. and Broadcom Corp. agreed last week to jointly develop low-cost set-top technology designed to provide a 52-megabit-per-second solution for delivering broadband voice, video and data services to and throughout the home over existing telephone wires.

Also, Next Level-which supplies VDSL (very high-speed digital-subscriber-line) platforms to U S West, GTE Corp. and smaller telcos-signed agreements to provide a multivendor set of

options in such headend operating categories as digital encoding, ad insertion, multichannel multiplexing and integrating data and digital TV.

"We' re moving into a much faster-paced environment now, where about two-thirds of the 32 or 33 customers that have been testing our system are signaling that they're very interested in going forward with VDSL deployments," said Bill Weeks, senior vice president and chief strategy officer for Next Level.

Others looking into what has been a slow-moving return of the telcos to the TV business echoed the view that telcos sense a threat from cable-telephony competition, thanks to the presence of AT & T Corp. in the cable ranks.

"This is definitely a competition-driven phenomenon, as you can see in Phoenix," said Michelle Abraham, senior analyst with Cahners In-Stat, a research group owned by the publisher of Multichannel News.

In that city, Cox Communications Inc. has mounted a serious threat to U S West' s core voice business, and is also challenging the telco on the high-speed-data front.

U S West launched its new VDSL service platform in the region last year, and it now has about 19,000 customers in several franchised segments in and around Phoenix, Abraham said.

As a Phoenix-area resident, she added that the telco' s marketing effort is still very low-key. Mailings and door hangers were distributed to the pockets of fiber deployment where VDSL-based services are available.

With only about 100,000 customers currently receiving TV services over VDSL and other DSL variations, it will take a tremendous push on the telcos' part to get to the deployment levels Abraham anticipates.

By 2005, she said, there will be 75 million homes passed by video-over-DSL services, 20 million of which will be in the United States and Canada.

One reason why such numbers seem high in relation to the level of activity visible right now is that the leading players in VDSL-U S West and GTE-have been temporarily slowed by merger activities.

U S West-which was deploying VDSL equipment in franchised areas of Colorado' s Douglas and Boulder counties in advance of launching in the Denver area-recently signaled that it would stop further deployments until completing its merger with Qwest Communications International Inc.

And GTE-which is using VDSL in a market trial in Clearwater, Fla.-has said it will hold off on commercial deployments until its merger with Bell Atlantic Corp. wraps up.

Weeks said the U S West announcement, which he characterized as "pretty negative," was prompted by shareholder concerns that capital spending would skyrocket in light of the need to improve basic infrastructure for delivery of core voice and related services.

"The merger has people squeamish over capital spending, but once it' s completed, the funding issues will be easier to deal with," he said. U S West officials could not be reached for comment.

The upbeat assessment of telcos' pursuit of video-service options was buttressed by vendors providing digital-encoding and related techniques to the TV market and now exploring the possibilities on the telco side.

For example, Eric Norton, director of product marketing at DiviCom Inc., the leading supplier of MPEG-2 encoding gear, noted that he has been "spending a lot of time lately talking with people in the telephone industry about applications of our technology."

"Our biggest customer is U S West in the VDSL space, and we' re also supplying GTE in Clearwater," Norton said. "We' re also seeing a lot of people approaching from the ADSL [asymmetrical DSL] side."

ADSL operates over up to 18,000 feet of copper, and can deliver multimegabit levels of service at distances of about 9,000 feet. VDSL relies on deployment of fiber deep enough to shorten copper-wire lengths to about 4,500 feet or less, raising throughput to 25 mbps or better, depending on distance.

With the potential to deliver digital-TV services to multiple TV sets through a single home-based controller over existing telephone wiring, VDSL offers big telcos the platform for taking on cable.

For Broadcom, teaming up with Next Level is a way to provide this new market with the cost-effective functionality that it needs to move forward, CEO Henry Nicholas said.

The two companies said they would co-develop a residential broadband-gateway platform using next-generation VDSL silicon from Broadcom.

This open platform will provide Broadcom' s customers with an economical solution for the delivery of broadband services-including multiline digital IP (Internet protocol) voice, video and data for phone, fax and Internet connections, high-definition television/MPEG-2 video graphics and 3-D game-quality graphics over phone lines.

A key component in the mix of integrated chips that will lead to a more cost-effective business model is Broadcom' s "no-new-wires iLine10" home-networking technology, which exploits the HomePNA (Home Phoneline Networking Alliance) protocols to facilitate whole-house distribution of interactive content through a single point of interface with the outside network.

Today, accomplishing all of the functions in the Next Level "N3 Residential Gateway" requires about 10 chip sets costing $10 to $50 each. The new platform will require only a couple, in the $20 to $40 range, Weeks said.

The N3 currently costs about $700, which, in cases where multiple TV sets are involved, can still be competitive with cable' s digital-TV services. But with digital-cable set-tops deploying at well under $300 per unit, the cost parity only applies in a small percentage of homes.

Weeks said the reduction in chips required to create the "whole-house" video, data and voice capability for VDSL will put it ahead of cable when it comes to cost-effective platforms for bundled service offerings, although he declined to say how soon the N3 costs would fall to $400 or lower. "That' s a question of volume once you' ve achieved the integration," he added.

Adding to the business case for telcos entering the video business is state-of-the-art encoding, insertion and multiplexing technology supplied by companies like DiviCom, PixStream Inc. and VideoTele.com, a recently created unit of Tektronix Inc.

All of those vendors have taken action to ensure compatibility with the Next Level VDSL system, thereby affording telcos the same cutting-edge capabilities for manipulating and customizing MPEG-2 signals that cable has.

PixStream has teamed up with a variety of ADSL-system suppliers to provide its digital-headend capabilities in the independent telco market. Now it has partnered with Next Level on the VDSL front, expecting that platform to rapidly gain traction among independents and big carriers alike, PixStream vice president of marketing Dave Caputo said.

"This closer alignment with Next Level allows us to lower costs by avoiding the need to re-encode video at the headend," Caputo said, noting that PixStream had already been working with Next Level as suppliers to Bell Canada in an MDU-based (multi-dwelling unit) test of video services.st of video services.

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