Videophone Gambit Could Be Tough Call

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WorldGate Communications Inc.'s decision to switch its focus from interactive-television provider to videophone technologist is a an attempt to find a better vision for the company's future, according to founder, CEO and chairman Hal Krisbergh.

But while WorldGate enters a videophone market with only a handful of competitors, it is by no means clear that cable and telco network operators are seeing the videophone picture.

With a first demo product still months away, the question now is whether the WorldGate can survive the start-up phase and make the product connection.

To start with, videophone technology is not exactly a new idea, having made its debut at the 1964 World's Fair. Since that time, many companies have tried to develop videophones for commercial applications, but they have been hampered by the technology's cost and video quality — not to mention the bandwidth needed to send video signals back and forth.

But about a year ago, technology breakthroughs had improved both issues, so Krisbergh started up a videophone-technology development project at WorldGate, dubbing the product Ojo.

Krisbergh is reluctant to detail the technologies the Ojo videophone will use because WorldGate has not as yet secured the critical patents, but he claims it will solve the upstream bandwidth issue.

"There have been some major breakthroughs in the video processing area," Krisbergh said. "We use less than 3% of the available bandwidth upstream to get a fully loaded system. We've got to the point where we have eliminated the upstream bandwidth issue."

In addition, the technology would work equally well for twisted copper-based broadband networks, so Ojo's market can expand to include digital subscriber line providers. A first version of the product will be out by the end of the year, and trials will likely start in 2004 among telco and cable providers, Krisbergh said.

"When we have a much broader product, that will in effect help generate its own acceptance and really require the operator to have minimal incremental effort — except for just literally adding inventory — this gives them a nice revenue stream," he said.

WorldGate will take that pitch to a market that as yet has few competitors.

Viseon's View

While home-networking appliance makers including D-Link Systems Inc. have come out with videophone concepts using the TV set or a PC monitor the viewing screen, Dallas-based Viseon Inc. is one of a handful venturing into the market with an all-in-one videophone appliance aimed at consumers.

It hasn't exactly been an easy sell — Viseon has been hunting for cable operator partners for almost two years, and so far it has gained only lab tests for its videophone with MSOs including Charter Communications Inc.

"We are in various stages of discussions with all of the top 10 MSOs in trying to move one of them closer to rolling out in a market with an actual consumer trial," said John Harris, Viseon's CEO.

The first version of the Viseon phone sports a 6-inch screen, an integrated camera and speakerphone. It costs about $599 retail, but Harris noted a second-generation product targeted for a mid 2004 release will try to pare the price tag down to a more consumer-friendly $299.

"We're implementing new components that are cheaper to produce in quantity," he said. While he didn't want to spell out the exact architecture "suffice it to say we are going to an architecture that allows us to take advantage of lower manufacturing costs."

QOS Issues

Competition isn't the only hurdle WorldGate will face. While broadband providers might not need fancy new routers or headend gear to manage videophone data flow, they will have to have quality-of-service transmission protocols in place to make the videophone connections flow smoothly.

For cable operators, that means Data Over Cable Service Interface Specification 1.1 systems, and not all operators have upgraded their systems to that scheme as yet.

"But all of the modems being sold today are (DOCSIS) 1.1, cable operators are already converting to 1.1, and a year from now when this thing is really ready for high-volume production I think 50% to 60% of the market will be there," Krisbergh said.

Then there is the small matter of gaining network operators' attention. WorldGate faced a similar problem with its interactive TV products, but Krisbergh argues that will not be the case.

Although cable operators are preoccupied with video on demand and HD services these days, Krisbergh argues they will be attracted to the videophone because it piggybacks on their successful data services and as such, doesn't require a lot of capital — especially if the videophones are sold at retail, just as modems are.

"What we are able to do here is take that high-speed data infrastructure and plug in a new product here," Krisbergh said. "It's not a major new sell. It's a simple add-on. It doesn't require any significant investment by the cable operator in infrastructure. And it uses the exact modem infrastructure that is already there."

Viseon, meanwhile, has found that while there may be interest in the videophone product, MSOs have been focusing on priorities for other service rollouts, including digital video recorders and voice-over Internet Protocol.

"So many of them are still trying to roll out voice over IP that it has certainly taken the time away from exploring almost any new type of technology," Harris said. Noting it has taken almost four years for VoIP to go from concept to the first few rollouts, "we don't think videophones are going to take that long to deploy, because we think there are probably a higher demand for videophones than voice over IP. Everyone already has a phone, and we are hopeful that we can show the MSOs that there is a market for videophones to the consumers that they will push it up the priority pole."

Priming Consumers

Interest will be driven by consumers, and in that videophone technology may face the classic consumer chicken-and-egg quandary — the phones won't gain in popularity until enough consumers buy them, however, consumers may be discouraged from buying videophones until more people do so.

While Krisbergh acknowledges that is an issue, he points to WorldGate's research indicating most consumers make the majority of their telephone calls to a small list of friends and family, so getting the product deployed to a majority of the population is not required.

"It's not like we have to sell the whole United States," he said. "We really deal with a community, deal with families within those communities and break that ubiquity issue."

Still, that could take time, and now the task for WorldGate is to stay financially afloat. With the $3 million WorldGate expects to glean from selling its ITV technology to TVGateway, it should have enough funding to make it into next year, Krisbergh said. WorldGate will have to raise additional capital, but Krisbergh said there are signs the financial community may start investing again — particularly if WorldGate has a product shown to work in field tests.

"I absolutely believe in five years people will be doing video telephony. Hopefully we will be one of the leaders," Krisbergh said. "The only way you will really communicate in the future is with visual communications. It's not like a nice thing — it is the way it will go."

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