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The December 15, 2005 Issue Provided by System Dynamics Inc.
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Switching Channels at TelcoTV

We came away from TelcoTV feeling that we've arrived at the tipping point for telcos offering video services. The biggest telcos are all either committed to moving forward at scale, or are close to a commitment.

IPTV used to be for pioneering small telcos; the big ones were thinking about it but weren't ready to make any commitments. While the big telecom suppliers showed up at TelcoTV to express their interest, most of the business went to smaller pioneering IPTV vendors.

Now all the big telcos are clearly going to play. TelcoTV had speakers from independent telcos like Pioneer Telephone Cooperative and Chilbardun Telephone. But the keynote speakers were from AT&T (formerly SBC) and Manitoba Telecom Services (MTS), and other big incumbents like Bell Canada, BellSouth and Quest were well represented.

Traditional IPTV vendors like Minerva, Kassena, BitBand and Amino were there. But the big booths were dominated by large, traditional telecom suppliers like Alcatel, Lucent, Siemens, Nortel and Motorola. They now seem convinced that IPTV will take hold with their "Tier 1" customers and they have to be part of the action.


Confluence of Forces

A confluence of forces has brought us to this point:

  • Traditional telephony revenues eroding: As people subscribe to broadband, they often cancel the second line they used for dial-up. As they get mobile phones, many people cancel their wireline service. Companies like MTS and PCCW (formerly Hong Kong Telephone) have found that adding video services not only provides a new revenue stream, but also makes customers more likely to keep their phone service.
  • Increasing competition: The entire communications space is filled with companies trying to get their part of the market. In many markets, new facilities-based "alternate operators" like FastWeb are gaining a foothold by providing the "full bundle" of data, voice and video. VoIP from independent providers is catching on quickly. As cable companies have started taking telephony customers, it's logical for telcos to go after cable's video customer base.
  • Technology improvements: The latest DSL technologies like ADSL2+ and VDSL2 provide sufficient bandwidth (at short loop lengths) for multiple channels of video. New compression technologies like MPEG4/AVC and WM9/VC1 make it possible to carry high-definition video in DSL bandwidth. New VOD server systems move video servers much closer to the network edge, reducing the load on the core network.
  • Deep fiber: To prepare for high speed data, telcos have extended fiber deeper into the plant and deployed some flavor of DSL. This provides a good base for competitive video services, with deeper fiber permitting more simultaneous video channels.
  • Demonstrated feasibility and success: In Hong Kong, PCCW has the world's largest IPTV deployment and is rapidly catching up with the incumbent cable operator. MTS has gotten 20% market share in Winnipeg in the year since it started full commercial rollout of IPTV; it now provides TV service to over 40% of all the digital TV homes there.


AT&T's "U-verse TV" Service

One of the biggest stories at TelcoTV was the upcoming launch of AT&T's "U-verse TV" service. The new AT&T (formed by the merger of SBC Communications and the old AT&T) plans a very ambitious offering with IPTV services personalized for each user and integrated across "the three screens": the TV, the PC and the cellphone.

At the conference, Jeff Weber, AT&T's Vice President, Product & Strategy shared an opening keynote session with Alcatel's Jim White. To some skeptics who have questioned AT&T's ambitious technical approach based on Microsoft IPTV, Weber said "we are well past the 'Does this solution work?' stage." He said they had completed their last technical field trial and concluded that "it doesn't have a hole." He said they have signed the content agreements to create an offering "robust enough and good enough for a competitive marketplace," and were "on track" for a "controlled launch" in the first quarter of 2006 followed by a full launch later in the year.

Alcatel's Jim White --> Click for larger pictureWeber and White described how the service Alcatel is helping AT&T roll out will differ from today's television services. They talked about the ways TV services will be improved, including a better user interface, fast channel change, multiple picture-in-picture capability and whole home digital video recording (DVR).

But better TV is only part of the picture. They think the trump card will be cross-service integration and interoperability. As an example, they said you could take a picture of your son's baseball game, upload it to the SBC Yahoo! DSL service and "within five minutes" your father could view it on the TV screen at his home. This multi-service integration is where many of the US telecom providers intend to take TV; it will be seamlessly integrated with other communications and entertainment media.


Traditional Telecom Suppliers

As the largest telcos move to deploy IPTV, their traditional large telecom suppliers are playing a lead role. These large suppliers have in common an emphasis on their ability to handle large-scale integration of complex telecommunications systems and their experience in providing scalable systems.

Here is a capsule view of the positioning of these suppliers, garnered from our meetings, conference presentations and press releases.

Nortel

Nortel booth at TelcoTV --> Click for larger pictureAt TelcoTV, Nortel's Walt Megura (GM of Broadband Networks) and Ken Couch (Director of Broadband Network Marketing) told us about the end-to-end IPTV solution Nortel announced at the show. Their emphasis was on the integration of Nortel's SIP-based multimedia communication technology into the television experience. They said IPTV subscribers will be able to use their TVs to communicate and interact with friends and family through a variety of media, such as voice, instant messaging, video, and picture sharing.

They told us about the extensive testing which take place at their IPTV lab in Ottawa and their offering of professional services which provide a single point of contact that can manage the network build-out, as well as participate in planning, operating, and/or managing the customer's IPTV network.

Nortel has assembled a vendor ecosystem for providing a complete end-to-end solution. It includes middleware from Minerva Networks and Orca Interactive; video-on-demand from Kasenna and BitBand; content security solutions from Irdeto Access; encoders from Harmonic and Optibase; Web browser interface from Espial; digital program insertion from Terayon; an emergency alert system (EAS) from Trilithic; xDSL modems from Westell; and set-top boxes from Amino.

Motorola

We were already familiar with much of Motorola's video expertise, including head-end and set-top equipment and various types of wide area services and last-mile configurations over copper and fiber. At the show, Floyd Wagoner, of Motorola Networks Global Marketing, concentrated our discussion on the support, applications, integration and management aspects of Motorola in video services.

Motorola role in Verizon FIOS --> Click for larger pictureMotorola's big win in the telco TV space is Verizon. Motorola is providing the turn-key engineering and construction of head-ends and hub offices; providing the set-top boxes; and implementing the Network Operations Center, providing initial operations staffing and post-deployment support.

Lucent

Lucent's IPTV infrastructure has been used in commercial deployments, such as that of Telefonica, which currently serves more than 100,000 residential subscribers. Shortly before TelcoTV, Lucent announced their Multimedia Access Platform which, in conjunction with their IP Multimedia Subsystem (IMS) makes it easier for service providers to introduce "blended lifestyle" services combining voice, video and data capabilities.

At TelcoTV, our discussion with Robert Piconi, VP & GM of Lucent's Broadband Solutions, touched upon the importance of having a consistent look and feel for advanced services, however they are delivered to the customer. When our conversation moved to the role of IMS in IPTV and more generally in blended services, we realized a more in-depth discussion would be helpful. Lucent's IPTV HQ is only a few minutes from our home base, so it made more sense to continue the discussion there rather than at a conference 3000 miles from where we both are based; we report below on our follow-up visit.

Alcatel

Alcatel's major IPTV visibility in the US is through its role as system integrator for the upcoming AT&T commercial launch in 2006. Alcatel's partners in the AT&T project include Microsoft, Scientific Atlanta, Amdocs, Motorola and 2Wire.

We believe the emphasis on service integration is what led Alcatel, subsequent to this conference, to purchase 25% of gateway and backend management provider 2Wire (with another 26% purchased by AT&T and Telmex). Alcatel's announcement stressed "a more consistent, dependable user experience and a significant reduction in the level of complexity users will be faced with as they continue to embrace new media-rich, broadband services."


What Telcos Are Offering

Amino IPTV set-top box --> Click for larger pictureThe IPTV value proposition a telco needs to offer customers is very dependent upon the specific dynamics within each country or region. The competitive offerings, the number of TVs in each household and whether HDTV is a factor all have a impact on what IPTV offering will be most successful.

The usual IPTV offerings include "broadcast" video, subscription channels, video-on-demand and an interactive guide function. Additional features can include interactive TV and PVR functionality. Many telcos market voice, data and video as a bundled service. When the customer takes voice and video, the provider may show caller ID on the TV screen.

By and large, most IPTV offerings are similar to those offered by cable companies. Some telcos seek to differentiate themselves by novel pricing packages or better customer service.

MTS's Roy Sherbo --> Click for larger pictureOne of the key places some telcos are differentiating their offerings is by allowing customers to choose their own content rather than receiving a broad "one size fits all" bundle of channels. Companies like FASTWEB in Italy and MTS in Canada allow customers to select specific "theme groups" and individual channels. PCCW in Hong Kong allows the customer to order directly through the TV interface; customers can add an additional pay channel subscription at once using their remote control. This requires telcos to put in place more sophisticated "self-service" channel selection and billing systems than most cable operators have.


Distributed Video Servers

Many telcos offering on-demand video services started with a centralized video server architecture. As these services start reaching high penetrations and usage, telcos have found it appropriate to move the servers further toward the edge to reduce the load on the core network. Many vendors now offer a distributed video server architecture with a master repository in servers at a central site and cached copies in additional servers close to the network edge.

Dave with John Pickens of Arroyo --> Click for larger pictureWe talked with many vendors offering these video architectures, including Kasenna, BitBand, and Arroyo. All said this approach is necessary for telcos driving toward high usage of on-demand video. Some systems are based on proprietary hardware; others, like Arroyo's use standard "off the shelf" high-capacity servers.


Microsoft--An Invisible Presence

Much has been made of the competitive situation in today's IPTV vendor world. Some see IPTV as being Microsoft on one side and all the other middleware providers, like Minerva, Orca, Kasenna, etc. on the other.

The other providers encourage telco customers to "mix and match" from a variety of standards-based hardware and software vendors. By contrast, Microsoft's IPTV solution is an integrated solution with proprietary software--middleware, video servers, DRM and video codecs--that only operates with set-top boxes built to Microsoft specifications. It makes extensive use of network servers to provide "instant channel change" and other features.

At the TelcoTV show, Microsoft came up in lots of private conversations, but was nearly invisible. There was no Microsoft booth on the show floor, and only one Microsoft speaker in a panel session.

We found it especially striking that--even though Microsoft IPTV is central to AT&T's IPTV offering--AT&T and Alcatel barely mentioned Microsoft's role in their keynote speeches. AT&T referred to Microsoft as "a software partner" in a long list of other vendors.


Conclusions

IPTV is at the tipping point. All the key technologies are reaching maturity. Competitive pressures are forcing most telcos to move quickly before the lose much of their "cash cow" residential voice business.

Unless something goes terribly wrong, AT&T will soon launch the most ambitious IPTV deployment to date, with the goal of providing a truly differentiated service featuring "blended services" across the TV, PC and cellphone screens.

It will be very interesting to watch how the satellite and cable incumbents react.

( www.att.com ) ( www.alcatel.com ) ( www.nortel.com ) ( www.motorola.com ) ( www.lucent.com )