FUZZY RECEPTION: WHY OFFERING VIDEO MIGHT NOT BE ALL BRIGHT LIGHTS AND BIG PAYOFFS FOR TELCOS

While dozens of small telcos have deployed video services for the first time this year, and perhaps another hundred more will do so in 2004, those that already have started offering the combination of voice, high-speed data and video as part of a “triple play” package say it’s not nearly as glamorous as one might expect. At the same time, few in the market would do things differently if given the opportunity to turn back the clock.

Despite the demand that many analyst reports have shown for packaged services—not to mention the early success of the largest carriers in bundling voice and data—doing the triple play is not simply a matter of cleaning up your plant, putting set-top boxes in homes and waiting for the revenue to come pouring in. In fact, many telcos that have started offering video say the service is only marginally profitable if at all.

However, given the emerging threat of cable-based IP telephony, and more import technology substitution that could be unleashed by the recent decision that allows landline users to port their numbers to wireless phones, video’s potential can’t be ignored. Additionally, telcos using their existing copper networks to provide video services have some technical advantages over competitors, such as the ability to offer network-based personal video recording (NPVR).

For many of the telcos that have gotten into video, the experience has been something of a learning process. Much of the lesson starts inside the home: While access telcos are able to control the quality of the outside plant well enough to deliver multiple video streams to a residential gateway, carrying video to the TV is another story. “One of our biggest challenges is in the home itself,” said Bill DeMuth, chief technology officer of SureWest Communications, which claims more than 10,000 triple play customers in and around Sacramento, Calif. “We spend a lot of time rewiring.”

The category 5 wiring that allows carriers to provide whole-house broadband service is rare, except in high-end homes or in cases where the owner is tech-savvy and has planned ahead. And most set-top box vendors say they don’t have enough faith in Wi-Fi’s ability to control quality to make that particular technology an option.

At the TV set itself, another challenge arises. While IP set-tops are dropping in price, they remain one of the most expensive capital expenses for telco video providers. The goal, according to a recent report from In-Stat/MDR, is to get prices down to around $200 per unit. However, given the current size of the market—only 51,000 IP set-top boxes were shipped worldwide in 2001—and since materials on a single-stream DSL box averaged $164 in 2002, it’s going to take volume production to bring costs down. Currently, the only significant adopters in the U.S. are rural ILECs, which aren’t ordering the millions of units it will take lower costs.

The distribution channel for IP set-tops also needs to change. Less than a year ago, many believed that as larger carriers started deploying the units, the technology would develop along the same lines as DSL modems, moving from boxes that required a truck roll and technician installation to units that could be shipped to the customer for self-installation. That hasn’t happened, and likely won’t in the next few years. Additionally, developments in the consumer electronics environment have brought the very concept of an IP set-top box into question. Go into any high-end electronics store these days and you’ll find hybrid set-top units that allow for personal video recording, data retrieval, Web TV services and reception of IP video.

San Mateo, Cal.-based hybrid set-top vendor Prismiq originally planned to distribute exclusively through telcos, but watched its plans fall victim to bad timing. “We were trying to sell that product in 2001, which was a tough time to be selling anything other than data,” said Brad Kayton, Prismiq’s vice president of marketing and business development. Instead, the company developed a media player that allows users to watch TV and view and listen to any type of digital media stored on in-home servers. Not exactly the telco-centric box they were planning, but that may change if larger carriers make the jump into video.

“Most of our management still thinks that’s the channel that is going to win in the end,” Kayton said. “We see broadband services as the next set of features we’re going to be supporting. Next year really seems to be a big one. We’re doing a lot of RFP work.”

Most of those RFPs from telcos, however, aren’t targeted for the highly profitable services envisioned just a few years ago. Many carriers now simply hope to use video as a stopgap measure to slow access line loss and increase market share of satellite providers like DirecTV and EchoStar. “We didn’t think we’d take customers from satellite, but we thought we’d stop the migration to them,” said DeMuth.

Still there are some logical reasons for carriers to move into the video business. In some cases, particularly in rural markets, telcos are winning over DBS customers with local content that can’t be delivered over the satellite networks. Also, there are some inherent technical advantages in using the multicasting scheme being adopted by telcos, such as the capacity offer true NPVR with full playback controls. “One of the things we’ve found is that the killer application is the pause button,” said Mark Gray, president and CEO of Kasenna, a vendor of video content management equipment that  is providing servers to the largest triple play operator in the U.S. (SureWest) and Europe (Italy’s FastWeb). Telcos also can offer highly focused advertising that could allow advertisers a level of granularity cable and satellite operators can only dream about.

That’s all contingent on solving the challenges of in-home wiring and installation, of course. “There’s all kinds of inside wiring issues that you really need to think about before you go to market,” said Doug Eidahl, CEO of James Valley Telecom, a 4000-access line co-op in northeast South Dakota. Case in point: after installing video services in a customer’s home, James Valley was deluged by calls about poor reception.

After some investigation, the culprit turned out to be the blower motor on a new air conditioner.