A 2003 telco video progress report

Why is it that “telco video” remains a phenomenon of small independent telephone companies in 2003? Many analysts, including myself, had thought that 2002 would be the breakthrough year--the year that it would “cross the chasm,” “climb the hockey stick” or, in plain English, take off. The big U.S. carriers seem to have so many reasons not to introduce TV services to their subscribers. “There are so many uncertainties in the U.S. economy.” “It’s too expensive.” “It’s difficult.” “It’s not our core business; let’s stick to our knitting” (meaning “let’s stick with voice and data”). And the best one I’ve heard lately: “Our (expensive) consultants tell us that we’ll do great by offering bundles of our existing phone, wireless and broadband Internet access.”

Ok, fine. But meanwhile, a “subculture” of dedicated independent telephone companies (IOCs) has continued to build upon its video experiences and press ahead. As I have become acquainted with quite a few of them at this point, I thought readers would find it interesting to hear about their experiences, their problems and their successes. Once I began this column, it became clear that there is a great deal to talk about, and that it would take a couple of installments to accomplish the task. So this month, we’ll look at the current state of the union, with some macro-level observations. Next time, I’ll share some insights that I have gained from some of the actual service providers that have offered TV-based services for at least a year. Doing this also provides a context in which to describe what is happening in the “telco video” world as a whole, not just in the IOC space.

First, let’s look at the big picture: Have telcos been able to offer TV to subscribers, and make money at it? The answer is a resounding “Yes!” What’s more, there are multiple ways to skin the cat, all field-proven. One major accomplishment has been that TV can in fact be served reliably and consistently over ADSL, regardless of the nay-saying by vendors of analog and higher-speed digital infrastructure products. Multiple access network suppliers offer solutions that allow telcos to provision ADSL with at least 8 Mb/s bandwidth to at least 10,000 feet in most instances; plenty adequate for two TVs and lots of overhead for other services, over a single line. This is a big accomplishment, especially when considering that some suppliers could barely grasp what the telco wanted to do at the outset. And the other viable alternatives include VDSL, ATM optical networks, IP/Ethernet optical networks, and even the ability to retrofit digital technology onto existing analog cable. All of it is real, all of it works.

Another success by most telco video service providers has been in the bundling of services. Most of the service providers I have spoken with recently have succeeded in offering tiered TV services; the equivalent of “basic cable,” and various combinations of premium services--and in turn, bundle them with phone and broadband Internet service; the fabled “triple play.”

A third major accomplishment has been the testing and integration of so many disparate components from different suppliers, into end-to-end systems that work. Suppliers have worked very hard with their telco customers to work out the kinks. Knowing that they would be called upon to do it again for others, they have written implementation processes, testing procedures, and other documentation that never existed before, in many cases for systems that were never designed for the task. Most of the suppliers did this despite the small nature of their initial customers, as an investment in the future potential of the telco video market. But the work is far from done, and carriers can still expect unanticipated problems that will impose significant delays.

Therefore, systems integration--something that, just a moment ago, I stated to be a major accomplishment--remains as one of telco video’s biggest challenges. All the service providers I have recently spoken with insist that systems integration is the toughest nut to crack. A major reason for this is that there is no single point of responsibility, other than the service provider itself.

This is a deep issue. Someone must shoulder the burden to be the technical and integration lead, and must coordinate integration and testing efforts across network platforms, routers, middleware, set-top boxes, the head-end, video servers and so on. And it must by done while using three or four separate management platforms, because no single element management system for the end-to-end video solution exists today (though the middleware suppliers are in the best position to do this, and are making progress).

In the worst cases, fingers are still pointed and time is still wasted. Accordingly, fault isolation is very hard. What’s more, many problems are not what they might seem to be. One case in point is that problems that at first seem to be hardware-related, such as dropped channels, poor transmission and video macro-blocking, turn out to be software-related.

The self-serving efforts of some individual suppliers pose additional challenges. One major equipment supplier has been presenting several roadmap options to its installed-base customers, in hopes that it can migrate the customers away from products that it acquired through mergers. Despite their successes with the acquired products, customers have been urged to undertake a “systemwide upgrade” by the supplier. Taking it a step further, a major caveat for suppliers would be to make sure that they don’t become complacent about their customers; a majority of the telcos that I interviewed this month expressed the need for continued executive and working-level contact.

Content acquisition, and its effect on pricing, continues to be a significant challenge. One of the service providers I interviewed recently has been unable to break its TV service package down into a tiered offering whose smallest package is small enough to compete on price. Its basic service is a package consisting of more than ninety channels at about $40. Why? Because its supplier contracts obligate it to offer the programming as a package.

A number of service providers have built their business cases upon the easy availability of movies for video-on-demand. Although some technology suppliers have facilitated this content acquisition process for some time, the reality is that until recently only a small number of movies have been available for VOD at any given time. Now that an increasing variety of movies and programming are becoming available for VOD, and the number of VOD suppliers is growing, the initial vision can finally be realized.

Every single one of the service providers I have contacted in recent months has said that, if they were to do this over again, they would do it again almost exactly the same as they had done it. With minor changes, to be sure. But none of them said that they would not have done it, if they knew then what they know now. Almost every one of the service providers has achieved its objectives, or is relatively on-track toward achieving them--some with minor delays, but none catastrophic.

Unfortunately, despite the successes and challenges in the U.S. IOC segment, the overall U.S. telco video world is one of cautious optimism, rather than being one of full-bore deployment. It seems a little strange that the U.S. is emerging as the laggard market for telco-based video services. After all, we put people on the moon. But perhaps emblematic of the times we live in, major American carriers continue to be risk-averse and unwilling to take the step that their Asian and European counterparts have aggressively pursued with vigor. In fact, the largest and fastest-growing part of the world with respect to telco-based TV services is Eastern Asia. Service providers in Korea, Japan and China plan to serve millions in the near term, and tens of millions soon afterward. Not to mention the announced (and unannounced) intentions of most of the European and Canadian carriers.

Contrast this with the U.S., where the largest TV deployment over DSL remains the Qwest installation in Phoenix, still at about 50,000 subscribers, as it has been for several years. Yes, there’s a lot of buzz with respect to the larger U.S. carriers, and perhaps this year will yield some big announcements from the RBOCs and major independents. But as I’ve said on many other occasions, if they continue to kick the tires, rather than committing to the video business, the cable companies will continue to nibble away at their share of the market until it is too late for them to recover.

Hopefully, the major carriers will see, from the experiences of the IOCs that I discuss in this month’s installment and next, that the stars are not just in alignment--the whole shebang is nearly mature enough for mass deployment.

Steve Hawley is principal consulting analyst of Advanced Media Strategies. He may be reached via his Web site, www.tvstrategies.com.