Applying providence to the province of Saskatchewan

There is more to independence than the designation as an independent. Independence comes with knowledge, and true independence comes from the courage to act on it. Canada's SaskTel, which serves Saskatchewan, the province that proudly bills itself as the largest Uranium supplier to the Western Hemisphere, used those qualities to strike preemptively against the threat of cable competition from Shaw Communications with one of North America's earliest and largest deployments of video over DSL using IP. The question is: Did they hit their mark?

The engineering group at SaskTel consists of what Lucent Technology's Deke Crowe, director of product management for access networks, calls engineers' engineers — people who can speak at both the network level and the chipset level. “A very, very sharp group,” he said.

SaskTel also has a couple of assets most other telcos don't — experience building a cable TV network and Bob Turner, who while working with SaskTel's international business in the early 1990s was involved in building the telecom and cable networks of Saturn Communications in New Zealand and Leicester Communications Ltd. (LCL) in the U.K. SaskTel also built Saskatchewan's cable network back in the 1970s, then later sold it.

So when the time came for strategic planning in early 1999, SaskTel considered two issues: looming competition from cable providers and technology choices.

“We knew cable companies were coming, and we felt that from a defensive measure, we needed to harden our market to compete against the so-called triple play or holy trinity or whatever you want to call it,” said Mike Anderson, vice president of marketing for SaskTel.

They considered building an RF cable network, which they had done before, but soon realized it was cost prohibitive. Turner said that although it was the early days of DSL, he knew SaskTel could get at least 8 Mb/s through its ADSL network, or enough to run video. He also knew there was a technology shift on the way.

“We had a very good copper plant out there that we needed to get the most value out of for the company,” Turner said. “And it looked like IP would be the transport of the future.”

So 93 years after SaskTel built its first telephone exchanges in the towns of Hanley and Melville — bookends to the provincial capital of Regina (known best to some Americans as a stopover on their way to a ski week in Banff) — SaskTel rolled out its Max IPTV service in Regina in September of 2002.

But not without some help. Vendors such as Alcatel, Cisco Systems, Harmonic, Lucent, Pace Micro Technology and Westell got involved — some more than others.

For Lucent, the project provided an opportunity to advance the development of high-speed interfaces for its Stinger remote DSLAM, and as Crowe put it, “to take a nice shot across the bow [of our competitors.]

“We needed to make a splash, and we needed to do it with someone going down the video path explicitly,” Crowe said.

That impact came in the form of a first-to-market gigabit Ethernet interface card, which was partly responsible for SaskTel being able to deliver the necessary bandwidth for video to their MAX subscribers.

“We brought in our developers, guys working on their Ph.D.s and all very sharp, and we were in the meeting five minutes talking about chipsets and algorithms when very quickly our developers found kindred spirits inside SaskTel who understood what we were trying to do and where we were going,” Crowe said.

When SaskTel approached Lucent, the equipment-maker was offering an OC-3 interface to its IP2000 module for the Stinger. (The IP2000 is a 4 Gb/s controller that integrates IP and ATM processing engines within Stinger). SaskTel was asking for a multiple OC-3. Shortly thereafter, they were asking about an OC-12 card.

Lucent had a gig-E card on its road map, but it was about 18 months from production. It usually takes an RBOC-sized customer to get a typical vendor of Lucent's bulk to move off its mark in bringing solutions to market quicker, but not in this case.

“On the surface, SaskTel was a small customer, but they were the first ones to step up,” said Wes Henderson, director of sales and new business development in Lucent's Western Canada customer team. “It's not unusual for a small player to be a pioneer. And the thinking was that the [U.S.] ILECs would fall in behind them once the business case was proved out.”

That, Henderson said, has been the problem all along with video over DSL: making it a viable commodity.

Two year later, the business case is beginning to prove out for Lucent, SaskTel and other vendors that used this project to bring their products along.

“Video makes sense on its own just from the perspective of protecting our customer base, but there is not a bad case for generating incremental revenue either,” SaskTel's Anderson said.

For SaskTel, it's turning into a little of both. Assuming growth continues as it has since its launch, SaskTel anticipates its MAX video service to turn cash-flow positive in early 2006.

In March last year, SaskTel's penetration rate for video was about 7%. Today it is averaging 12% across its deployed market and up to 14% in some areas. That equates to a market share for video of approximately 15%.

Helping the business case along is the bundle factor. MAX video is not a stand-alone service. Customers must subscribe to broadband Internet service as well. And among those broadband users, 28% to 30% bundle long-distance and 10% to 15% bundle cellular. Overall, 60% to 70% of SaskTel's customers are on one form of bundle or another.

“We are quite happy where we're at in terms of customer numbers and revenue,” Anderson said. “We think we did the right thing launching the service when we did, even though we were probably out on the bleeding edge from a technology perspective.”

Being out on the bleeding edge is not as lonely as it sounds, though. In addition to bringing in vendors that typically jump at the chance to be part of a new technology deployment, being on the edge, like being out on a ledge, draws crowds.

The eyes of the world were on SaskTel and its vendors. But unlike the gawkers who secretly hope to see a jumper jump, no one was rooting for SaskTel to fail.

“Telcos around the world have been watching, and I'm sure a lot of people are interested in what they did,” said Michelle Abraham, senior analyst with InStat.

Turner said they have had a great deal of interest from telcos, including the RBOCs, with which they have engaged in discussions about the project.

“Bell Canada and Telus were peeking over our shoulders the whole time,” Henderson said. “Now it's a nice story to tell.”

It's also a nice feather in SaskTel's vendors' caps. First-to-market bragging rights for providers often extend to their first-to-market vendors.

Except for some work with another early adopter, Kingston Telecom in the U.K., digital set-top box provider Pace Micro Technology had been focused on the cable space before it got involved with SaskTel. It is now on its third generation of set-tops at SaskTel and recently introduced the DB220.

“We have basically customized a lot of our platform code for their application,” said Bruce Gureck, vice president of product development at Pace. “Today it is our largest customer for IP, and I would argue they're the largest in the world, IP deployment-wise. The IP market is pretty small right now.”

That's all about to change, of course. As Gureck said, “2005 is the year for the big guys.”

ABI Research analyst Michael Arden agrees. He said in a recent report that the sector is about to gain momentum and stimulate new business for vendors.

“All eyes are now on early market movers and the imminent entry of incumbent telcos as video service providers will trigger a ‘ramp-up’ in the equipment market,” Arden said in the report.

InStat's Abraham said that new compression techniques, such as MPEG-4, could be important to that growth by allowing carriers to carry more data in the same bandwidth.

“Equipment should be available in 2005, readily available compression equipment on the headend and readily available set-top boxes able to decompress it on the other end,” she said.

SaskTel, which uses the same MPEG-2 standard as the cable industry for compression, is not in a hurry to move to MPEG-4, but is considering it.

“We are staying with MPEG-2 for the short term,” Turner said. “Yes, we will have to build more bandwidth into the network, but we always have to look for more efficient ways of providing what we are providing today.”

However, the future could be here as soon as early 2006. “By then we believe we will be in a position where we have to carry HDTV and support multiple set-top boxes,” Turner said. “We're starting to work on a network upgrade that will get significantly more bandwidth to customers.”

In the meantime, SaskTel is still working on making its business case stronger by adding more services. The company will launch Calling Name and Number on the TV this quarter. Trials for these services have already been conducted, and Anderson said the service has gone over big with participants.

Anderson also said that SaskTel is close to working out a deal with a content provider that will provide access to fully interactive parlor games. SaskTel already introduced video-on-demand in September 2004, which includes full VCR functionality — although securing content remains an issue the company is still trying to solve.

Home networking also will be a big part of SaskTel's future, Turner said. SaskTel is currently evaluating providers of home gateways. The company already has a security monitoring business that it plans to move onto its IP network and will use the new gateway to bundle home security, high-speed Internet, voice service and MAX video service.

Other services on the horizon include content filtering, parental controls and antivirus software and firewall services.

Beyond numbers and services, SaskTel can argue that its preemptive strike against Shaw Communications has worked so far. The Canadian cable giant has announced that it will offer voice-over-cable modem service early this year, though it has only filed for CLEC status in the provinces of Alberta and Manitoba.

“We would like to think we hardened the market here so well that they focused in other areas where the telco incumbent has not launched their video service yet,” Anderson said.

And so we'll give them that. Who's to say otherwise?

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