The big shift

For years, the dream of the full service network has been the mirage shimmering before the telecommunications industry's eyes: a dizzying array of interactive services that will allow the average consumer to never leave home and pour a steady stream of revenues into the carriers' pockets.

Ironically, freed at last from onerous Modified Final Judgment rules that have prevented them from realizing that dream, telephone companies have been stepping back from their pie-in-the-sky interactive video plans, replacing them with networks and service packages that look remarkably like what their cable TV competitors are offering.

"It's been a 180-degree change from what the telcos proposed just a few years ago, when they were talking about their full service networks," says John Aronsohn, senior analyst at The Yankee Group. "They're realizing that if they want to compete aggressively with cable TV companies, they need to get in the market now-and they don't necessarily need all of those sophisticated services or those advanced networks."

One of the biggest changes has been in which architectures telcos would use to fulfill their video plans. The prevailing assumption has long been that one architecture would win out in the long run. That assumption, however, has been severely shaken in recent months, with telcos indicating that they would likely use several different architectures.

"There are advantages and disadvantages to a number of technologies," says Dick Bergen, director of consumer multimedia at BellSouth. "That's one of the reasons we haven't settled on one technology. We'll likely find that some technologies are better than others in different areas, and we may even use more than one within a given market."

For BellSouth, as for other telcos, at least one of those technologies is likely to be a wireless architecture. As the cost and time required to build their wireline systems add up, and as their cable TV competitors continue with their current trend of mergers and buyouts to create a larger regional presence, telcos are finding that if they want to get into the video market, they need to do it soon.

As a result, Pacific Telesis, Bell Atlantic and Nynex all plan to roll out multichannel multipoint distribution service (MMDS) systems as early as the end of 1996-and BellSouth recently announced that it has bid on a wireless cable system in New Orleans.

"We believe that putting out an MMDS system will give Bell Atlantic Video Systems the ability to gain a certain amount of market share," says Mark Weigleitner, vice president of multimedia network implementation at Bell Atlantic. "The idea is to get a network out there."

But while Bell Atlantic regards MMDS only as an entry vehicle while it builds out its wireline network, both Pacific Telesis and BellSouth are committed to using MMDS in conjunction with their wireline systems. "We see MMDS as something that will continue, even as we begin turning on our wireline network," says Steve Harris, vice president of external affairs in broadband for Pacific Bell.

Customers are interested in services, not technologies, Harris says, pointing out that while MMDS may continue to be an appropriate video delivery technology for some customers' needs, others may want the interactive services that the telco will eventually provide over its wired network. Staying the Wireline Course

However, while every telco says the potential for the rollout of wireless video services-whether MMDS, direct broadcast satellite or local multipoint distribution service systems-still remains open, all seem committed to a single broadband wireline architecture. The exception is SBC, which owns hybrid fiber/coax (HFC) systems in the Washington, D.C., region but is testing switched digital video (SDV) in Texas.

For every telco but Bell Atlantic, that loyalty is to HFC. "The fiber-based platform we're putting in makes sense both in the short term and the long term because it allows us to deliver a competitive, robust enhanced cable TV package today and allows for enhanced services over time," says Greg Brown, president of Ameritech's New Media Enterprises Group.

Pacific Bell's Harris and BellSouth's Bergen agree that HFC provides the most scalability, allowing a carrier to begin offering analog broadcast services and eventually migrate to digital interactive services.

"The cost of putting in SDV only makes sense if you believe you're going to reap considerable revenue from interactive video services," Harris says.

"Bell Atlantic's projections for interactive service penetration have always been more robust than ours. We believe that video revenues will be a nice addition, but we're concerned about how long it will take these services to come to market, and until then, we need to recoup our investment with telephony revenues," he says.

The Big Freeze While Bell Atlantic recently touted higher-than-expected take rates for its Stargazer video-on-demand (VOD) trial in Virginia, most of the other telcos are admitting that current demand for interactive video services is still a big unknown.

"What telcos have learned in their trials is that it's tough to make a lot of money on interactive video. The question is how much marginal revenue it would take to make up for the cost to get the service into the home, and whether they could make that sort of revenue," says Bill Gaik, national practice director for telecommunications and electronic services at Deloitte & Touche Consulting Group in Atlanta.

As a result, most telcos are scaling back their grand VOD plans, opting instead to start with broadcast cable services and migrate to two-way interactive if and when they can demonstrate a market for it. BellSouth, for example, is building a one-way HFC network in Daniel Island, S.C., and will upgrade to two-way when it decides the time is right, Bergen says.

Another option that some telcos are exploring is limited interactivity, according to Aronsohn, including services such as interactive program guides that are delivered either over a channel or over the vertical blanking interval.

"We're going to start seeing a lot of simplistic interactive services that do a lot of very useful things," Aronsohn says. "They may not be as robust as the kinds of interactive applications people were talking about two or three years ago, but this is stuff that can create new revenue with a low investment."

On-line Rush But for the most part, the big rush over the last year-by both telcos and cable TV operators-has been toward Internet access, a move driven by unexpected consumer demand for the Internet and on-line services. "Interactive video-on-demand services are almost completely being replaced by on-line services," Aronsohn says. "The Web is where interactivity is right now."

Cable TV companies are jumping on the Internet bandwagon in full force, taking advantage of their bandwidth-rich systems to offer high-speed access to the Internet via cable modems. But for telcos saddled with narrowband copper networks, taking advantage of the Internet frenzy is far more difficult.

"Cable TV operators already have that broadband line into the home, while the phone companies may have to put in a different conduit to do it," Deloitte & Touche's Gaik says.

Pacific Bell, Ameritech and BellSouth are all evaluating cable modems for use with their HFC systems, and both SBC and Bell Atlantic are exploring ways to offer high-speed Internet access over their SDV networks. But the systems represent only a small percentage of potential customers, leading some telcos to take a second look at asymmetrical digital subscriber line (ADSL) technology.

"The telcos have looked at ADSL on and off since its inception," says Beth Gage, broadband consultant at TeleChoice, Verona, N.J. "Then they decided that ADSL didn't have enough bandwidth, so they went with hybrid fiber/coax, fiber-to-the-home and fiber-to-the-curb options, until reality shook them and they realized how much cost was involved."

As a result, Gage says, telcos have been re-evaluating ADSL since 1995, as evidenced by ongoing trials by GTE, U S West and Bell Atlantic for both data and video services. Gage predicts that there will be even more announced later this year.

"We believe that ADSL is absolutely a solid competitor to the cable modem," says Joe Glinn, director of internetworking design for U S West's !nterprise division. "In fact, with ADSL, we can guarantee a better quality of service to the consumer, since packets aren't flowing past those of other people who might be sharing a bus, as is the case with cable modems."

In addition, unlike ISDN, ADSL has high enough bandwidth to support both data and interactive video, providing telcos with a migration path between Internet services and interactive video services. Bell Atlantic's Weigleitner, for example, says that while switched broadband capabilities remain the company's ultimate goal, it is finding that ADSL may well prove to be a viable offering for both data and video, at least in the short term.

"For the next 12 to 18 months, I expect telcos to begin coming up the learning curve with ADSL and deploying it for high-speed data applications," Gage says. "That should give them a good baseline of experience for when and if they get to the point of offering video-on-demand applications." And ADSL could provide telcos with the trump card they need to compete effectively with the packages of services being assembled by their cable TV competitors, Aronsohn says.

"Consumers don't care about technology, but they do care about the packaging of services," he says. "By offering high-speed data service via ADSL, telcos can make sure they're not going to lose customers by not providing every possible service."