Middleware Muddle

The number of companies adopting the label of IPTV middleware provider has grown significantly over the past year alone. Whereas the market was supporting 12 vendors last October, now there are more than 20 fighting for space. The ambiguity of the term “middleware” and the different tiers of service providers have left the industry wide open for intense competition. To keep up in this already overcrowded market, analysts and service providers agree that middleware vendors have to focus on three key areas — scalability, reliability and innovation — to determine if they will thrive or be pushed aside.

As recently as a year and a half ago, large IPTV providers, including Telefonica SA and PCCW of Hong Kong, were focused on developing end-to-end solutions and producing their middleware offerings in-house. Now the spotlight has shifted to third-party vendors that are working to make solutions that are both portable and user-friendly. As a result, many vendors that used to call themselves set-top box providers or providers of the user interface are donning the middleware label to better align themselves with this key item in the IPTV market.

“[Competition] is intense and getting even more intense,” said Vince Vittore, senior analyst for Yankee Group. “Middleware is a pretty vague term and can mean a lot of different things to a lot of different providers. So the fact is, if you have potentially 20 different companies claiming they are middleware providers, it just means there is that much more competition out there for everyone involved in the market.”

The middleware industry has taken on many forms since the introduction of the technology in the mid-1980s. In the pre-Microsoft, pre-integration years, the first round of providers from Telus to Verizon to small telcos had a lot of problems with systems integration, said Danny Briere, CEO of TeleChoice. When Microsoft entered the game in 2003 boasting a one-stop, clean solution, larger service providers migrated away from the smaller providers and into Microsoft's open arms.

“IPTV has been a massive area of promise, but Microsoft has screwed up that promise by going and locking in a lot of customers that otherwise would have gone to a lot of these start-ups,” Briere said.

While round one went to Microsoft, it's an entirely different playing field now, Briere said. A lot of companies were disappointed when AT&T's U-verse, powered by Microsoft's middleware solution, was not deployed at promised speeds last year. The companies were promising to launch their IPTV service in 15 markets by the end of 2006, but they fell short with only 11 total markets. The service now reaches 100,000 customers, double the number of subscribers from June, but many are still skeptical.

“Microsoft is going at a certain pace and the market is going at another pace, and there is question as to whether or not that is aligned,” Briere said. “I think there is a third wave here, where people are doing the next round of decision-making, and in that round you are seeing Verizon go its own way. You see [AT&T] emboldening Homezone. You've seen other players like Alcatel resuscitating their own internal middleware effort to come up with an alternative to the Microsoft deal they've got, and you've seen the little guys fighting over who is really available to be the remaining partners.”

But Microsoft is not going anywhere, said Joe Seidel, director of global partner ecosystems for Microsoft TV. “I don't think any of the competition holds a candle to us, and I think that is proven,” Seidel said. “We've now signed 19 of the world's largest Tier 1 telcos. … I think that speaks for itself about what our platform is compared to everyone else because there are choices out there. They just didn't do what [operators] wanted them to do.”

In light of Microsoft and other incumbents' relationships with Tier 1 providers, many middleware vendors are happy focusing on the remaining Tier 2 and Tier 3 carriers. Companies such as Nokia Siemens Networks, aided by its acquisition of Myrio in 2005, have a sweet spot for the lower-tier markets. Ron Freeman, head of IPTV and emerging markets for Nokia Siemens Networks, said that with the Tier 1 market locked up by AT&T, Qwest and Verizon, Nokia is uniquely positioned to help keep the lower-tier markets competitive.

“What that really leaves is a very strong Tier 2, Tier 3 and Tier 4 market where we have representation all over the country with our solution,” Freeman said. “The competitive nature of what these Tier 2s, 3s and 4s are facing makes it absolutely mandatory for them to have to do something in the video space.”

Consolidating with a larger, incumbent company to go after the Tier 1 providers is another important trend, Briere said. With the prevalence of mergers, acquisitions and partnerships, smaller companies are left with the option to compete in the Tier 2 and 3 markets or to form strategic partnerships with incumbent telecom vendors in Tier 1 accounts.

“I think we are definitely seeing, over the past several years, a consolidation trend where a lot of middleware companies are being bought up or partnering up with other firms,” Briere said. “And a lot of others that didn't partner sort of struggle.”

Orca was one such company that felt the effects of the consolidation trend. In 2006, just months after entering into a partnership with Lucent, the company announced it was merging with Alcatel, leaving Orca out in the cold. Orca is still recovering and currently looking to the U.S. to expand its customer base. Despite the past rejection, Haggai Barel, CEO of Orca, said consolidation is a positive force for the middleware industry as it brings maturity and stability.

“In this ocean of IPTV in the next few years, it definitely makes sense to Orca to be part of a bigger offering,” Barel said. “We just have to make sense of what the best offering would be. Being part of a huge company is one thing, but being actually merged with another flexible, dynamic company like ourselves and being able to offer a bigger solution but not losing the independence is another option.”

Barel also agreed the market in general would not be large enough to support all current vendors. For that reason, Orca is looking toward the Independent operating carrier (IOC) division — a field he said is small, but not overcrowded.

“I think the IOCs don't have a lot of choice,” Barel said. “What we heard is that they are not that happy with the existing solutions. They feel they are not getting the right response. They are open to hear about fresh blood in the U.S. We are also trying to give a refreshing new attitude to in terms of what is important.”

While a fresh attitude and open interface are certainly important factors for a service provider, perhaps more important is the ability to take an offering to the next level. Whether a company is a global provider like Orca or a rural telco serving the Independent market, scalability will be a key differentiator and determinant of a company's success.

“The key factor for all of them is scalability: Can you scale up to millions of users?” Yankee Group's Vittore said. “If you can get 10,000 users and function correctly, that is fine for the rural players. But if you are really going to compete with the large Tier 1 global providers, you have to prove you can scale to millions of users in an economic way.”

Nokia Siemens' Freeman cited BelgaCom of Belgium as an example of a large customer that was able to scale quickly using Nokia's middleware offerings. “It was our largest deployment, and our solution allowed this customer to scale very quickly to over 150,000 IPTV subscribers using the least amount of back-end server architecture,” he said, adding that those companies that can scale quickly with reliability will be the unmatched winners in the middleware space.

In the spirit of scalability, Mark Marinkovich, director of IPTV and mobile TV marketing development for Grass Valley in North America, said that the company is going after several large accounts. Although it has yet to secure any large Tier 1 or Tier 2 accounts, it is in discussions with several.

“People obviously want choice, and they want stability,” Marinkovich said. “That is one of the greatest things we keep hearing. They want it to work. They don't want to be a test case any longer. That is a big advantage that we bring, because this has been soundly proven in a field deployed with many hundreds of thousands of users.”

Marinkovich said that Grass Valley's back office is another distinguishing factor of the company. “There was a lot of effort that went on in terms of creating different types of packages, allowing subscribers to self-provision services creating bundles,” he said. “Through a lot of the work we've had to do with our current customers, it's really hardened and expanded the capabilities of the back office solution tremendously.”

All things considered, analysts, vendors and customers alike will reach the conclusion that the middleware market will naturally winnow to only a few competitors. The large incumbent carriers will continue dominating the Tier 1 markets, while other smaller middleware providers will have to find their niche market, merge with incumbent companies or move out of the middleware space entirely.

“Microsoft is still in position,” Vittore said. “I know that there is a lot of hatred out there for Microsoft, in part because they are Microsoft, … but I think long-term there is no question Microsoft will be a big player in this market. I also don't think there is any question that Myrio will survive well here, given that they are part of Siemens.”

Middleware pioneer Minerva Networks is another large incumbent slated to continue its reign among the second to fourth tier of service providers. They currently have more than 100 broadband network operators worldwide using their products and services. Matt Cuson, vice president of marketing for Minerva, said that the key to the company's success is three-fold: a proven product, a scalable platform and open application program interfaces that allow an operator to pick a best-in-class solution.

“For us, the way we're staying ahead is making sure we deliver to our customers, the operators, what they need to compete in their market,” Cuson said. “We have a product that scales very well. It is easy to operate, and there is a series of [application programming interfaces] that allow the operator to integrate with their [operations support/business support] system.”

There also have been year-old rumors of Cisco Systems developing a middleware solution — what many call the missing piece in their end-to-end offerings — but thus far nothing has been confirmed. A spokesperson for Cisco declined to comment on the speculation.

IPTV is expected to reach 66 million subscribers, totaling more than $20 billion in revenues, by 2011, according to Len Feldman, director of IPTV analysis for MRG. Growing ecosystems of several companies making up an end-to-end solution, simple user interfaces and an increased demand for entertainment offerings will mark the next generation of middleware differentiation.

“I think in this next phase, what you are seeing is people challenging the traditional definitions of IPTV with a lot of other things like gaming and six-access controllers and e-commerce on the TV set,” TeleChoice's Briere said. “It is not just about buying videos on demand and watching TV. It is more about the whole entertainment experience.”

As is true with each phase of competitive middleware offerings, the question is not if vendors will develop these abilities, it is when. “All it is going to take is for one player to come out with this stuff, and it blows it right open,” Briere said. “Once the rules change, everyone will have to keep up.”