SBC, Comcast enliven convergence

The flag has finally dropped on the long-anticipated race between the cable TV and telephone industries to deliver a package of voice, data and video entertainment services into U.S. homes.

With major announcements this month, the country's largest telephone company, SBC Communications, and its largest cable provider, Comcast, each took a giant step onto the other's turf. And while it appears that the cable TV industry has a decided infrastructure advantage over incumbent telcos, each new technological innovation promises to reshape the competitive landscape.

Almost overlooked in the hoopla of the major players' activity was the announcement by a newcomer, Qbit, of a new compression technology that could allow the telcos to deliver high-definition TV over their existing copper phone lines (see story on page 20).

“You don't normally think of the telcos as being at the forefront of innovation, but they are taking considerably more risks,” said Ted Schadler, vice president of Forrester Research and the author of a new report, “The Battle for the Digital Home,” which assesses winners and losers among the nine different industry segments engaged in using digital technology to transform the home. “The cable industry is in a leadership position now because they have the large installed base, they have the infrastructure — the last mile is wired. They have the ability to innovate; they just haven't done it.”

Earlier this month at the International Consumer Electronics Show in Las Vegas, SBC announced an offering blending its partnership with EchoStar's DirecTV satellite video with a 2Wire MediaPortal to create a whole-home entertainment network. This announcement signaled the company's intention to move more quickly in courting customers with a service bundle that features more than integrated billing and discounts. Rather than wait for its Project Lightspeed fiber plan, SBC has created an integrated service that will be available this year.

SBC Chairman and CEO Ed Whitacre said at CES that the packages are more than just me-too cable TV services.

“We're talking about a digital lifestyle,” he said. “It's going to change the way people watch and listen to entertainment.”

Comcast's long-awaited entry last week into voice over IP (VoIP), meanwhile, bore all the marks of an established telco.

Rather than leap into VoIP as it was first taking off, Comcast has taken a measured approach, due in part to hard lessons learned from taking over AT&T's circuit-switched voice business as part of its AT&T Broadband deal in 2002, Comcast CEO Brian Roberts told the 15th Annual Smith Barney Citigroup Entertainment, Media and Telecommunications Conference.

“We have 1000 employees working in voice, we have E911, operator services, billing systems, customer care,” he said. “Our model is a private [IP] network. The call never touches the Internet. We also have battery backup to the modem, so you have the same reliability and quality of any Ma Bell services, even if power goes out. We intend to market this service to 15 million homes. We did not want to just show up and run big ads and get swamped by phone calls and not be able to handle it.”

Comcast's unlimited VoIP for local and long-distance will cost $39.95, roughly twice that of VoIP pioneer Vonage, which features 911 and other basic services but uses best-effort Internet technology and doesn't offer battery backup service.

Comcast “is clearly aiming for the higher-end subscriber households,” said Michael Paxton, analyst with In-Stat/MDR, which is projecting a steady rise in cable VoIP subscribership over the next two years. “That's who Comcast wants for its triple-play service.”

And the company isn't stopping at plain voice, Roberts emphasized. Comcast has a menu of advanced features, including unified messaging, call management, anywhere account access, customized ring tones, caller ID on TV, PC softphone and videophones, that it will be rolling out.

“Customers want to be able to program a DVR from TV or a PC or a wireless Palm Pilot,” he said. “We will give them that.”

The two industry giants are also competing to capture the fancy of videophiles with a host of new entertainment options.

Much of SBC's initial push will be through the EchoStar's Dish Network service and 2Wire's MediaPortal, which acts as a multi-TV set-top box, personal video recorder, audio compiler, e-mail device, Internet access gateway and router. Like other set-tops, MediaPortal can translate and display multi-modal information using the existing coax connection. However, the device also can display two separate high-definition streams as well as multiple standard definition channels. Additionally, playing off an alliance SBC struck for its broadband data customers, the MediaPortal can be used to download pay-per-view movies from the MovieLink library.

“This is a convergence that all of us have talked about for so many years. But it's here,” Whitacre said.

The less developed portion of the service — the U-verse branded service — will come as Project Lightspeed is rolled out. Under that architecture, Microsoft will be providing middleware and some still unspecified other network elements. At CES, the companies were demonstrating an early version of the service with set-top boxes from Thomson.

Conspicuously absent was the idea of à la carte channels, which SBC executives had been championing in their initial presentations of IP-based video. Traditionally, programmers have resisted the idea of allowing users to pick and choose channels outside of set packages. However, according to Dan York, who was recently brought on to head SBC's content strategy and forge relationships with Hollywood studios, the carrier will be able to do more with packaging content than cable operators because of the IP technology base.

“This platform allows us to do more content in a richer way,” he said. “The programming companies have been incredibly receptive.”

Comcast has already rolled out an extensive video-on-demand (VOD) library, Roberts said, and considers that service “a major differentiator” over one-way satellite video. Comcast now has a library of 3000 programs, including movies, sports and TV shows, and will expand that to 6000 shortly, possibly hitting 10,000 programs by year's end.

“We had 62 million VOD orders in November,” he said. “In Philly [where the service has been available longest], 80% of our customers have accessed the service within the last 60 days, with 23 orders per month per average household,” he said. “We are changing television, and it has cost us virtually nothing to do. What you get for the $39 billion investment, is that churn is reduced by 20% to 30%.”

Churn reduction is the primary benefit of VOD, says analyst Paxton, because Comcast makes very little money on the service itself.

“The revenue is not significant,” he said. More than half of VOD programming is free.

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