Telco video: Is the third time charmed?
At the 1988 Democratic National Convention in Atlanta, a relative newcomer to the political scene made his debut on network television — and in a BellSouth HDTV broadcast to the World Congress Center down the street where a number of dignitaries and journalists were gathered. John Kennedy Jr.'s handsome face was probably more visible to the latter group via the remarkable new technology known as fiber optics than to the hoards gathered in the actual convention site or to the millions watching at home.
What makes that event notable today is that it took place at a time when telephone companies — led by BellSouth and GTE with its Cerritos, Calif., interactive video network — were aggressively testing the technology and political waters to try to break into the video market.
If that was the first chapter in the telco video story, the second would be noted when a group of Bell company executives celebrated Halloween of 1994 by gathering in Hollywood to announce a new partnership between Ameritech, Bell Atlantic, BellSouth and GTE — as would-be video service providers — and a handful of entertainment moguls.
That relegates the current telco video service launches — scheduled for later this year by Verizon and in 2006 by SBC Communications and possibly BellSouth — to Chapter 3, perhaps the moment in this saga where telco video gets real. Given the previous starts and stops, however, it's probably understandable that bold predictions are fewer and farther between than in 1988 or 1994.
“Who knows for sure how things are going to turn out five years from now?” asked Clif Holiday of B&C Consulting, who just wrote a major report, “IPTV — The Telcos' New Light Sword,” for IGI Consulting, and was working at GTE when it launched the Cerritos project. “We have all been down this path before. There are many different things that could happen.”
But Holiday and most other industry analysts recognize that the Bell companies will launch video services and begin acquiring customers within the next year, if for no other reason than they don't have much choice if they plan to compete with cable on its bundled services offering that includes voice.
“This isn't a matter of building a business case in order to decide whether to launch a service,” said Patrick Hurley, broadband analyst with TeleChoice. “They know they have to provide this service to compete, so it's more a matter of making the best possible business case.”
Independent telcos have already gone down this path, and their experience does offer some guidance in setting realistic expectations for the Bell companies.
Geoff Burke, video solutions marketing director for Calix, came to the broadband loop carrier company from Next Level Communications, which provided local loop gear to Qwest Communications in its VDSL-based video deployments in Phoenix and Colorado, and he has been an observer of the telco video scene for some time.
Calix currently has about 30 video deployments with mostly independent telco customers, he said, and more than two-thirds of those are in commercial operation, meaning they have customers paying to receive video signals.
“The core strategic question is how do you establish and maintain profitable and high-margin customer relationships and revenue streams going forward,” he said. “I believe video is a big part of that because if you look at the broad set of typical consumers, about 30% are willing to commit to a high-speed data relationship with a provider. From the telco's perspective, it is much more digestible for someone to say, ‘I understand what a pay TV relationship is, and I like all this content.’ High-speed data is still a harder sell; it hasn't reached the plateau where everyone needs it, but pay TV is way on the other side of that curve.”
Once a service provider establishes a customer relationship with IP-based TV, “Low and behold, you are able to get 50% to 60% to say, ‘I'm willing to establish a high-speed data relationship as well,’” Burke said. “Plus you get a higher take-rate on the customer-calling features.”
Most independent telcos build their business cases around a 35% penetration rate in the first three years or so, according to Burke and others serving the independent market. But industry experience varies widely from company to company, making hard and fast generalizations difficult.
Richard Ruhl, general manager of Pioneer Telephone Cooperative in western Oklahoma said his firm is still building out its broadband network using Calix gear and is projecting 35% video penetration in three years and 50% in four. Pioneer Long Distance, the unit offering the video service, began building its network in phases a year ago and is ahead of schedule in the buildout, but has quickly learned things are not as simple as building it and selling it, at least in this early stage of telco video deployment.
“We started with eight phases to cover 65% of our market with 35,000 homes passed,” Ruhl said. “By January , we will have the network deployment completed, and it's going faster than we planned — we've shortened the phasing into six phases.”
Along the way, however, Pioneer has had to continually upgrade its network to take into account customer demands and unpredictable changes in market and technology issues. The company is torn between trying to keep up with what customers want and moving from a focus on network upgrades to one on marketing the service to drive more revenue.
“We've been conservative in our marketing of the product, even at 12 months deployment, because we are still going through a lot of upgrades,” Ruhl said. “You want to get out there and market the product as aggressively as you can because you want to get cash flow and bottom line, but at the same time, you want the upgrades and as high-quality a product as you can deliver.”
When customers indicated they wanted three TV streams, not two, Pioneer worked to cut its loop lengths to 8000 feet from 10,000 to 11,000 feet to deliver the extra bandwidth, said Ruhl and Scott Ulsacker, product manager of the company's video product.
“Now it's video-on-demand they want, and the next thing is HDTV,” Ruhl said. “Every time we go through that, it's how do we adjust marketing-wise and how do we adjust the message we give to customers. We have to be very cautious.”
Even with a conservative rollout, Pioneer has 2300 customers, Ulsacker said, and is selling much more high-speed Internet access along with its video service than expected.
“We were assuming 50% of video customers would take DSL as part of the package, and we are well ahead of that,” Ruhl said.
By contrast, Beyond Communications, the new brand name of DSSI Technologies, is deploying UTStarcom's end-to-end video solution in resort areas in Alabama and along the Gulf Coast, and has been able to achieve 95% to 100% penetration of its services in multiple-dwelling unit buildings, a take rate that is fueling the company's move to build fiber-to-the-home networks into the nearby rural communities.
“It takes us six weeks to deploy in a resort, and once we are deployed, they are waiting for us,” said Jeff Hathaway, founder, president and CEO of DSSI Technologies.
One reason for the appeal, according to Hathaway and Gary Stepanian, DSSI's chief technology officer, is that the company designed its service to be different from that of the incumbent cable operator.
“We've come up with a 118-channel package that doesn't require a set-top box,” Stepanian said. “On our Internet, we skipped past DSL, and we are offering 10 Mb/s to 100 Mb/s to compete against an ILEC that is stretching to get 6 Mb/s on ADSL2+. On cable, we offer analog, digital and IPTV.”
Its video-on-demand service utilizes time-shifting technology that allows customers to go to a program guide, select any program at any time and watch it from the beginning, he said. “We have been working with UTStarcom, and we believe that our architecture will allow us to record all the programs all the time by the end of this year,” Stepanian said.
It will be those kinds of differentiating features that boost take rates, analyst Hurley said. “If you can do IPTV and it's different, better than digital cable, then there is a much greater chance for success,” he said. The “better” part is hard to define, however, Hurley admitted.
That's one reason why John Celantano of Skyline Marketing is predicting a major price war between telephone companies and cable companies, on the order of what has broken out in the high-speed Internet access market as of late.
“Despite their best efforts to differentiate, as consumers and business users, we are going to shop, just as we have with wireless bundles and packages,” he said “We look for the biggest bundle that's the cheapest, and while all the little add-ons are nice, am I willing to pay premiums for them?”
The wireless industry may prove to be a model for broadband in a couple of ways, he said. First, the experience with the exploding ringtone market is an example of how younger consumers will influence the market in unexpected ways.
“It is hard to predict how this new generation of consumers will buy and what they are willing to pay for,” Celantano said. “Service providers have to make the devices that connect it all together affordable and cheap — the pieces that make up the network have to be cheap, and the service has to be affordable. Wireless is a good proxy for this, in that you buy a basic package — in broadband it would be bits instead of minutes — and you would pay extra for whatever incremental usage you have on top of that, as well as the premium services you would pay.”
Like wireless companies, broadband service providers will work hard to lock customers into multiyear deals, to prevent expensive churn, Celantano said.
Holiday's recent study examines the separate business cases of the Bell companies — BellSouth, Qwest, SBC and Verizon — and concludes that Verizon's aggressive FTTP plan will produce an initial take rate of 15% in the early years and 37.5% in 2010. That will produce 13 million homes passed by that date and 4.875 million video service subscribers.
By contrast, SBC is expected to deploy its Lightspeed service network, using predominantly FTTN architecture, to pass 19 million homes by the end of 2007. Holiday expects the expansion rate to slow thereafter to about 500,000 mostly green-field homes per year and to achieve a lower penetration rate than Verizon to hit 3.8 million homes.
“They are going to get past so many homes in doing that, that I just believe that they are going to be not able to keep up the penetration rate as companies that are going at a slower pace at building the network,” Holiday said. “After that buildout, they will have an inventory of homes passed that they will work against.”
BellSouth, which is still testing video services and hasn't announced deployment plans, is forecast to pass only 500,000 homes with its FTTC plan in 2006, but then to ramp up quickly to reach 9.5 million homes by 2010 and hit a take rate by then of 35% to achieve 3.325 million video services customers. Qwest remains the great unknown — despite operating video networks already, the company has not yet announced its IPTV plans. Holiday projects a ramp up beginning later — in 2008 — than the other Bells, to reach 2.5 million homes passed by 2010, and a take rate of 25% to reach 625,000 homes served by video.
The Bell efforts will not be universal, Celantano said, because the companies will focus on building out networks where they can gain an immediate return — namely, suburban and upscale neighborhoods.
Overall, the payback for video network construction can be pushed out several years, Burke cautions, as the need to continually invest in IPTV continues.
“The vast majority of your expense is included in the home — for the set-top, the middleware fees on a per-user basis and home installation expense,” he said. “You want your business models to be high invariable costs because you have a relationship between what is going out and what you are taking in. But this does push out the recovery period somewhat.”
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