IP agenda advances SBC's triple threat

SBC Communications is the latest telco whose future as a provider of triple-play services is coming into view. Within the last two months, one possible

vision for the future has become a much more certain and aggressive deployment plan, the latest pieces of which fell into place just before Thanksgiving. Those moves--the announcement of residential voice-over-IP service to be commercially launched in early 2005 and the commitment to spend $400 million deploying Microsoft’s IPTV video software platform--were the latest advancements in SBC’s $4 billion Project Lightspeed initiative.

“It’s time for the Bell companies to make a move--and not just with video,” said Michelle Abraham, senior analyst at In-Stat/MDR. “They have been losing access lines for years, and they need to invest in new services so that they can start gaining revenue in a different way. If they can get users to take the bundle, they can increase the take rate for all of their services.”

However, in this month’s Deloitte & Touche TMT Trends report, analysts questioned the ability of telcos to realize worthwhile margins from their triple-play bundles. Ajit Prabhu, principal in Deloitte Consulting’s TMT Group, stated in the report, “Bundling drives down the price on a per-unit basis, so the business case has to be clearly understood. What has to be asked is what is the margin spread you’re making on each product in the bundle, and is this trend moving in the right direction?”

The riskiest part of SBC’s triple-play plan might be the video offering, a new addition to its service menu. With VoIP, SBC actually has been marketing the service to enterprises, having won a major deal with Ford Motor Co. in September.

Another part of the video risk is that Microsoft’s software won’t be fully developed until next year. The deal with Microsoft was a culmination of events that began when SBC earlier this year joined the Microsoft TV early adopters program. SBC began testing components of Microsoft IPTV Edition software at SBC Labs in June, and plans to progress to field trials in mid-2005 before commercial deployment begins.

“SBC is the first carrier to take a step beyond a trial,” said Ed Graczyk, director of marketing at Microsoft TV. “This move validates the whole IP TV industry in general and us in particular. Keep in mind that we just launched Microsoft TV a year ago, and the software isn’t even done yet.”

In-Stat/MDR’s Abraham said SBC probably has contractual agreements in place to mitigate any risk.

“Minimums will have to be met, and there are probably certain things that aren’t public about the arrangement yet.”

What’s known about SBC’s video service is that it will be end-to-end IP with no radio frequency overlay and will use network equipment supplied by Alcatel as part of project Lightspeed. Video will get encoded into Windows Media 9 compression at the headend, though Graczyk said SBC and other telcos could “plug in different compression schemes if they want.” SBC has not yet named a set-top box supplier, but so far, Thomson Electronics is the only vendor manufacturing boxes supporting Microsoft’s platforms.

The service will be based on a switched video distribution system, delivering content according to user requests and freeing up additional bandwidth for other applications. Edward Whitacre, chairman and CEO of SBC, said in a corporate statement announcing the Microsoft deal, “Our service will change the way people experience TV. The customer gains additional control over the content they want versus what is delivered to them. We get the flexibility of not being constrained by bandwidth.”

The offering also will include many other content features and functions, notably a digital rights management (DRM) feature allowing high-definition TV programming to be delivered to multiple TVs in a given home that also will allow IPTV content to be transferred to other IP-enabled devices such as PCs and mobile devices.

“Instead of conditional access on a free, monthly premium or pay-per-view basis, as cable TV companies provide, DRM lets you watch it as many times as you want and transfer it to different devices,” Graczyk said. “It allows telcos to have a more competitive offering by actually creating a better experience for the customer.”

In the short term, while video development continues, VoIP service will be the element of SBC’s triple-play strategy that most bears watching. Initially, the service, which has yet to be branded or priced, will be launched over DSL facilities, but an SBC spokeswoman said that within two to three years, the company would be delivering VoIP over the Project Lightspeed network.

The carrier has field trials currently under way in Chicago, Dallas, Los Angeles and its hometown of San Antonio, Texas.

“The trials are more for determining the best features, pricing and ensuring quality,” said the SBC spokeswoman.

SBC will be the third of the former Bells to enter the space, following rollouts by Qwest and Verizon. How aggressively SBC will approach residential voice over IP remains to be seen. Service launches by other incumbents appear to be more protectionist in nature than competitively covetous. AT&T’s CallVantage product also is growing slower than anticipated.

The SBC service will feature a VoIP Web portal that helps consumers manage features such as “find me” and enhanced “do not disturb,” which gives them the ability to specify from which numbers they will accept calls. It also will have a click-to-call capability that lets customers call friends and family with the click of a mouse, as well as voice mail, call forwarding, call waiting, caller ID and three-way calling.

“Initially, you will see a lot of the features available with VoIP today, but the service will continue to be enhanced as features become available,” the spokeswoman said.

Vonage is adding about 82,000 subscribers per quarter. CEO Jeffrey Citron expects to grow by 100,000 in the current quarter, putting the company over 300,000 subscribers.

Not every new Vonage subscriber is a line loss for the RBOCs--although Gartner projected public network revenue to dip below $60 billion in 2008--and despite those who doubt the long-term viability of smaller providers such as Vonage, Citron believes there is room for everyone.

“People said Vonage would be crushed by AT&T. That hasn’t happened. People said we would get crushed by cable operators. That hasn’t happened either, and I don’t think it will,” Citron said. “This is an enormous market, and there is ample room for them and Vonage.”

As for the former Bell companies, Citron said, “Do you really think Qwest is going to give up $70 average revenue per user and trade it for $30?”