Making More of IPTV

IS OTT THE FUTURE?

FOR AN INDUSTRY that has repeatedly been told that IPTV is the way to compete against cable, change can be a scary thing. Giving up control of the network can be even scarier. Still, many North American telcos are being forced to consider changing how they do business to stay relevant in a market being overrun by over-the-top video vendors.

The OTT industry is still in its early, experimental stage, but it's a segment populated by an ever-growing number of vendors banking on the IP pipe to deliver broadband content — with or without the help of telco. Within the past few years, a number of companies have brought STBs to the scene, including Apple TV, Blockbuster, Netflix, a joint effort from Netgear and Verismo, Vudu, and several others offering some variation of Internet content, primarily videos.

Whether a service provider is interested in partnering with any of these vendors depends completely on their economics of delivering the service, as well as the bundle of services they are trying to sell, said Jonathan Hurd, director at Altman Vilandrie & Co. It's not a great opportunity for telcos to get into partnering for OTT video for its own sake, he said, but it has to be looked at in the context of the overall household relationship and the economics of the products it is selling to that household.

“Video in itself is, on average, a much less profitable product line,” Hurd said. “Telcos are in for defensive purposes, so can over-the-top video be a useful part of a service provider's bundled offering where they are trying to maintain that household relationship? I think the answer is potentially yes, but it really depends on what the service provider's overall strategy is.”

Thus far, the telco strategy has been to build another cable company, said Danny Briere, CEO of TeleChoice. And so far, this hasn't paid off for any company outside of the biggest player, AT&T. For this reason, there is a lot of opportunity for telcos to out-compete cable and satellite by teaming with players looking to really innovate in the TV space.

“I believe consumer electronics players are able to out-innovate telco players by two or three times in a given time frame,” Briere said. “If a telco does something in three years, a CE company is probably on its third generation in the same three-year period.”

There is ample reason to believe that OTT vendors may be interested in pursuing the partnership route. At a recent Citigroup Media Investor conference, Blockbuster CEO Jim Keyes told attendees that the company is soliciting AT&T and Verizon for help in the space. Last year it began offering a 2Wire STB that plays purchased digital downloads. The brick-and-mortar giant already has a customer base of 60 million that it hopes will prove attractive to growth-minded telcos. “We represent a good partner for others,” he said at the conference. “Perhaps it's Verizon or AT&T selecting Blockbuster to compete with cable.”

Keyes may be going after the wrong tier of providers. Rural ILEC Toledo Telephone of Toledo, Wash., has thus far been thrilled with its partnership with OTT vendor Vudu, which has turned to telcos as it struggles to gain market share. Tony Miranz, co-founder and executive vice president of sales and business development for Vudu, has found that it's not a partnership that appeals to the big players, namely AT&T and Verizon, and even some mid-tier providers such as Embarq, but it does have widespread appeal among U.S. Tier 3 operators. The need for subscriber uptake may be Vudu's motivation, but Miranz said both the competitive threat of cable and consumer demand are driving the push on the telco end.

“The level of awareness is going up thanks to the great work of Apple and other players doing anything in this arena,” Miranz said. “Consumer awareness is increasing demand for services like Vudu. Those consumers are going to turn around and call their RLECs, ILECs and say, ‘This is the service I want, why aren't you offering it?’”

Dale Merten, chief operating officer of Toledo Telephone, estimated that its relationship with Vudu has created cost savings in the millions. The payback came after only 14 months, he said.

In addition to cost savings, the biggest draw of OTT has been the ability to freely peruse the open Web. Premium content without 150 other channels attached — plus long-tail, niche videos — is an attractive combination for many viewers. But the list of potential pitfalls isn't lacking, either. Each vendor has unique strengths and weaknesses when it comes to breadth of content, quality of navigation and business model, but there also are several issues inherent in any OTT experience. Drawing content from the Internet means little-to-no control over quality of service and subsequent customer experience. Fast, reliable broadband service will ensure the speed of the download, but the problem of quality management is exacerbated with peer-to-peer OTT services. Bandwidth limitations to offering video over the Internet also pose a potential threat.

OTT and IPTV are not the only options for a telco to weigh, although they are the most public. Shane Walker, consumer electronics research analyst for IMS Research, pointed out that it may make the most sense to offer a terrestrial box that receives ATSC signals as well as incorporates content from a broadband pipe managed by a telco. Sezmi, prepped to make its debut this year, is adopting a semi-OTT attitude toward TV delivery. The startup provides an end-to-end, wholesale product that includes a full broadcast lineup, cable channels and Internet content — all delivered over the air. Sezmi has yet to announce telcos partners, but maintains that a strong interest exists in the Independent community.

Regardless of the path a telco chooses to take for delivering video, OTT services are sure to creep in. Consumers are already using the Web to find the content they cannot get through linear TV, and the abundance of OTT vendors is slowly beginning to drive consumer awareness. In 2009, it may be the case that those telcos who can't change with the times will be left behind.

“The next generation is going to nail it in 2009,” TeleChoice's Briere said. “Someone is going to put all this together, and it will be like the iPhone of OTT. That is a telco's worst nightmare — an OTT achieving iPhone status — unless they partner with them and work it to their advantage.” — SARAH REEDY

CROWDED HOUSE

The market for OTT providers is only getting more crowded as online movie storefronts, video rental companies and device manufacturers try their hand in the space.

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