This past Friday, our MAP team -spread out over different cities-held a conference call with our sponsor in Ireland using Skype-the free P2P telephony software program. In the bottom of my window was displayed a number-5,500,236 users online. Telephone companies ("telcos"), have seen almost every aspect of their local and long distance business hurt in the past few years. Profit margins have been shrinking and revenues have dropped steadily. According to a Forrester Research report, monthly long distance spending has dropped from $18.95 in 2003 to $12.33 in 2005 and local spending has shown similar declines. Even the lucrative yellow pages business has been eroded with the advent of online search.
Telcos have three key factors to blame for their misery. Firstly, cable companies are offering digital phone service over broadband lines. Secondly, VoIP providers have matured their business models and seen accelerated growth due to increasing broadband penetration. Thirdly, wireless carriers have made it unnecessary to own a phone at home. In 2004, roughly 5% of U.S. households dropped their landline in favor of a mobile phone.
But there is another stream of revenue that the telcos are placing their bets on - video, or more specifically, IPTV. By offering bundled services of voice, video, and data, also known as triple play services, telcos are hoping to increase revenue and reduce customer churn. In fact, a recent Light Reading study showed that with triple play services, telcos can increase their ARPU to $120. So what is IPTV anyway?
Although IPTV can be easily confused with watching TV over the Internet, the two are distinctly different.
IPTV - An Overview
IPTV refers to the delivery of video- broadcast and stored-over an IP (Internet Protocol) based network. Broadcast video services are identical to the baseline offerings of the cable providers. They are comprised of national channels such as ABC, NBC, CBS, and others including national and regional sports networks, special interest channels and international channels. Telcos would also offer consumers the ability to view the content in High Definition (HD) or Standard Definition (SD) format. Stored video services, a key service differentiator, would allow users to acquire video content on demand, store it locally or within the network, and perform functions such as the ability to pause, rewind, and stop. The stored content can viewed multiple times over a fixed period of time. Over time, telcos hope to deliver additional features such as online gaming, voice and Internet integration services such as incoming call notification, conferencing, TV e-mail, and TV Web Browsing.
Building the IP Infrastructure
Since TV signals do not originate over the IP network, telcos are spending billions building a network infrastructure to acquire, store, prepare, and distribute TV content over their proprietary IP based networks. At a high level, the value chain can be broken into the following components:
Digital Head-End Broadband System: This component is responsible for acquiring the television signal through terrestrial or satellite feeds in various audio and video formats. Once the content has been acquired, it is compressed and encapsulated so that it can be efficiently transported. There are also large numbers of VoD (Video on Demand) servers that store the content. The major players in this category are BigBand Networks and Tut Systems, which make head-end systems, and Bitband and Broadbus who make VoD servers.
Middleware: The middleware component serves as the software glue which integrates the head-end systems, VoD servers, IP set top boxes, and TV browser interface so that they can all communicate with each other. Quite naturally, its complexity and reach across the network make it one of the most critical pieces of the entire delivery chain. Although Microsoft had a shaky start initially, it has emerged as one of the major players in this space through its partnership with telecom vendor Alcatel. Alcatel's relationship has given Microsoft the credibility it needs when selling to telcos since critics have doubted the company's ability to sell carrier-grade products. The other player in this space is Myrio which is owned by Siemens.
IP Set-Top Box: These boxes are similar to the cable set-top boxes found in most homes. They have support for a browser, security and decompression software and are the primary means of delivering IPTV content to televisions. Due to the low tech nature of these boxes, there are many players in this space including Amino and Motorola.
Security/DRM Software: Since the content is stored and distributed digitally, the risk of it being reproduced and propagated illegally is higher. As a result, strong security and digital rights management are crucial to get buy-in from content owners. Conditional Access (CA) is one of the main functions of this space. The industry is also looking at software based security such as virtual smart cards to minimize unauthorized duplication. The key players in this space are Irdeto Access and Microsoft.
Players Adopt Differing Strategies
Although AT&T and Verizon are both rolling out television services, they have taken different approaches in their deployment plans. In order to support the rich services, both have decided to lay high speed fiber in the last mile. AT&T has chosen to lay fiber about 3000 feet from customers' homes whereas Verizon has pursued a more aggressive strategy of fiber to the home (FTTH). And it reflects in their cost structure, AT&Ts estimated costs until 2008 total $5 billion, roughly one quarter of what Verizon intends to spend. Additionally, Verizon has chosen radio frequency (RF) overlay over fiber instead of the IPTV approach mimicking the current cable model.
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