U.S. Telcos will push broadband hard and emphasise multiple services through a single device. By Jimmy Schaeffler, Chairman and CSO, and Sean Badding, President, at The Carmel Group

OVERVIEW:

The Baby Bells are at least 18 months away from being a true threat to the satellite and cable industries. Even then, The Carmel Group estimates a Telco market share encroachment of less than two per cent, or about 500,000 satellite TV subscribers, by year-end 2007. That may be significant for the Telcos, but it’s just a pinch for EchoStar and DIRECTV (which together total more than 25 million subscribers today). It’s taken DBS more than 13 years to attain 27pc of the U.S. MCV market, with more channels, better digital quality, lower capital costs and greater technology than cable. Yet, even with a better product and service, consumers remain very hard to capture and retain. Telcos face a steeper uphill battle, and pulling off a better growth record than satellite would be a near-miraculous feat.

BATTLEGROUND:

The Telcos will be pushing and selling what they know best: broadband. It (and telephony) are areas where satellite currently falls short, and Telcos will use it to their advantage. The longer the satellite industry lags in broadband, the better Telcos’ chances. HDTV could blow open the doors for the Telcos yet, with unproven services and business models, the success of HDTV remains a toss-up. The good news is that HD transmits very well over IP, with high-quality resolution. We believe that the content integrity and reliability of HDTV on IPTV will maintain consumers’ "Wow" responses, just as it does today for cable and satellite. The bad news is that it’s still unproven outside the labs, and the Telcos have a content disadvantage versus cable and satellite. Presently, VOOM and other HDTV channels are an advantage for EchoStar’s DISH Network.

Creative programming options for Telcos can turn the tide against rivals, which have perfected the mammoth, 400- channel video package deals. Telcos can’t compete by offering merely another video package, competing via price. Instead, Telcos will choose to be creative and offer consumers video/data content that is more tailored to their interests and fascinations. A la carte offerings, hybrid IP/satellite models and the bundling of advanced services will allow consumers to order bite-size appetizers, as opposed to full-entrees that carry bigger price tags. Taking a page from the decade-old satellite playbook, if Telcos can offer greater choices with new programming options - and better deals on advanced services and bundles - then the game for Telcos could be just beginning.

The retail market could be another window of opportunity for the Telcos. As we see it, IPTV may hold even greater retail promise and profit than it did for DBS, particularly if IPTV utilises open standards. Currently, Telcos appear to be leaning toward a cable-like model, as seen when SBC (now AT&T) announced it had chosen Scientific Atlanta and Motorola for its U-verse IPTV service. Even without Telcos, IPTV will likely become a huge revenue source for retailers and their allies during the next five years, when innovative start-ups reshape the TV industry and change how consumers get their content. Everything - from set-top boxes to mobile iPod-like video devices - will be sold at retail. If Telcos play their cards right, the retail opportunity could prove a significant win.

STRENGTHS:

IP technology gives Telcos the ability to offer content and services across multiple access platforms with innovative business models, a key advantage over satellite operators. AT&T is spending an estimated $4 billion over the next three years to string optical-fibre cable to neighbourhoods, serving as many as 18 million homes to deliver IPTV services. Verizon is spending an estimated $6 billion over five years to bring fibre directly to as many as 16 million homes, to deliver programming more like a cable system, broadcasting all channels simultaneously, with additional on-demand offerings over IP. Telcos claim they will bundle their services better than satellite by delivering telephone, Internet and TV services through one set-top device. AT&T will allow its customers to send programmes to their TV sets, music to their stereos, and photos to and from their PCs through a single set-top box.

WEAKNESSES:

The Baby Bells know little about television beyond what they have learned from DBS operators with which they have partnered. Now they’re getting their feet wet by signing content deals, some of which they'll likely pay a premium for (at least at first). IPTV infrastructure is largely unproven and untested. Under controlled environments, it looks great. But questions remain whether it can support millions of customers, not just thousands of beta testers. OPPORTUNITIES:

Telco operators will undergo a trial-and-error process to eventually bring about new, innovative TV business models that maximise IPTV's technology. There’s plenty of room for improvement – just look at the a la carte debate. IPTV operators should engage Hollywood studios and other content creators to understand the video business and avoid the costly mistakes made by satellite operators. THREATS:

In addition to threats noted above, there's the cost of basic home installation. We’ve heard reports of high costs associated with wiring a house for IP video, including the set-top boxes, cabling, installation, technician time and the truck roll itself. Telcos will need to carefully navigate this potential killer cost, which could eclipse satellite’s $600 acquisition cost per subscriber.