Tuesday, April 19, 2005

“Cable Operators- Still Moving at Dialup Speed”

A couple weeks ago, 17,000 cable television executives gathered in San Francisco to debate the future of the cable industry at the annual national show. One of the points on the agenda was a discussion about the potential competition arising from Internet Protocol over Television (IPTV) which allow competitors such as telecom firms to offer video services to consumers.

Facing increasing competition from cellular telephones and cable companies, telecommunication companies with extensive land line infrastructures see IPTV as a major source of expansion. Major players such as Verizon and SBC Communications are investing billions of dollars to develop infrastructure and technology to enable IPTV. Verizon and SBC plan on delivering limited offerings of commercially available IPTV services by the end of the year. SBC with their recently announced Project Lightspeed is quickly deploying fiber to neighborhoods in thirteen states. By leveraging current copper lines going from the neighborhood junction box to homes, SBC looks to reach 18 million households within the next couple of years. This equates to roughly 20% of the current cable subscriber base. Verizon is pursuing the market even more aggressively by extending fiber directly to the home, offering Internet connections with speeds up to 30mbps. The company hopes to reach 18 million homes within the next 2 years.

The conservative cable industry, used to traditional competitors like satellite television and regional stations, doesn’t place the same expectations on IPTV that the telecommunication companies do. Cable executives have adopted a wait and see approach, still questioning a present day multi-billion dollar investment in IPTV. Industry analyst’s views are mixed, with some questioning the apparent laissez-faire attitude in the following articles: 1 2 3 4 5.

In our estimation, telecom providers will serve as a significant threat to the old guard of the cable industry. By utilizing IPTV technology, telecoms will be able to offer value-added services that traditional cable operators currently cannot match. With IPTV, the telecoms will not be constrained by bandwidth to the home as signals are only sent upon request. This will enable telecoms to offer a greater number of channels than would be possible with the current architecture of cable operators giving consumers more control over their television viewing experience. For instance, customers will be able to seamlessly choose the specific camera angle for their favorite sporting event. Along with IPTV, comes the integration of Internet, television and phone. Consumers will be able to receive information via the television, such as caller id, email notifications, and customized weather and traffic information. In addition, consumers will be able to access media and Internet content from multiple sources, enabling them to send their favorite show to their cell phone. Today, cable operators are trying to steal telecom customers offering the “triple play” with television, phone and internet bundled. Tomorrow, the telecoms will be offering “quadruple play” which will include their growing wireless services.

Cable operators are taking the stance that consumers will not value these services enough to switch. While this position may be true in the short-term, we doubt that the cable companies will be able to sit on their hands much longer. More consumers are demanding integration of their information services everyday as evidenced by the growing popularity of VoIP. IPTV is already a success in markets such as Hong Kong with over 350,000 subscribers. Consumers will find value in the integration of these services, especially given the likely fierce price competition that will ensue.

Ultimately we feel the real winners in this industry will be the content and software providers. On the software front, Microsoft is the major player and has already secured contracts with the major telcos including SBC and Verizon and awaits the adoption of IPTV technology by the cable industry. From a content provider perspective, they are relishing the additional distribution networks to which they have access in the United States. The danger content providers face stems from the cannibalization that could occur with movies and other content placed on DVD. To offset this danger, many content providers are delaying the release of their content on IPTV until a preset time after DVD’s have been introduced. Once telcos enter the television space, content providers will be able exercise significant supplier power as they pit constituents against each other such as cable vs. telco vs. satellite. The question is not whether IPTV will take off in the U.S., but when.

Aaron Chawla, Chris Duncan, and Puneet Tandon


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