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Fatten the Pipes

21 Feb, 2005 By: Gary Arlen

Telephone companies are fattening the pipeline for the delivery of movies and other video programming.

Hundreds of Verizon and SBC Communications trucks are unspooling fiber optic lines in American neighborhoods today — speeding up the ability of the nation's two largest telcos to deliver video as well as voice and data to up to 6 million homes by the end of this year.

Verizon is using the term “FiOS” (as in “Fiber Optic Service”) for its platform, which it will turn on for video delivery by summer. The company is introducing FiOS in select communities in Texas, Florida and California.

SBC calls its technology “LightSpeed” and its residential service package “U-verse.” By the end of 2007, the company says, U-verse will be available to 18 million homes in the 13 states where it operates phone service.

As high-tech “telco TV” becomes available in certain areas, skeptics and Wall Street critics are questioning the immense investment (estimates go beyond $10 billion). They also wonder whether the communications behemoths can pull viewers away from entrenched cable TV and direct broadcasting satellite providers (DBS).

Cable operators acknowledge the challenge.

“We're in the most competitive era that our industry has ever seen,” said Michael Willner, president of Insight Communications, a large cable TV operator, and former chairman of the National Cable and Telecommunications Association.

Companies are aiming for a “triple play” — bundling video, voice and Internet access services. Cable and telco providers feel they can out-maneuver DBS, which faces technical limitations for Internet and phone services. The role of voice services is also critical in winning the hearts and wallets of consumers. Hence, the big telcos are merging — AT&T into SBC and MCI into Verizon — while cable operators are aggressively building voice services through a variety of partners.

The Future in Video
But video truly is the brass ring in the new competitive rivalry. In particular, video-on-demand (VOD), personal video recording (PVR) and other advanced services are the strategic battlegrounds where telco TV, cable and DBS will skirmish in the war for TV control.

“Being able to interact with customers in ways they could not do with the current viewing experience” is high on SBC's agenda, said company spokeswoman Denise Koenig. Although the company has not specified what programming it will actually offer, Koenig emphasized the value of a “flexible platform” that only sends “content people want.” She claims there will be hundreds or thousands of titles available, in both linear and on-demand formats.

She said SBC will offer PVR functionality, but has not identified specific details about that feature.

There have been reports that SBC will offer a monthly subscription service with films for download to a digital video recorder. While acknowledging such a service could be possible through its U-Verse system, the company denies there are any specific plans.

Verizon is similarly coy about its programming and video technology plans.

“We'll have hundreds of channels … and hundreds of VOD titles,” said Sharon Cohen-Hagar, a Verizon spokesman.

Divergent Approaches
Verizon and SBC are taking divergent approaches to video services now, a situation that may affect their market entry.

SBC is focusing on “IPTV” — Internet Protocol Television. As such its U-verse service is an extension of its two-way telecommunications network and not subject to local cable franchise requirements, the company claims.

Verizon is using more traditional radio-frequency technology and hence becomes an “overbuilder,” competing against existing cable systems. Verizon reports it will apply for cable TV franchises from local authorities.

These different approaches — which are likely to become regulatory quagmires in coming months —may affect the kinds of programming that are offered.

Federal law requires that program networks — cable channels such as MTV, ESPN, Discovery, HBO, Showtime and others — must make their programming available to all carriers. Still, the new, relatively small telco TV venture will not have the bargaining clout with these providers that major cable companies bring.

Verizon and SBC acknowledge they are negotiating with feature film VOD suppliers such as MovieLink and CinemaNow. Verizon is working with “third-party developers” to establish a content package, but details are not yet available, said Verizon's Cohen-Hagar.

Despite these recent moves, cable operators are showing an odd complacency about the telcos' entry. At last month's International CES, Cox Communications COO Pat Esser pointed out that the telcos are “doing a wonderful job of putting out press release after press release about how they're getting into the video business without really delivering on what they've promised.”

Gary Arlen is president of Arlen Communications Inc., a Bethesda, Md.-based research firm.

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