I attended the third annual Telco TV 2004 Conference and Expo, November 16-18, 2004, at the Orange County Convention Center in Orlando, Florida. The conference was produced by Shorecliff Communications.
Ten years ago, the telephone industry was getting ready to take over the cable industry. They had a long association with television. AT&T's long distance technology made it possible to link together independent television stations to form the original television networks. The telcos now wanted to use their new DSL (Digital Subscriber Line) technology to delivery television programs to the home. The telcos thought they would be able to compete with the Cable Industry. Their operating model was Video Dialtone; everything was a telephone call.
The Video Dialtone services were a total failure.
Since then, the telcos have used DSL to sell Internet services. The Internet changes everything. The telcos are now preparing to try the television business again. This time, the operating model is Video over IP; everything is data.
There are problems with IP (Internet Protocol) for video and voice applications. IP uses a "best effort" approach which makes it very resilient. This worked well for file transfer applications, but it is not well suited to realtime applications. Recent work in QoS (Quality of Service) for IP networks is eliminating the realtime problems. Improvements to DSL (ADSL2+ and VDSL2) and FTTU (Fiber to the User) will make telephone delivered video very competitive with cable, and in some cases, superior.
The Telcos no longer have an organization like CableLabs to do standard setting, so they are struggling in reaching a technological consensus. The Telcos are converting to IP technology and open standards. They want to avoid being dominated by one or two manufacturers (as the Cable Industry is). Interestingly, Motorola is selling equipment to both industries.
SBC recently announced Project Lightspeed and a $4B investment in upgrading its digital technology. Verizon made a similar announcement of a $800M upgrade. Television is now seen as an important defensive product for telcos. It improves their chances of withstanding cable's competitive Voice over Cable products. IP will also allow the telcos to escape from some patent fees.
This conference was not about the big phone companies. It was about tiny, rural phone companies. These companies are often organized as cooperatives. Being a thousandth of the size of the big telcos, the rural telcos are sometimes able to respond faster. Also, because their customers are often the owners, they put a much higher value on the quality of customer service. There was talk about "growing the pie" (growing the market), but I think the market is ultimately contracting. People spend about 5% of their income on entertainment. That percentage is unlikely to increase. The number of choices available to the consumer is increasing. (No single TV event has had a greater than 40 share in 10 years.)
For these reasons, some of the little telcos are already in the television business, and are already successfully competing with cable and satellite. The little telcos were at this conference to learn about technology and business practices.
Currently, the services offered by cable and digital telcos are being bundled as a triple play: Telephone, video, and data (Internet). The combination of services is thought to increase customer loyalty. Customer retention is now more important than customer acquisition. Some of the telcos have already found that television is not a great business, but it is still a good investment because it keeps customers.
Some are looking beyond the triple play, talking about benefits from the integration of these services. For example, customers highly value On Screen Caller-ID: When the phone rings, a message appears on the TV screen identifying the caller. This makes it easier for people to decide if they should pause the program and take the call. The TV can also improve the interface to Voice Mail and other phone services. You can program your DVR from any web browser. You can play your MP3s and photos from your computer on your TV. You can IM (instant message) and email while watching TV.
The network becomes a platform that can carry a large and growing set of products. This is a big change from the single-function system that the telcos have operated for the last century. Motorola calls it ICE: informed, connected, entertained. Siemens calls it TIME: Telecommunications, Internet, Media, Entertainment.
There are a number of ways that the telephone system can be configured, based on the type of service, the distance from the central office, and the age of the plant.
In most cases it will be copper to the home in IP over DSL. The signal goes to a Home Gateway box, which acts as a tiny cable head end. It converts its digital signals to analog, and inserts them into RF channels emitted through coax to the TV sets in the home. Digital TV is not yet a factor in most markets. Ultimately, digital signals may be emitted to ethernet.
In the cable model, all channels are sent and the STB acts as a filter, allowing only one channel at a time to be passed through to the TV set. In one of the telco models, only one channel per set is sent to the home. That channel can be customized at the central office. It is possible to make the Home Gateway look like a DVR. The STB does not need to contain a hard disk, so it can have the same features as a DVR STB, but with a lower cost.
Some systems use DVRs, and can offer Push On Demand services similar to those offered by satellites. In Push On Demand, consumers select programs from a menu for later delivery. There are one or more channels that stream programs for delivery to all customers. The DVR records the requested programs when they come by. Some think that DVRs with DVD recorders will become the preferred way to deliver DVDs.
In some markets, they are going straight to fiber for delivery to the home. In this model there is an ONT (Optical Network Terminal) which acts as a bridge between fiber and ethernet. It is then ethernet to the STB.
Fiber is well suited to greenfield (neighborhoods with all new construction) and plants with aerial overbuild (telephone poles).
One problem with the telco TV architecture is that the STB cannot detect that the TV is turned off, so it must always be delivering a channel per set, even if no one is watching. The system is constantly running at peek load.
There are other modes, including PON (Passive Fiber Network), QAM over Fiber, and FTTU with RF overlay.
The telcos are calling the new model IPTV. I have also seen the computer companies using the name IPTV. The telcos believe that their version of IPTV will be successful. This is because private IP networks can do a better job of realtime media delivery. Also, consumers value TV content higher than PC content. People are also worried about computer problems invading their TVs.
The telcos are worried about becoming a "fat dumb pipe". If they are unable to establish themselves in the home television system, then they will be reduced to being just an ISP, and other companies will be able to use their connection to deliver the value added services.
The telcos are monopolists, not competitors. It is not clear that the big telcos can move fast enough to be successful. They are competing with successful cable and satellite operators.
The telcos benefit from the pent up hatred of the cable companies. The cable companies have behaved badly for many years, and many people want an alternative.
There are two types of phone companies: ILEC (incumbent local exchange carrier) and CLEC (competitive local exchange carrier). A CLEC is allowed to compete with an ILEC, utilizing part of the ILEC's own infrastructure.
It is thought that the keys to success are in offering superior convenience, simplicity, and value. I hear that a lot at these conferences, and I see a lot of products that are annoying, complicated, and over-priced. Everyone has a vague sense of what to do. My hope is that the winners will be the ones who do it right.
The regulations around telephone and television services are horribly complex. There are several ways that a telcoTV system can be presented to regulators. Each has some advantages and many disadvantages.
There may be a rewrite of the Telecommunications Act next year. This could be a good thing because the current Act is far too complex. This could be a bad thing if the competing industries move the Battle for the Center of the Universe from the marketplace to the Halls of Congress.
The biggest difference between this show and the NCTA National Show is that the Programmers were missing. The NCTA had HBO, Showtime, and may other channels fighting to get the attention of the MSOs. They had movie stars, television stars, rock stars, and porn stars. They had four different Christian religious programmers who were giving away prizes. Programming was an important part of the cable trade show. There was not a single programming booth at the telco tv trade show.
It is easier for a Cable system to add voice services than it is for a telco to acquire content. This is the biggest surprise for telephone companies. They think that the design and construction of their plant should be the hard part. Getting the rights to play content on over there systems can be much harder.
There are many reasons for this.
First, some of these telcos are really small, having only hundreds or maybe thousands of customers. In some cases they are not worth the Programmer's time to contract with them.
Second, the Programmers are accustomed to many decades of brutal negotiation with the MSOs. The telcos have no experience in this game.
Third, in some cases the Programmers have made exclusive contracts with competitive cable operators. In some cases, the Programmers are owned by Cable companies who have an interest in seeing Telco TV fail.
Fourth, the regulations around distribution rights are extremely complex. The rules are different if the program is delivered to the head end by satellite than if it is delivered terrestrially. The rules for broadcast-originated channels are very different than for cable-originated channels.
Fifth, there is DRM.
The FCC's intention is to encourage competition, and to encourage the delivery of high-value media services to all consumers. Its regulations, unfortunately, work against that intention. The regulations are a mess.
The NTCA (National Telecommunications Cooperative Association) lobbies the government on behalf of the rural telcos. It also negotiates with some of the Programmers, creating standard contracts and licenses, using the leverage of its membership.
The Studios are afraid of IPTV. They think that it will make it too easy for people to tap the internet and get unrestricted access to content. They are threatening the telcos that contracts will not be renewed unless DRM systems are put in place. This puts the telcos in a difficult position. The investment in DRM systems can be expensive. In some cases it means replacing STBs. DRM is the opposite of convenience, simplicity, and value.
There were two questions during the conference about DRM. One pointed out the analog hole, asking why do they have to pay for DRM systems that can easily be gotten around. The other asked about portable devices, and shouldn't it be allowed to copy a program from the STB to your portable player.
The second question was answered strongly by Bryan Burns of ESPN. He said that it should NOT be allowed, and when he gave the reason why, he lied. He said that ESPN (the leading sports network) has very complex contracts with the sports companies such as the NFL (National Football League), and that these contracts force them to force the cable and telco operators to prohibit consumers from making copies to their portable devices.
The honest answer is that ESPN is owned by Disney, and Disney considers remote access to be a redistribution which they want to be paid for. The issue has nothing to do with the NFL. It has nothing to do with piracy. The studios want leverage over the consumer so they can take more money from him.
A recent survey asked people who do not have HDTV why they do not have HDTV. Some of the responses were
20% not enough channels
24% HDTV programming package too expensive
80% don't have an HDTV set
The Telcos know that they will have to carry HDTV. The technologies they are using are able to do it. The consequence for them is in the cost of the additional bandwidth, which in some cases is a per-customer expense. Eventually, consumers will demand HDTV programming. The only programmers at the conference were ESPN HD and Discovery HD Theatre. These services are delivered in MPEG2. Most systems will want to transcode in AVS or VC1 for efficient delivery. However, transcoding causes scarring. The programmers were asked if they would deliver product in AVS or VC1. They did not have an answer. This surprises me. With all of the talk about the WOW factor of HDTV, the leading HDTV programmers are not committed to delivering the highest quality signal.
Advertisers are, for the most part, still not delivering ads in HD.
As the DTV rules go into effect, SD resolution sets will disappear from the market. HDTV will gain greater acceptance as a replacement product.The Digital Transition [2004 - 2005]