Can Telcos Win The Battle For IPTV?

There's a battle coming between cable providers and telecommunications carriers for the nation's televisions. The former hold the high ground of an impressive installed base, while telecom carriers are coming to the field with Internet television (IPTV), a promising technology that uses IP to deliver television feeds and other services to consumers.

However, telecom carriers have a tough fight ahead of them. According to Forrester Research vice president Maribel Lopez, the author of the April report "Telcos' IPTV Reality Check," they're starting with some serious disadvantages, whatever the promise of IPTV.

"We're going to have multiple choices: many people with many pipes to you home and the ability to sell services," she says. "But it'll be another solid year before you see anything concrete from the carriers."

IPTV's principal selling point is not simply video quality or the range of stations available --- cable and satellite providers already have that nailed down --- but on-demand content and interactive features. As Lopez noted in her April report, IPTV providers could offer direct on-line interaction with voting-based programs like American Idol as well as real-time video shopping and games. Integrated communications options like onscreen call display and messaging and less flashy features like faster channel changing and use-customizable channel line-ups could, if anything, be even more attractive to customers.

The problem, however, is that none of these features, as exciting as they might be, may be enough to draw subscribers away from cable and satellite. "It is better television, but how do you market that?" Lopez asks. "It's like the Tivo challenge: many consumers just didn't get it. People who have it love it and don't want to give it up, but as a customer acquisition tool, it doesn't work,"In their quest for the hearts, minds and remote controls of the nation's couch potatoes, telecom carriers will have to compete on content and price, and they are somewhat disadvantaged on both fronts. "As a new player in television, the big challenge for the telcos will be customer acquisition," Lopez says. ""The good news is that SBC is getting between $40 to $70 per new customer. While that's good, they can't justify the broadband upgrade on IPTV alone."

Indeed, IPTV is somewhat more complicated for carriers than just piping reruns of interactive game shows over the telecommunications grid. The push to IPTV has and will require a massive network upgrade at a substantial cost just to catch up with the cable networks. Verizon's plan to pass three million subscribers with 5 to 30 Mbps fiber to the home by the end of this year, and possibly 10 million by 2009, will ultimately cost the company between $1000 and $2000 per subscriber. Even SBC's network upgrade which, by late 2007, will pass 18 million subscribers with 5 to 20 Mbps fiber, will cost $4 billion.

Admittedly, the telecom carriers will have to upgrade their network infrastructures in any event, to meet the demands of converged applications and services. However, Lopez points out that IPTV is a poor upgrade rationale in itself. "Even when you add video, it will take years for them to justify the capital investment," she says. "Video can help the telcos' business case, but it certainly doesn't make the business case."

Moreover, the carriers are at a distinct disadvantage when it comes to customer premises hardware like set-top devices and content licensing and security management. The former are still in development, while the latter could turn out to be the carriers' biggest headache, Lopez says. Since the IPTV feed can, in theory, be received by any IP device on the network, the carriers have to work out copy protection systems to satisfy content providers.

All this is assuming that they have acquired the content in the first place. In her report, Lopez noted that "telcos aren't going to lure away cable customers by getting exclusive rights to the Tennis Channel." With customers more likely to tune into The L-Word and Deadwood, carriers still have a lot of negotiations and licensing expenses ahead of them, not to mention establishing IPTV reseller franchises in each market.

With all that in mind, cable companies are in the enviable position of being able to poach more easily and more cost-effectively on the carriers' domain than vice-versa, creating substantial downward pressure. "I still think it's easier for cable companies to offer voice than for telcos to offer video," Lopez says. "There's margin pressure for everybody, but the cost of telephony services is less than video." This is particularly true because the cable providers don't have to build new infrastructure to deliver voice.Even with cable subscribers paying $40 to $70 per month, Lopez doesn't expect an all-out price war, and that might give IPTV enough space to establish itself, not as a dominant video service, but one choice among many. "Cable companies can play lowball on prices, but they're not interested in going too low because, once they do, it's difficult to get prices up again," she says. "For now, they're more interested in getting the most out of customers before Verizon or SBC come to the neighborhood."

In the end, she says, customers will benefit from having more choice and the opportunity to subscribe to the video service of their choice without being gouged. Given that they're are most concerned about price, customers will ultimately benefit, whatever the outcome of the coming battle for television.