Video gets a call from telcos

At a glance, the addition of IP-delivered video services to a regional phone company's offering holds the promise of being a very good thing. It drives the per-sub valuation by multiples and also creates new revenue opportunities.

But a longer look often produces skepticism. After all, such services have been a carrot on a stick for years, and no one was successful in chasing it. Still, phone companies, particularly those in rural areas, are looking to offer bundled services by the end of the year.

The key for any telco looking into video services is to build on the relationship it already has with consumers. It's the rare consumer who is enamored of the cable company's customer service.

Aditya Kishore, Media & Entertainment Strategies analyst for The Yankee Group, says that, according to the group's Technologically Advanced Family Survey (TAF 2001), 49.6% of households interested in a single provider said they were likely to get bundled service from their local telco while only 25.6% said the cable operator. The average household spends $43.10 on cable, $20.30 on long-distance phone service and $33.10 on local.

Vernon Telephone Cooperative, Westby, Wis., is an example of a company that has found interested subscribers. It now provides long-distance and local telephone service plus Internet connectivity to its 21,000 subscribers and, in June or July, will offer 120 channels of television via ADSL, a digital subscriber line that can deliver up to 6 Mb/s of data. VDSL, with speeds up to 26 Mb/s, would be the ideal solution but is effective only at relatively short distances.

"VDSL was not going to work for us because our density requires us to get out more than 3,000 feet from the concentrator," says Rodney Olson, GM of Vernon. "With ADSL, we're able to push this out to the limits and reach enough customers for cash flow."

Olson says using Internet Protocol to send video services has been under consideration for a little more than two years. Vernon and seven other local phone companies formed consortium Midwest Telnet to more cost-effectively offer Internet services. The group began to look at TV services. "We knew it was something we wanted to do," he says, "and we knew it would be best to roll out a wholesale signal to each of the phone companies to spread out the cost."

The cost of the complete headend facility is in the neighborhood of $2.5 million. The group negotiated carriage agreements with the networks and also got some of the deals done through the national cable television cooperative. HITS was an option, but the monthly programming costs were much higher. "It would have decreased the cost of the headend, but," he adds, "because we were doing that through the consortium, it seemed like [doing negotiations ourselves] was the way to go."

The IP technology at the headend is supplied by Minerva Technology, which will handle decoding, encoding and distribution to the still-to-be-determined set-top boxes.

"Minerva didn't win necessarily on price, but we didn't want to look for a transport vendor, middleware vendor and headend vendor, then put all the things together," he says. "Minerva had the most pieces."

The set-top box decision is complicated because the boxes aren't ready yet. Thomson, Pace and Philips boxes are under consideration, but the decision will come down to cost and features. More-expensive boxes (around $400) will enable services like Web browsing and e-mail from the television, something Olson is interested in offering. But $150 per box is much more appealing.

"We want the customers to believe that we can build a smart house for them, and that's something the cable companies can't do," he says. That includes reading utility meters and e-mail from the TV.

Olson says customer interest has been strong. "When you live in small towns, news travels fast. Everybody wants to be a test site, and they want to be signed up even though we can't tell them what it will cost."

On the East Coast, Hargray, a local phone company in the Hilton Head Island area of South Carolina, expects to offer between 80 and 120 channels of video, including VOD and PPV, by year-end. According to Ed Heuck, operations manager, Hargray broadband/CLEC technical services, the bundled package of phone, Internet and cable his company plans to offer will save consumers 20% to 40% over buying the services separately.

"Our goal is to increase revenue while bringing value to our subscribers," he says. "IPTV will help us achieve this goal."

It also will expand the definition of his company, which will become what he calls "a total communications provider." That will drive the valuation of the company. "For obvious reasons, the revenue per subscriber will be greater than that of a cable company who does not offer all the services."

They may not. Yankee Group's Kishore says part of the reason it's a good opportunity for telcos is that cable competition will not be very strong in most of the markets.

Like Vernon, Hargray has selected Minerva Networks' iTV Manager to manage operations at its IP television headend. That will include subscriber and device management, asset management, electronic program guide and even parental controls.

"I've seen it, and it works, so I believe in it," Heuck says of IP-delivered video services. "The system seemed complicated initially, but then we realized that we were looking at data streams, which is something that we have been doing for years with a high degree of reliability. The same precautions, testing and monitoring can be used with some modification."

Kishore says the impact of telephony-based television services on large cable companies will be limited, because such operators typically focus on areas with a high concentration of subscribers and phone companies in those areas, with the possible exception of Qwest, haven't done much in the area of video carriage. Smaller, more rural MSOs, though, could be vulnerable.

"These telcos serve small, often rural markets, which probably have antiquated cable plants," he adds. "And, in a small market, you are in a better position to have a closer relationship with their customers. In [the case of Vernon], the company is a cooperative that plows its profits back to its subscribers. It's tough to beat that."

Whether the endeavor will be successful remains to be seen. The engineering challenges often aren't apparent to the untrained eye. "Good luck," says one engineer. "Companies have been trying to do this for 10 years."