Made for TV: A Tale of Two Telcos

Verizon and AT&T take divergent technical paths
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Over the next two years, two phone giants—Verizon and AT&T—will spend more than $10 billion to present TV packages that rival all the latest digital services offered by cable operators today.

AT&T will spend $4.6 billion by the end of 2008 to improve its fiber network in order to offer its U-Verse video service, along with voice and data service, to some 19 million homes (an initiative it calls Project Lightspeed). Verizon says its fiber-optic network will pass some 4 million homes by years’ end with its FiOS video service, a total investment of $3.6 billion to $5.6 billion.

While they are both spending heavily, Verizon and AT&T are taking very different technical approaches to providing video service. Verizon is rolling out a robust “fiber-to-the-premises,” or FTTP, network that allows it to basically replicate the digital-cable transmission architecture while still being able to deliver bundled high-speed data and voice services.

SIMULTANEOUS TRANSMISSION

Like cable operators, Verizon is using QAM (quadrature amplitude modulation) transmission gear and MPEG-2 compression to simultaneously transmit hundreds of channels to the home, where they are received on a Motorola digital set-top box. The only part of Verizon’s current offering that is truly Internet Protocol TV (IPTV)-based is its video-on-demand (VOD) system, although it is beginning to roll out new IP-delivered content, such as interactive traffic and weather information.

AT&T, on the other hand, aims to use existing copper-wire connections to the home and achieve the necessary throughput for video by using a fully IPTV-based system. AT&T combines VDSL (very-high-speed digital subscriber line) transmission, which yields 20-25 megabits per second of bandwidth, with switched-broadcast technology that delivers only the requested program streams to U-verse subscribers instead of simultaneously “broadcasting” hundreds of channels. To achieve the maximum video quality in the smallest possible bandwidth, AT&T is using advanced MPEG-4 compression, which the company says will allow it to deliver four different video streams, including an HDTV stream, to multiple Scientific-Atlanta IP-based set-tops, along with high-speed data and voice services.

UBS analysts John Hodulik and Aryeh Bourkoff believe the telcos won’t back off this time, but they do have reservations. “While we continue to believe that fiber deployment is the right strategy for the Bells, we believe the financial benefits will take a much longer time to positively impact the companies’ bottom lines,” the analysts said in a recent report.

Phone companies have tried television before. In the mid 1990s, two groups of regional Bell operating companies attempted to launch television services, respectively called Tele-TV and Americast, which promised to compete with cable by offering hundreds of digital channels delivered over fiber-optic pipes. In 1996, Bell Atlantic (now part of Verizon) even started a “fiber-to-the-curb” video service in Dover Township, N.J.

But the costs of building the necessary fiber networks to deliver competitive television services proved too high, and the telcos’ video plans were put on hold. After a wave of consolidation among the Bells, telco giants Verizon and AT&T are now back pursuing video with a vengeance.

So what’s different in 2006?

Today, phone companies are under greater competitive pressure. Cable operators first took the early lead in the high-speed data arena and now are grabbing away market share for telephone service with new Voice over Internet Protocol (VoIP) systems. But the technology needed to deliver video—improvements in transmission and video-compression hardware and new IPTV software—are making it more financially feasible for big telcos like Verizon and AT&T, as well as smaller phone companies, to get into the video game.

Verizon is chasing a more aggressive strategy. It launched FiOS in Keller, Texas, last September, and it is now available in about 50 communities in parts of Florida, California, Virginia, Maryland, Massachusetts and New York.

The telco has snagged programming deals with all the major broadcast and cable networks and offers around 400 channels, including a core “FiOS Premier” package of 180 channels for $39.95 a month. For additional charge, it also has more than 20 HD channels and 2,200 VOD titles available.

AT&T’s U-verse service is currently limited to a trial deployment (which AT&T refers to as a “controlled market entry”) in Richardson, Texas, although the company says it should be available in 15-20 markets by years’ end. AT&T isn’t talking about specific programming or pricing details but says it currently has more than 200 channels available in Richardson, including A&E, CNN, ESPN, HBO and MTV. U-verse doesn’t currently offer any HD programming; that should change as it goes to a broader commercial launch, says Jeff Weber, AT&T VP of IP product and strategy.

“One of the surprises so far has been how positive the customer feedback has been around the user interface,” says Weber, who believes that the ease of use of the Microsoft software, particularly in the form of the electronic program guide, will give AT&T a competitive advantage versus cable. He adds that the EPG was one of the major reasons AT&T went with Microsoft’s IPTV software.

In the meantime, Verizon is steadily digging—and filling—its own ditches in order to lay fresh fiber. By rolling out a traditional QAM-based plant, says Shawn Strickland, VP of FiOS TV product management, the telco is able to enjoy the fruits of the cable industry’s digital labors.

“We are able to leverage the scale economics of the digital video plant, and the cable industry has paid that premium over the last 15 years,” he says. “It’s a mature technology, it’s wide open, and it’s well-understood.”

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