SBC Plans a Network Overhaul

Telco giant sees enhanced IP service as competitive wedge against cable
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In a bold bid to remake its network to deliver TV over the Internet (IPTV), phone giant SBC struck a 10-year, $400 million deal with Microsoft. By the end of 2005, SBC expects to begin rolling out a four-tier IP-based video, phone, cellular and data service. SBC thinks this option gives it a competitive edge against the triple play of voice, video and data offered by cable operators.

<p>Telco TV Snapshot</p>

Upside

Flexible IP-based infrastructure

More channel capacity

Consumer trust

Downside

Spending billions on fiber

IPTV technology unproven

Higher costs, lower margins

“Our intent is more than just cutting prices and hoping we get market share,” says Jeff Weber, SBC's vice president, product and strategy. The goal is to attract subscriptions through added service.

In order to offer the enhanced IP service, SBC, the nation's second-largest phone company, will spend nearly $4 billion digging up roads to lay ADSL2 fiber so it can deliver 20-25 Mbps of data to homes. Those settings provide enough power to deliver SD and HD cable services, voice and data.

But Dave Spear, executive vice president, strategy and market development for Cedar Point, whose switch-based voice-over-IP (VoIP) technology is designed for cable systems, believes those build-out requirements will be a strain. “It's going to be tough,” he says of SBC's plan. “Cutting through the streets and getting right of access to the street can be complicated.”

Still, once that initial buildout is complete, IPTV could change the nature of the medium. IP places data, voice, and video services on the same signal- transportation platform. “This changes the ground rules in terms of the types of service that can be provided,” says Ed Gracyzk, Microsoft TV Group. With the TV and set-top boxes sitting on the same network and using the same language as a PC, gaming consoles, mobile phones and other ground-breaking services can be added.

Sharing the same IP infrastructure means systems can also communicate with each other. For instance, a football fan stuck in traffic when the big game begins could send a text message from a cellphone to his DVR telling it to begin recording. Or a couple tired of sitting in front of the living-room TV could redirect a program on the DVR into the bedroom.

That connectivity spells more opportunity for TV stations and networks, too.

“A network like HBO could send out a 30-second clip to a cellphone, and then the person could dial back into the DVR,” says Gracyzk. In addition, an IP-based switched-architecture technology is far more efficient in terms of bandwidth than the traditional cable plant, since it delivers only the channel requested to the viewer. A cable plant broadcasts every channel to the subscriber's home at all times.

In SBC's case, all content will pass through Microsoft servers located at video-distribution points that serve a certain neighborhood or town. Microsoft Foundation software will provide the electronic programming guide and user interface through which viewers access the channels.

Conceivably, an operator could offer more than 1,000 channels on the program guide, says Gracyzk. The number doesn't affect how much bandwidth is needed into the home. To ensure that the service is bandwidth-efficient, it employs Windows Media 9 advanced video- compression format. That format typically needs half the bandwidth of video currently used in MPEG2.

In addition to the mega-channel listing, there is an opportunity to explore other services: video teleconferencing over the television set, retrieval of voice mail through the TV, forwarding calls to phones outside the home. Meanwhile, TV networks and stations can investigate a new level of two-way interactivity.

“This is clearly a better two-way platform than anything on the market,” says Weber. “And as content providers look to do more interesting iTV applications, we're clearly the platform that makes the most sense.”

In fact, SBC and other telcos are embracing IP-based delivery of video signals for a bottom-line reason: survival. They've seen their traditional phone-line business snatched away by wireless companies, and now cable operators are going after digital-phone service.

“Cable is very bullish right now,” says Spear. For the telcos, the trick is not just offering the service. It's turning the service into a business.

But some industry insiders remain skeptical. “The cable industry's flexibility to offer new services is superior to the telcos', so I think they're going to capture [the triple-play] market and capture it quickly,” says Spear.

Companies like Cedar Point are working with cable operators to ready VoIP services. Every month, the telcos lay fiber that the cable companies can use to sign up new voice customers.

More important, the cost for cable operators to add voice is small compared with the costs telcos will incur for launching video services. (Deploying voice services typically requires about $150 per subscriber; video services are usually $600.) The cost a distributor pays for a cable channel is closely tied to the amount of distribution: more distribution, lower cost per subscriber. “Content-wise, the telcos will have more expensive negotiations than the MSOs,” adds Spear.

Whether the telcos can pull off the triple play remains to be seen. One thing, however, is certain. During the next 12 months, both telcos and cable companies will embrace IP technologies. “It's all about broadband and sending packets and bits,” says Spear. “The world is going IP everywhere.”

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