It would be a crucial move into unproven territory for SBC, which like the other regional telephone giants wants to grow by expanding beyond phone and Internet services and into entertainment. To do that, SBC expects to spend more than $4 billion during the next three years on its fiber-optic network in order to offer faster Internet connections capable of carrying digital video programming.
As SBC rolls out fiber
to the neighborhoods of
millions of new customers,
a key component will come
from the software giant.
The deal is also a milestone for Microsoft. The company has spent roughly $20 billion in the past decade trying to break into the television business, but it has little to show for that investment, industry analysts said. The 10-year agreement with SBC is Microsoft's first commercial contract to help deliver programming to millions of homes.
SBC plans to deploy Microsoft's software to encode television programming before it is sent to subscribers and then decode the same programs on TV set-top boxes in customers' homes. Most important, the software compresses digital signals so that video programs can be sent over high-speed data lines.
Microsoft has been testing this technology, called IPTV, with several telecommunications companies outside the United States, including Bell Canada and Reliance Telecom, one of India's largest phone providers.
Though some analysts are skeptical of how quickly and cheaply the regional Bell companies can enter the television market, SBC plans to start selling programming through its fiber and copper network from the satellite provider, EchoStar, by the fourth quarter of 2005. SBC already has a separate agreement to market EchoStar's satellite service known as the Dish Network.
Like SBC, Verizon Communications and BellSouth, as well as many smaller phone companies, also plan to sell television in the coming years to increase revenue and challenge the cable industry, which is fast moving into the phone business with Internet-based phones.
Richard Doherty, research director of the Envisioneering Group, a technology consultant on Long Island, said SBC's deal with Microsoft underscored how fierce the competition between cable and telephone companies was about to become.
"For the first time we hear the cable companies saying, 'the telcos are coming,' " he said.
Microsoft's software, along with SBC's plans to extend fiber-optic cables to within a few thousand feet of customers' homes, will help the company provide digital video to consumers quickly, according to Lea Ann Champion, who runs Internet-based operations at SBC. Speed is crucial, she said, because cable companies are urging their customers to replace their older, analog TV services with advanced digital services.
"It's our window of opportunity to reach cable customers," she said.
The SBC-Microsoft alliance underscores the changing nature of how telecommunication services are delivered. To compete with cable's high-capacity pipe into the home, phone companies are rushing to invest billions in fiber optic networks that make it possible for them to send larger amounts of data to homes and businesses.
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"This is a very big endorsement," said Moshe Lichtman, vice president of Microsoft TV. "It's a signature of confidence in the direction Microsoft has been taking in this space."
Consumers will potentially have hundreds of channels to choose from, although the delivery of that programming will be different from cable's. All IPTV programs will be delivered on a video-on-demand basis, where consumers request programs from a central server and it is delivered immediately. By contrast, cable companies typically send hundreds of channels to customers' homes all at once--although newer, digital cable systems can also send programs one by one, video-on-demand-style.
Initially, SBC hopes that the Microsoft technology will enable it to simultaneously send two high-definition channels, two standard definition channels for consumers with two televisions on at once, as well as a high-speed Internet connection to consumers. Subscribers will need to add only a new set-top box to receive the programming. SBC will also have to vastly increase data speeds on its network.
Microsoft's technology will also make it easier for SBC to offer TV programming to its customers on a variety of devices, that in the future might include cellular phones and personal digital assistants, when wireless speeds become fast enough.
The deal with SBC comes after several high-profile failures by Microsoft in its efforts to enter the lucrative television market. Since 1993, Microsoft has invested $20 billion in cable companies in the United States and abroad. Several of those television-related ventures soured, said Doherty of Envisioneering.
But Microsoft appears to have learned from those earlier mistakes. Instead of trying to win business by become an equity partner in cable companies, Microsoft is instead focused on improving the server computers and set-top boxes for IPTV.
Other phone companies are also looking at using Microsoft's technology.
Together, the Bell companies are expected to acquire 6.1 million television subscribers, or 6.2 percent of the national market, by 2010, according to Jeffrey Halpern, an analyst at Sanford C. Bernstein & Company in New York.
A major hurdle for SBC, however, is how to increase the speed of its network to deliver the television and Internet services it promises. SBC will have to increase its current connection speeds by seven-fold, which may make the company's goal of providing television programming within a year difficult to achieve.
"The projections are going to look completely ridiculous by the time we get to the end of 2005," said Albert Lin, an industry analyst at American Technology Research, an equity investment firm.
Separately, SBC said Tuesday that would start offering Internet-based phone service that operates over broadband lines in early 2005. The company is now testing the service in Chicago, Dallas, Los Angeles and San Antonio. Verizon and Qwest have already made plans to offer similar services.
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