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Commentary: TV deal clicks for Microsoft

As SBC rolls out fiber to the neighborhoods of millions of new customers, a key component will come from the software giant.

Commentary: TV deal clicks for Microsoft
By Forrester Research
Special to CNET News.com
November 17, 2004, 6:58AM PST

by Josh Bernoff, Vice President

When SBC Communications rolls out fiber to the neighborhoods of millions of new customers by 2007, its TV service will run on Microsoft TV middleware.

In fact, SBC says it will spend more than $400 million on Microsoft's set-top-box software over the next 10 years. This announcement signals the start of a big move by telephone companies to compete for U.S. television subscribers, threatening cable and satellite--and making Microsoft the early set-top-software leader.

Related story

As cable providers encroach
on their turf, phone companies
are ready to strike back
with TV services.

For years, major U.S. telephone companies have told us they'll be getting into the TV business, but little has happened. Now it will. In the wake of a ruling by the Federal Communications Commission that allows telephone companies to control services on fiber lines they build, SBC will accelerate its Lightspeed fiber deployments to reach 18 million SBC customers by 2007. SBC plans a "triple play" on its fiber, offering a bundle of voice, high-speed Internet and, for the first time, TV services.

Microsoft TV is a crucial element of SBC's offer, since it will make advanced TV services--guides, interactivity and video on-demand, for example--available to SBC's TV subscribers. Our advice in the wake of this announcement:

• Telephone companies like SBC must differentiate their triple-play services. Both SBC and Verizon Communicatons, which announced a fiber rollout earlier this year, face a challenge: Basic telephone-company TV won't be enough to win video market share from cable. If their triple-play services are the same as cable operators' offerings, these rollouts won't do much beyond slowing voice defections and driving prices down. To win share, telephone company bundles must emphasize new features and integrated services, such as voice mail on the TV, video downloads to the PC, and the ability to pause any live TV program--on any TV in the house. But the service is just the beginning. The marketing also has to sparkle and hit cable companies hard, and that has not been a strength of the phone companies.

• Cable must open its network; satellite should grab subscribers. With their own triple-play initiatives well along, cable companies can gain advantages by opening up their networks to outside innovators. They should make cheaper digital cable possible by digitally simulcasting all channels. They should also open their networks to consumer electronics innovation and new applications by embracing the OpenCable and CableCard standards. The telephone companies' entry to the TV space spells trouble for satellite, as the Bells will begin to abandon their marketing alliances with DirecTV and EchoStar. Unable to offer the triple play, satellite's only alternative is to grab all the customers it can in the next two years with exclusive content, like DirecTV's NFL package and EchoStar's ethnic channels.

• Microsoft must tie together its living room strategies. After 10 years of trying, the software maker has won or is poised to win set-top-box contracts with Comcast, SBC and Verizon, making it a dominant force in set-top-box middleware. Redmond should extend its Microsoft TV set-top-box software, allowing MSTV boxes to connect to Media Center PCs and Internet content, as it has already done with Xbox consoles and Media Center Extenders. While we don't think Microsoft can re-create the monopoly position that it has on PCs--the operators are in charge here, not the software vendor--its TV success will also help power another key Microsoft initiative: dominance in digital rights management for Hollywood content.

© 2004, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.