Baby Bells are spending billions to sell video service over broadband. Can they crack cable and satellite's hold on TV viewers? Image: Video via broadband
The metaphorical overtones of the video are hard to miss. The clip is part of a carefully orchestrated demonstration aiming to show off the prowess of SBC Communications' pending Internet television service, due out next year--and the phone giant is swinging for the bleachers itself.
Like the other Baby Bells, SBC is spending billions of dollars to upgrade its network in a bid to fend off cable television giants that are stealing its customers. In the next year, it hopes to turn the tables by converting its antiquated infrastructure into a digital dynamo, serving everything from high-speed Internet access and phone service to multichannel high-definition TV.
SBC and other old-line phone companies face fierce competition from cable providers, which are selling telephone service as well as entertainment offerings. Video could give them the ammunition to fight back.
"If we are going to build the IP (Internet Protocol) pipe, we want all the revenue streams," said Ralph Ballart, vice president of broadband at SBC Laboratories. "The great thing is that several technologies are coming together now. We're very happy about that."
The wall between the cable and telephone industries is rapidly crumbling, as each begins to issue challenges in the other's backyard.
Cable companies such as Comcast and Cox Communications have already begun to push telephone services over broadband connections, encroaching on local monopolies maintained by the Bells for roughly a hundred years. Now the Bells--SBC, Verizon Communications, BellSouth and Qwest Communications International--are preparing to strike back with TV services.
"There's no question they have to do this, competitively, because their core business is so much under threat," said Jim Penhune, an analyst at Strategy Analytics.
Industry pundits have predicted the collision of the two industries ever since the Internet first brushed the public consciousness more than a decade ago. Now those forecasts are becoming a reality, thanks to growth in broadband services and new software applications that run equally well over digital cable, advanced DSL and optical fiber lines.
Analysts said last week's deal represents a watershed for both companies and a new challenge for cable companies facing increasing competition from satellite-based rivals.
"It may not be at every household...but neighborhoods closer to the central offices, such as apartment buildings and dorms, will have that access," said Richard Doherty, research director at The Envisioneering Group.
Buy now, save later?
To offer TV, the Bells are going to have to pay.
Ordinary telephone signals use very little bandwidth, running over copper lines installed years before the high-speed Internet was ever envisioned. Thus, the network is insufficient to offer high-quality television broadcasts for the vast majority of people who use it.
Asymmetric digital subscriber line (ADSL) service--the most widely deployed high-speed Net technology currently in use by the phone companies in the United States--tops out at 8mbps, but is generally offered at much lower rates in most commercial services. The technology is considered barely passable for delivering a single video transmission and not nearly robust enough to match cable or satellite TV, both of which offer hundreds of channels at once.
The bandwidth shortfall has led some phone providers, notably Verizon, to push for a complete switch-out of its copper infrastructure in favor of a pure fiber-optic network. That's expected to eventually superpower Verizon's network to 100mbps in major cities--more than enough to run phone lines, high-speed Internet and multiple digital television channels, including new high-definition transmissions.
The Bell giant will spend $800 million this year to lace a million homes with super-fast fiber-optic service, called Fios. By the end of next year, Verizon plans to reach an additional 2 million homes and begin selling pay TV to its customers. They can also receive broadband Internet access at the breakneck speed of 5mbps for about $35.
"Everybody in the industry knows and believes that fiber is the overall answer, long-term," said Mark Marchand, a Verizon spokesman. "The real question becomes, do you do it now or later? We want to do it once. We think this future-proofs our network."
Although fiber is widely considered the most potent option for the phone industry, replacing existing copper networks is costly and time-consuming.
As a result, most of the Bells other than Verizon are turning to hybridnetworks that include bringing fiber closer to the customer, but still using copper links to actually enter the home.
These hybrid networks will have the ability to run TV services, thanks to newer DSL technologies such as ADSL 2+, a newer version of standard ADSL, and VDSL (very high bit-rate digital subscriber line). ADSL 2+ offers roughly twice the downstream bandwidth of ordinary ADSL, or 16mbps, while VDSL has top speed of 52mbps. While both are limited compared to fiber, these advanced versions of DSL are considered robust enough to deliver video, depending on how far the customer lives from the switch that connects the copper to the fiber-optic Internet backbone.
Whether it's through pure fiber or a hybrid network, the Bells are opening their wallets wide as they head toward the TV market.
In addition to last week's $400 million contract with Microsoft, SBC will spend $4 billion to upgrade its network infrastructure with fiber-optic lines. Last month, SBC said it would pay French equipment maker Alcatel $1.7 billion to build its new network.
SBC will not stretch fiber into individual households, but rather will extend the lines from central offices into neighborhood "nodes." From the nodes, the company will upgrade its copper lines with VDSL, a technology that can offer 100mbps to homes within 1,000 feet of a node. SBC-serviced homes, however, will get 20mbps to 25mbps, since VDSL lines will stretch more than a mile.
BellSouth is taking a similar approach by pulling fiber to the curb, which is closer than a node, but still not all the way into the home. To get into the living room, the company will rely on its copper wires to run ADSL 2+ technology to reach the speed needed for TV. The company is still testing the technology and has not deployed video to its general consumers.
One company that has deployed a limited trial of these technologies is Qwest. The company has deployed VDSL to about 43,000 customers in Highland Ranch, Colo., and Phoenix, offering video and 1.5mbps broadband. The company will continue to test new forms of ADSL 2+ and VDSL for upgrading other parts of its network.
Once video becomes a common staple for the Bells, the battle will only intensify. Since most video customers use cable or satellite, the Bells will be trying to pluck their customers with more appealing offers.
"It's about churning a customer away from a major cable operator," Strategy Analytics' Penhune said. "The way to do that is through bundling and integrating all sorts of IP services together."
Microsoft came to play
For companies planning to rely on DSL, such as SBC and BellSouth, new video compression technology could make the difference in turning high-speed copper networks into platforms capable of supporting competitive television services--without requiring more costly upgrades to fiber.
As SBC rolls out fiber
to the neighborhoods of
millions of new customers,
a key component will come
from the software giant.
Microsoft hopes to step into the gap. The company has been a leading developer of next-generation video through its Windows Media technology, which SBC licensed last week. The company has signed up several other customers for its technology around the world, including Bell Canada. Of these, however, SBC is arguably the most important to date, offering a foot in the door of an industry that has largely rebuffed its advances.
Microsoft has invested a hefty $20 billion over the years to win a berth for its technology in the TV industry. With the SBC deal, its fortunes may be about to change.
SBC and the software giant recently showed off its IPTV technology to CNET News.com in a cushy mock living room at Microsoft's Silicon Valley office in Mountain View, Calif.
The demonstration highlighted multiscreen capabilities and a TiVo-like digital recording feature, enabling viewers to record, rewind and pause a game, even when it's live. Executives also showed off instant channel changing, contrasting it with the 1- or 2-second delays frequently experienced using current digital cable technology.
Video was streamed onto the set through a broadband Internet pipe at 10mbps in pristine high definition using Microsoft's Windows Media 9 codec. Microsoft also created the programming guide and the service's various features, such as instant channel changing.
For Microsoft, adding SBC as a client underscores its attempt to bring its software onto various platforms, such as the set-top box. Earlier this month, Microsoft and Comcast announced a deal to test Microsoft TV software in the cable giant's Seattle systems.
SBC is betting all of its chips--$4 billion worth--on Internet-based television and hopes that Microsoft will help dig itself out of its hole. If the Bells' investments in TV are well-spent, the slow-moving phone industry could give cable a real run for its money.
"2004 is the last year when people consider video an exotic application for broadband," said Peter Barrett, chief technology officer at Microsoft TV.