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Improving the Business Case for IPTV
by Geoff Burke, Director of Field Marketing
5/28/2008
As I stand back and look at the IPTV landscape over the last few years, a recent movie springs to mind whose plot seems to oddly parallel the market's development. Maybe you've seen it -- Failure to Launch, starring Matthew McConaughey and Sarah Jessica Parker, in which a highly eligible 30-something bachelor chooses to live with his parents rather than strike out on his own. It ultimately takes professional help, coaxing, and pheromones to push McConaughey out of the parental pad and into adulthood. Replace this leading man's drivers with access line loss, a lot of elbow grease, and an aphrodisiac called "RBOC success," and the story lines that describe Failure to Launch and the IPTV market seem eerily similar. Despite the long-overdue result, the good news is that, in both cases, it looks like the protagonist has finally grown up. I suppose it had to happen some time, although at the risk of sounding like an ungrateful parent, it sure was a long while in coming.
Despite delays introduced by technological uncertainty (need I mention the MPEG4 AVC set-top box false starts?), content challenges, and a business case burdened by big up-front investment, we now see a clear maturation in the IPTV industry. This maturation is marked by a myriad of high-profile commercial successes, lower costs of equipment and deployment, and the emergence of new deployment models optimized for the unique requirements of distinct market segments. Let's take a close look at these changes, the new alternatives that they spawn, and how they affect the continued maturation of the IPTV industry technologically, operationally, and financially.
Why is the North American IPTV Market Now "Ready to Launch"?
New Technology
It seems as though MPEG4 AVC has been coming to market for an eternity. For years, the "50-percent plus" compression improvements over MPEG2 were touted as the panacea for the bandwidth-constrained access network, and nearly four years ago headend providers were bringing to market their first MPEG4 AVC encoders. The problem turned out to be two fold. First, high-definition (HD) content began its proliferation, immediately raising the bandwidth stakes nearly five-fold for each channel delivered into the home. Second, HD content dramatically increased requirements for processing capacity, creating daunting challenges for the chip and set-top-box manufacturers. This resulted in a nearly three-year delay between the first viable MPEG4 AVC encoders and the first stable and commercially viable HD-capable set-top boxes.
Although this is now water under the bridge, the delay froze the commercial IPTV market, as telcos looking to leverage these new technologies were reluctant to invest without a stable solution. It was not until mid-2007 that viable HD-capable MPEG4 AVC set-top boxes became available. Today's market dynamics are a reflection of these circumstances, with pent-up demand for set-top boxes recently subsiding enough to let the laws of supply and demand begin to decrease average selling prices. These dynamics have also driven new innovation, with new features and gateway models now becoming available. The good news is that the set-top box -- arguably the most expensive element of an IPTV deployment on a per-subscriber basis -- is now stable, readily available, and rapidly decreasing in cost while burgeoning in functionality.
Another major technology development driving IPTV economics has been the emergence of deep fiber architectures, such as fiber to the node (FTTN) and fiber to the premises (FTTP), as increasingly preferred options for IPTV service delivery. What makes FTTN and FTTP attractive now? HD content has proliferated, along with advanced entertainment services/features like digital video recording (DVR), multi-channel mosaics, and picture-in-picture (PIP), that promote increased simultaneous channel usage in the home. As a result, IPTV bandwidth requirements to the home now frequently exceed the capacity of ADSL and traditional digital loop carrier architectures.
Although there is unquestionably more cost associated with driving fiber deeper into the network, the good news is that cost decreases and deployment innovations for deep fiber technologies have dramatically improved the economics of deployment. FTTP costs have decreased by nearly half over the last few years, and although VDSL2 chip challenges have delayed the maturation of the FTTN market, competition and innovation will rapidly drive down the costs of FTTN deployment as well.
Operational Advancement
Despite IPTV's reputation as a capital-intense service, those who have deployed IPTV will tell you that one of its most costly elements is the labor cost for home installation, provisioning, and support. It is not atypical for a service provider to devote three hours of time by two technicians to rewiring a home for IPTV services, only to have to roll a truck numerous additional times in the future to both troubleshoot and upgrade the subscriber's services. The last year has seen the commercialization of a number of technologies and solutions that greatly reduce the time and effort for entertainment services turn-up.
One of the first such solutions has been wireless routers, from such companies such as Ruckus Wireless, that remove the necessity of home rewiring altogether. Service providers using this technology have found it to be both robust and stable, and capable of shaving hours off typical installation times (reported average install-time ranges at companies that have commercialized the technology, such as Pioneer Telephone Cooperative, have been reduced from nearly three hours to less than 45 minutes). Although this solution has not necessarily proven to be cheaper than traditional home rewiring, it has enabled service providers to install wireless routers in as many as four times the usual number of homes in a single day. From a business-case perspective, this solution has rapidly improved time-to-market and ultimately, time-to-revenue.
Advancements in remote network troubleshooting and premises provisioning have also dramatically altered the costs of home deployment, not to mention customer satisfaction. As TR-69-capable customer premises equipment has become widely deployed in the network, the opportunity for service providers to enhance customer service functions and remotely provision service upgrades -- instead of rolling trucks -- has proven extremely beneficial in lowering operational costs. With TR-69, customer service representatives can now peer into the home network and diagnose issues that potentially affect service. Furthermore, customers who wish to change or upgrade their IPTV services can do so instantly, providing a key advantage to service providers attempting to retain and monetize customers.
An Improved Business Case
One of the biggest turning points in the IPTV industry and the improvement of its business case from revenue, cost, and risk/reward perspectives can be summarized in three letters -- "SBC" (now AT&T). SBC's commitment to the IPTV space more than three years ago instantly created a bona-fide market worth billions of capital dollars. Large global players in the entertainment and media world such as Scientific Atlanta (now a Cisco company), Motorola, and Microsoft began investing heavily in IPTV solutions and creating integrated ecosystems. As a result of these new players and increased competition, we now see a variety of credible and stable options, more innovation, de facto standards, and lower prices.
Perhaps the biggest impact of SBC, however, has been felt more recently, as it progresses from more than 100,000 subscribers to, it projects, 1 million subscribers before the end of 2008. The inference is that video as a service and a business can work, scale, and be successful. Although it's arguable that the same conclusion could have been drawn from the more than 100 mostly small and rural ILECs around North America that have already found IPTV success, it was AT&T that provided the critical mass, pushing the industry to accept video as a necessary and viable step. As a result, IPTV is a strategic discussion topic in the board rooms of almost all North American telcos today, and a number of new options have emerged that cater to the needs of telcos of all sizes.
One of the most interesting recent developments has been the emergence of pre-encoded satellite solutions from providers like SES-Americom (in conjunction with the NRTC), AvailMedia, Echostar, and a variety of resellers that subcontract from these providers. These services have radically altered the economics of video delivery to telcos, dramatically reducing the up-front capital costs for headend equipment by offering a rental solution for pre-encoded MPEG4 AVC feeds. The net result is that for a little more than a $500,000 investment, telcos can now get hundreds of MPEG4 AVC encoded channels, including HD, for what a telco investing in its own headend might pay at least $4 million to achieve.
Because these services basically offer a rent vs. buy model, they give telcos considering IPTV a number of new options and are a clear catalyst to the growth of IPTV in the North American market. Dozens of North American service providers have now gone commercial with these solutions, which allow them to get to market quickly with extremely compelling services. BEK Communications, an ILEC in south-central North Dakota, is using the NRTC/SES-Americom solution to deliver a robust IPTV solution that includes hundreds of SD and HD channels over GPON. Leveraging this solution, the ILEC claims that it captured over 50 percent of its addressable market in just 59 days after deployment.
A Wild Card Alternative
Just as IPTV has seemingly hit its stride, a new video service option has rapidly emerged that, although nascent, fundamentally alters service-provider business models and network architecture assumptions. Broadband video, often described as "over the top" or OTT services, take advantage of the growing ubiquity of broadband services in North America to enable delivery of a wide variety of video content directly to the home over the customer's existing broadband connection. The content available ranges from crude user-generated content delivered to the PC to HD Hollywood movies delivered directly to the TV. Consumer electronics companies like Apple, service providers like Netflix, and content aggregators like Joost have all created OTT solutions.
Service providers from Greenfield Communications to CenturyTel have embraced these services and offer compelling entertainment services like Vudu and MobiTV to all of their broadband customers. Others, like AT&T, are viewing these services as natural complements to the IPTV service, providing access to niche content that is often not available in today's broadcast TV world. The confusion created by this new service, and its potential risk to traditional service delivery vehicles, has caused some telcos to fundamentally question the viability of the IPTV service model and choose to build their own strategy around broadband service enhancements and OTT services.
There is no easy answer to the question of which IPTV service model to choose. The reality is that broadband video is indeed likely, over time, to supplant the broadcast video model of today. That said, the timing of this transition is very unclear. Telcos may best position themselves by leveraging the pervasive IPTV service model of today to capture video customers, while complementing this solution with easy and managed access to broadband video as part of a comprehensive service offering. Companies like Microsoft, for example, are today producing integrated solutions like the Xbox gaming console and Microsoft Mediaroom middleware that can deliver a comprehensive entertainment experience that includes broadcast IPTV, video on demand, broadband video, and a variety of interactive features including gaming. In an environment where telcos are competing head-to-head with powerful adversaries for customer attention, integrated solutions like these are clearly differentiated and compelling.
Conclusion
Having been involved with a number of the first video-over-copper deployments in the late 1990s, I can personally attest to the fact that IPTV has truly come a long way since its humble beginnings. Yet the rate of change is only accelerating, with dramatic enhancements to the IPTV business case driven by recent technological and operational advancements, as well as by a critical mass of customers with broadband access. Despite the moving pieces, there is little doubt that the deployment of IPTV has never been more favorable, more affordable, more stable, and more strategic that it is today. Telcos that have yet to make a move in the IPTV space can learn something from McConaughey's character in Failure to Launch -- staying at home may be comfortable, but moving forward requires striking out on your own.
About the Author
Geoff is a recognized industry expert in business, marketing, and technical issues associated with the delivery of entertainment services by telecommunications service providers. He has been involved with the majority of cable-competitive IPTV services deployments at North American telcos, and is often asked to share his expertise with the media, as well as at national and regional industry conventions.At Calix, Geoff is the Director of Field Marketing. His responsibilities include development and implementation of Calix's video solution strategy, as well as assistance with the IPTV deployment strategies of Calix customers. Prior to Calix, Geoff was Principal and Founder of Video Catalyst Group (VCG), a consulting firm dedicated to assisting local exchange carriers (LECs) in building successful video and other IP strategies and services. Previously Geoff served as the Director of Marketing Services at Motorola/Next Level Communications. In this capacity, he researched, developed and refined many of the business models, launch plans, and/or marketing strategies utilized by the majority of the first generation of deployments of cable-competitive video services. Before Motorola/Next Level Communications, Geoff held senior positions at The McKenna Group, and KPMG Consulting (now BearingPoint).
About Calix
Calix is the largest telecom equipment supplier focused solely on access solutions for broadband service delivery. Service providers deploy Calix access systems to enable a rich set of information, communication, and entertainment services and to expand their revenue base beyond connectivity. Calix access innovation helps service providers transform their networks from circuit to packet, narrowband to broadband, and copper to fiber. Calix has deployed millions of ports and tens of thousands of systems into hundreds of service provider networks throughout North America. For more information, visit the Calix website at www.calix.com
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