IP Convergence: Beyond VoIP, Beyond Cost Savings

In my previous blog on this subject I indicated that HDTV primarily revolves around flat screens and motion picture studio efficiency. In fact, flat screen TV systems are not purchased for their claimed HDTV capabilities but for esthetic reasons: Flat is Cool. Few of the flat screens are compatible with the true HDTV (1920 x 1080) format. The current quality improvements are based on the use of “DVD-quality” signals in digital format via the air, via satellite, or via cable networks. Given the low replacement ratio (in the range of ten years) for the 1.5 billion TV’s on earth, not much will likely happen with “HDTV” for the consumers in the coming years.

Now compare the quantity of TV’s with the 800 million PC’s and 1.5 billion mobile phones that are out there. We’re used to replace these items every three years, so this is the area where fast changes can happen. The 2006 UK regulator Ofcom report shows, that young adults now watch less TV than their parents. Computer games, chatting, and other internet activities are successfully competing with traditional television, and TV programs are watched selectively rather than passively. The end of the couch potato era is in sight! Taking the TV to the PC and the mobile phone is a logical step, and potentially a killer application. The format to do this is IPTV.

The Focus Group of the International Telecommunication Union (October 2006, Korea) defines IPTV as  “Multimedia services such as television/video /audio /text / graphics delivered over IP-based networks managed to provide the required level of QoS/QoExperience, security, interactivity and reliability”

Each line of business positions to get a piece of the potentially very rich IPTV cake: Equipment manufacturers advertise the IPTV capabilities of their routers; Local telecom providers focus on the quality aspects to compete with the cable companies and fill the gap of the ever reducing voice revenue; Cable companies see in IPTV a new way to move towards two-way services and offer video on-demand (VoD) via set-top boxes; Coffee companies advertise that their beans enrich IPTV viewing, and so on. They all plan to incorporate IPTV in their service offering as a new ‘triple”, or “quadruple” play subscription package. They all hurry to state that IPTV is not to be mistaken for free open Web TV.

Of course, Web TV is exactly what we’re heading for on our PC’s and mobile phones. The plans to offer IPTV as subscription service with set-top boxes are, at best, interim solutions that will fail to generate profitable revenue. Today’s PC users (connected either via DSL, Cable, WiFi/WiMax) are rapidly getting used to high-speed internet connections in range of 3 Mbps to 30 Mbps. These internet users are the early adopters of Web TV. The other internet users will join them as soon as their internet access connection allows for the speed, which is a matter of time. Compression technology improvements have resulted in the ability to view TV at data speeds of 500kbps – 750kbps.  Modern internet connections support watching different TV channels on multiple PC’s.

But what about the Quality of Service, you may ask?
Since 2000, various proprietary and open source codecs have been created that allow an acceptable display of TV programs, both for linear TV as well as for canned motion pictures.
Besides the H.264 standards that were agreed upon by the ITU members in the past decade, multiple open-source MPEG-4 codecs evolved to fulfill the market need. Codecs such a DivX, 3viX, and XviD were created, with additional services, such as subtitles, included in new container structures like OGM and Matroska. Simplified versions have been made for the mobile phone, such as 3GP. Check out the Doom9 site for guides and version details. No need to worry about all these new codecs: The PC or SmartPhone media player will detect the required codec and automatically fetch it from the internet in a matter of seconds (except when you’re tied to a proprietary set-top box, of course).

Today, computer and mobile phone users are enjoying mp3 audio on their phones and iPods. This highly compressed  music format has effectively taken over from the high quality audio CD. The same is happening with video. Consumers have embraced free “low-Q” video sites such as YouTube and Google. In the past year, free linear IPTV / Web TV services have seen explosive growth. Dozens of generic TV-portals are now offering free access to thousands of TV channels. Examples are Channelchooser and wwiTV. This number of portals will likely grow two orders of magnitude in the coming year.

Also for the mobile phone side there are TV standards, such as T-DMB. The free air to TV model, introduced in South-Korea late 2005, allows buyers of a T-DMB (Terrestrial Digital Multimedia Broadband) handset to watch TV without requiring a subscription. This is the way to boost the solution! In Germany, the mobile provider Debitel initially charged a fee for the TV service, which resulted in minimal growth. To boost sales, they are now offering a 6-month free introduction. T-DMB is not restricted to mobile phones. Also PDA, portable TV devices, and car navigation systems can make use of this service.

We’re slowly moving away from the Napster days. Consumers are getting used to pay for mp3 downloads via iTunes and its competitors. The same is bound to happen with TV (and games). Viewers will become used to pay a fee for on-demand motion pictures.  VoD is the reason that all providers are rushing towards IPTV. New anti-piracy tools, such as the video watermark system introduced by Philips this week, will help to protect (at least for a while) VoD material and revenue.

What will be the effect of IPTV on the ISP’s, Cable companies and other transport providers?
A recent Gartner report predicts that almost 50 million households will subscribe to IPTV service by 2010.
My perspective: Why subscribe to IPTV if you can get it for free via your regular internet connection?
In Europe, France leads the way: Companies such as FREE are including linear (terrestrial) TV channels in their package at no extra charge, focusing on new revenue via VoD services. According to a recent WorldBusiness article, PCCW in Hong Kong has highest local IPTV market penetration number,  but a fast ROI seems unlikely, especially if consumers can also watch TV via free web portals.

Similar to the music industry, where music producers and artists are bypassing the record companies by posting their music directly on the internet for a moderate fee, we will see traditional TV transport providers being bypassed by the content producers.
Most linear TV stations already serve their audiences with program replay and extended broadcast services over the internet. Best-in-class example is probably the BBC, offering a wealth of on-line information around their programs in over thirty languages, not only for their TV audience but also for mobile phone users.
Motion picture distribution will be done directly by the studios in cooperation with dedicated storage and on-line servers hosted by internet content providers such as Google, and/or via P2P download options.

In the coming years, I expect to see many local "legacy-based" TV distribution / metropolitan cable companies losing their business to the content and internet providers. A shake-out in this area is unavoidable.
For global IP-based network owners and service providers such as Global Crossing, I see only positive effects: Global IP traffic and capacity will increase even faster that it is doing today.

So what's next in the HDTV/IPTV theater? More about that in my third (and last) blog on this subject.
Gert Nieveld

Coincidentally enough as I was reading Jeff Pulver’s Network2 Petition for Declaratory Ruling before the FCC, I received an email from Apple touting its new Apple TV.  And it reminded me of the checks and balances that exist between network-based services and hardware-based services. 

As Jeff describes it, Network2 “provides a free service intended to facilitate growth of a particular kind of Internet Video: original programming created specifically for Internet distribution that is episodic or continually updated and which meets Network2’s standards for technical quality and production value.” 

Apple describes Apple TV as follows – “Now all the hit movies, TV shows, music, and podcasts on iTunes—and your photos, too—can be enjoyed in your living room on your big-screen TV, transferred wirelessly from any Mac or PC in your home.”

While the content may differ between Network2 and Apple TV, aren’t they essentially offering the same service?  Aside from the professionalism of the content, the only other difference between the services is Network2 is network-based and Apple TV is hardware-based. 

But this distinction is starting to have real consequences that the industry and policy makers need to heed.  Why does Jeff have to be so concerned with regulation while Apple seemingly could care less?  (Actually, I am a little puzzled as to why Jeff filed this petition.  He cites a European Commission initiative to harmonize the treatment of all video services, but I am not sure I see that necessarily as a threat to his service and in any event, I do not see a threat here in the U.S.  But I guess this is an effective way to garner some press for Network2.)  Note as well each party’s interest in net neutrality.  Presumably net neutrality will be a very important issue for Network2.  Not so for Apple TV because it does not rely on real-time delivery. 

Does Apple have the superior business model?  Is Apple’s approach to video distribution better than Jeff’s because it is insulated from regulation and efforts by network operators to increase revenue?  Is Jeff’s model better because it is not subject to the demands of powerful content providers and plagued by DRM demands? 

For regulators the question to ask is whether their policies unnecessarily distort the competitive market and provide an artificial advantage to Apple TV.  For telecommunications carriers, the question to ask is whether their actions (such as seeking to charge premium prices for premium delivery) are encouraging hardware-based solutions to which they have limited competitive responses.

The law firms of Kelley Drye (link to the petition) and  Bingham McCutchen (link to the petition), on behalf of several CLECs, have separately petitioned the FCC to modify the rules governing the retirement of copper loop plant by the Bell Companies. 

While these petitions raise an important issue, the relief they seek is all too typical of the Communications bar – more rules.  The concern raised by the CLECs is that the Bell Companies are retiring their copper loop plant in order to eliminate a potential “third wire” into the home.  That is a valid point.  But there is an additional point to be made and a better solution. 

The copper loop plant owned by the Bell Companies has both an intrinsic value as a raw commodity and a potential value as a third wire into the home.  As a commodity, the copper plant is quite valuable since copper is trading at or near all-time highs.  As a third wire into the home, the copper plant is also quite valuable as it can serve as the medium upon which broadband Internet access and IPTV can ride. 

So should the Bell Companies be able to retire their copper plant without any salvage value?  Wouldn’t that run counter to their duty to rate payers and shareholders?   The CLECs should be asking the FCC to require the Bell Companies to either (1) sell the copper loop plant on the commodities market and share the proceeds with ratepayers (who did after all pay for the plant to begin with) or (2) sell the copper loop plant to CLECs as an on-going operation and share the proceeds with ratepayers. 

Now I don’t necessarily favor the first option as I think that would be a waste and I recognize the second option is complex, but carriers around the world are looking at divestiture of their local loop plant and Bear Stearns certainly seems to think it is a good idea.  So instead of asking for more rules surrounding the Bell Companies’ retirement of copper loop plant, the CLECs should be asking the FCC to explore ways the Bell Companies can maximize the value of their copper loop plant not only for their own benefit, but the benefit of ratepayers and the public as well. 

After all, didn’t the CLECs learn from unbundling that you can’t force the Bell Companies to do well something they don’t want to do at all?  Is the best way for competitors to gain access to copper loops to have the FCC establish a host of rules and regulations that force the Bell Companies to do something they don’t want to?  Hardly.  The only way CLECs are going to get meaningful access to the copper loop plant is to buy it themselves.  The proceeds from the sale can be shared with ratepayers and the Bell Companies can use their share of the proceeds to fund their fiber deployment.  Talk about a win-win-win situation.  Ratepayers get a refund, the Bell Companies get a capital infusion, and CLECs get copper loop plant.  That’s a lot better than the Communications bar getting rich off of a series of rulemakings and litigations.   

It's interesting to watch this dance between 2 technology savvy companies.

I'm not a lawyer, but have experience in both patent and trademark areas while working at Harris Corporation and Acterna.

From my perspective,  Apple did in good faith attempted to negotiate  a license for sometime,  but walked away from the table the evening before the now famous announcement at MacWorld 2007.

Apple is playing a game , in which they feel they can show Cisco didn't protect the mark (which trademark owners must) and their use of iphone won't confuse the market.

It is said, it wasn't for money but for interoperability.   For the iphone ?  or another apple announcement that could be more disruptive to Cisco?

I think it's the later ,  I think it's all about Apple TV.

The announcement of Apple TV and Apple Inc place Apple right in the middle of your living room, and right next to Cisco's largest acquisition  ever, Scientific Atlanta.

Add more fuel to the topic and note that  Microsoft has entered your living room with their latest Xbox 360 offering IPTV.

The folks at Apple are smart and they are playing an awesome game.

Video over any network is big news,  content is available over the internet,  over Xbox live, and over your mobile phone.

The entertainment market is moving to a model where users want to be entertained , right now, over the media they select and with the content they  like (TiVo , Apple TV, etc.. )

But are you  ready to be exposed to targeted marketing at a unprecedented level?

Please take this poll and let us know your thoughts.

Why is it that the Bell Companies have been so successful with their push to reform the local franchising process and to bring pressure to bear on the exclusionary practices of landlords and building owners?  CLECs have faced these issues since they were CAPs (competitive access providers) and tried (largely in vain, but with a few notable exceptions, for instance legislation passed in Connecticut in 1995 that I helped draft) to persuade lawmakers to break the monopoly control of public and private rights of way. 

The cynic in me says that the Bell Companies are simply using their vast political and legal resources for good instead of their usual evil, but there is a reason for their success beyond just their sheer tenacity and political dominance.  I submit that law makers are much more attuned to their arguments because it is all about access to residential consumers and television.  Americans love TV and they become very vocal when anyone messes with it.  Sensing a public largely dissatisfied with the business practices of cable companies (which are improving), and frustrated that they cannot muster the votes necessary to re-regulate cable television, lawmakers are all too eager to help introduce competition any way they can. 

Conversely, when CLECs were trying to reform franchise and rights of way laws, it was perceived as a minor issue benefiting big business and its suppliers.  There was no appreciation for the criticality of access to rights of way in the development of facilities-based competition.  Only now are policy makers getting it because they see how the franchise process delays even companies like AT&T and Verizon as they try to deliver video competition to the masses (or at least the demographically appealing masses). 

Having just argued that bigger is not always better, I do have to acknowledge the one area where the acquisition of AT&T and MCI by SBC and Verizon, respectively, has paid off handsomely – access to rights of way.  But it is not that SBC and Verizon have achieved economies of scale in this area.  No, instead the acquisitions of AT&T and MCI allowed SBC and Verizon to pursue franchise reform and obtain access to rights of way far more rapidly than they would have if AT&T and MCI were still around.   This is because AT&T and MCI were the only carriers able to go toe-to-toe with SBC and Verizon in virtually every town where they applied for a franchise to roll out IPTV.  AT&T and MCI would have been able to use the franchise process to raise all sorts of issues, pertinent or not, related to the roll-out of IPTV, including cost allocation, network neutrality, unbundling, etc. 

Having bought AT&T and MCI, SBC and Verizon only had to concern themselves with the cable industry.  And with all due respect to the cable industry, they do not have the geographic scope of SBC and Verizon nor the financial resources.  And in any event it’s tough to defend the existing franchise process.  Moreover, the cable industry itself would benefit from some of the reforms SBC and Verizon are pursuing. 

So with the cable industry over powered and conflicted on the ultimate outcome, and AT&T and MCI taken out of the game, it falls to the consumer groups and remaining CLECs to challenge SBC and Verizon in their pursuit of franchises and franchise reform.  Of course neither of these groups has the financial resources to support themselves let alone participate in dozens (or even hundreds) of franchise hearings, municipal votes, state legislative debates, and Congressional hearings.  And even if they did “win” somewhere, SBC and Verizon would unleash their vaunted legal resources and most surely over turn the decision in court.    

So SBC and Verizon have embarked on a crusade to reform video franchising laws and regulations unimpeded by competitors who would use the process to exact concessions that would improve their operations and generally level the competitive playing field.  The fact that the government process can be used in this matter is a sometimes unfortunate, but often useful by-product of regulation.  When policy makers lack the courage or will to do what is necessary to level the playing field, competitors opportunistically use the regulatory process to achieve their goals.  The delay at the FCC over AT&T’s acquisition of BellSouth is the latest example of this. 

While many decry the process, unfortunately it is often the only option for meaningful advancements in regulatory policy.  Much of the early efforts of the states to open up local markets to competition came about only because the Bell Companies sought “alternative regulation plans”.  Sensing an opportunity, nascent competitors participated in the state public utility commission’s review of these plans and established a quid pro quo whereby the Bell Companies would get what they want provided they took steps to relinquish their monopoly control over local markets.  If AT&T and MCI were still around today, no doubt they would repeat the process.

But looking beyond the regulatory process, SBC and Verizon’s acquisition of AT&T and MCI demonstrates why it is so important to reform access to rights of way.  So much is enabled with appropriate access to rights of way.  With the franchise reform they are obtaining, SBC and Verizon will be able to roll out IPTV much faster than they otherwise would, potentially catching the cable companies flat-footed (although I still like their chances in this dog fight).  If AT&T and MCI remained independent companies, they would have challenged SBC and Verizon at every turn, delaying the process significantly and potentially achieving important compromises along the way that improved their own operations.  Or worse yet for SBC and Verizon, AT&T and MCI would have benefited from the same franchise reform and possibly invested in IPTV themselves. 

So, was the impetus behind the acquisitions of AT&T and MCI really about the business market?  Or was it about access to rights of way and IPTV?  I think SBC and Verizon got a twofer in this instance.  In the history of telecom, the incumbents have never faced competition in both the business and residential market simultaneously.  While competition for business services has existed for decades, the advent of VoIP brought competition to residential customers as well forcing incumbents to potentially face competition across all services for the first time.  For the incumbents, this wouldn’t do.   They have to be able to cross-subsidize from one service to the other in order to “compete” effectively.

Faced with this dilemma, SBC and Verizon came up with a brilliant solution.  They bought AT&T and MCI.  This takes the two major competitors out of the business market (where they were strongest), allowing SBC and Verizon to “stabilize” pricing and it eliminates a major obstacle to a rapid IPTV rollout (cross-subsidized of course by the stabilized prices in the business market).

You have to give credit where credit is due.  SBC and Verizon may not be the best competitors, but they are the most formidable. 

Om Malik has provided some possible insight as to how Satellite content providers may evolve into something completely different, I quote:
" The Akimbo investment by AT&T also hints at a hybrid-TV-IP future …
Forget that, for a minute. These hybrid boxes are intriguing beasts, and can be quite helpful for telecom operators who are still struggling to roll out their IPTV networks, and losing ground to cable."

In June 2006, my colleague Dave Siegel ran the numbers in understanding the scalability of bandwidth usage against comments from Bell South’s CTO Brian Smith, followed in July by a quote from an interview Ronald Gruia conducted with Brian Smith:
"We have had our eyes open on IPTV, and none of the problems you mentioned were a surprise to us. Our primary concern was scalability, and we are working with them."

From a capacity perspective:
- a terrestrial content/broadband provider deploying an ITU-T G.983 fiber to the home system (also know as APON or BPON or marketed by Verizon as FiOS) has capacity of 622Mbit/s downstream. Assuming High Definition TV (HDTV) compressed to MPEG-4, requires 13Mbit/s per channel (at 720p resolution) or 47 HDTV channels per connected household.
- While a satellite content/broadband provider utilizing both C-band and Ku-band transponders will have capacity for over 1,000 local HDTV channels and 150 national HDTV channels per system..

Looks like a satellite operator has more downstream capacity to support HDTV but have a weakness in addressing scalable capacity for OnDemand, while terrestrial operators have less downstream capacity but a strength in being able to push content closer to households for a scable OnDemand offer.

If you add the broadband internet access problem to this equation, I think you'll find that Om may be onto something!!

No sooner did I make the argument for “one policy, one rule, multiple networks” than Verizon filed its petition for forbearance in six major metropolitan areas. With it’s filing, one can expect the usual response from the competitive industry. They seem to have the Nancy Reagan approach to telecom policy – just say no. But how about we try something different?

Just like we have economic Empowerment Zones maybe we should have telecom empowerment zones. Let’s take the 6 MSAs that Verizon seeks relief in and do a bigger experiment. Rather than just give Verizon what it wants to be a better competitor, let’s give all competitors the tools they need to effectively compete. So, we can give Verizon franchise relief for its FiOS deployment, but let’s also give other network operators a free pass for their franchise and rights of way negotiations with the municipalities. We can give Verizon relief from price caps for their retail rates, but let’s also relieve the competitors from the price floor that is established by Verizon’s access charges.

But perhaps most importantly, let’s forbear from applying any regulation to Verizon’s relationships with other carriers. While some competitors may shudder at the thought, keep in mind that Verizon uses regulation as much as a sword as a shield. In this telecom empowerment zone, let’s leave Verizon to its own devices and when carriers can’t agree to terms for interconnection, resale, unbundling, or whatever else, let the carriers have quick access to a neutral arbitrator and engage in “baseball-style” or final offer arbitration. Each party puts its proposed contract on the table, the arbitrator picks one, and off you go.

The current regulatory process is the competitor’s worst enemy and Verizon’s best friend. It costs a minimum of $100,000 and 8 months to successfully pursue a complaint against Verizon or any other incumbent. More typically, it costs upwards of $250,000 and 3 years. It’s a simple calculus for Verizon. They can raise a “regulatory” objection to a nascent competitor’s new service offering comfortable in the knowledge that the cost of defending the objection will undermine the economics of the service offering and give Verizon time to develop its own marketplace response. Repeat as necessary.

So let’s give Verizon what it wants. Force them to compete in the real world without the protection of any regulator, without the ability to bring their overwhelming legal and political resources to bear. Let them go head-to-head, service-to-service and see how they do.

I am off to the VON Conference tomorrow to see all the wonderful things the competitive industry has to offer. Let’s just hope they survive the regulatory onslaught that the incumbents have unleashed over the past five years.

As if Verizon and AT&T’s whining about the local franchising process (see my August 8th entry) wasn’t bad enough, now they are complaining about “the negative impact on competitive entry of exclusive access agreements entered into by incumbent cable operators with owners, managers, or developers of multi-dwelling unit properties (“MDUs”) or other real estate developments.”

It’s funny because when I was raising this issue for Teleport Communications Group and the CLEC community in the 1990s, Verizon (then Bell Atlantic and NYNEX) and AT&T (then SBC, Ameritech, and Pacific Bell) scoffed at the notion, saying landlords, building owners, and property developers entered these arrangements only after a competitive bidding process and that exclusivity was necessary to prevent stranded investment. But now that they are engaged in a truly competitive enterprise (video delivery) where they are not the incumbent, they find there actually is a problem. And of course what do they do when they encounter a problem? They run to the government for help. “I caaaaaan’t negooootiate with muuuuuuunicipallllllllities for a fraaaaaanchise.” “I caaaaan’t negooooootiate with the laaaaaandlord for builllllllding accesssss” “They’re not playing nice.”

Welcome to the real world where the rest of us do not enjoy the trappings of a former monopoly. Once upon a time, it was easy for Verizon and AT&T to tell landlord and building owners that if they want to charge them for entry into the building or use of the building’s infrastructure, they would simply not provide service to the building. Recognizing that their building was useless without telephone service, the landlords and building owners would allow them in for free (and charge the CLECs instead). But now that Verizon and AT&T want to come in with new facilities, offering services the landlords and building owners already have, all of the sudden there is a problem and they are starting to throw their political muscle behind it.

There are lessons here to be heeded by both sides of the net neutrality debate. First, monopolies come in many forms, big and small and the biggest one is not always the most insidious. Second, witness the power of the Verizon and AT&T to undo a century of franchising law in about two years time. The CLEC community fought long and hard during the 1990s against municipalities and their unreasonable franchise requirements. Section 253 of the Telecommunications Act of 1996 was supposed to address the problem, but did little to actually improve the situation as municipalities basically ignored the provision and were happy to use tax payer dollars to fight any legal challenges mounted by the CLECs. Now, however, when its Verizon and AT&T‘s ox being gored, the problem is rapidly addressed by state legislatures around the country and, if some have their way, Congress. (In a much belated “I told you so” I would like to point out that we at TCG advocated a simple solution which was to require municipalities, landlords and building owners to treat all carriers equally. This would have pitted the Bell monopoly against the municipal and building monopolies and we were confident the Bell monopoly would have prevailed. It also would have served the Bell Companies efforts today.) Finally, this situation shows once again that Verizon and AT&T are not very good competitors. When the going gets tough, Verizon and AT&T get to the government. This is why I fail to understand the strategy of net neutrality proponents. Strip Verizon and AT&T of their ability to get the government involved and you will see how easy it is to out compete them. But give them a regulatory crutch, and they will use it every time either to hold themselves up or to crack their competitors on the head. So if net neutrality proponents really want a neutral network, they should argue for passage of a law banning any government regulation of the Internet. This will leave Verizon and AT&T to their own devices and true net entrepreneurs running circles around them.