Should Telcos Have Gotten into IPTV?

With the news from comScore that U.S. Internet users viewed 11.5 billion online videos in March 2008, a 13-percent gain versus February and a 64-percent gain from March 2007, it probably is inevitable that some observers will question the commitment telephone companies are making to multichannel video entertainment.

In March, 135 million Internet users spent an average of 204 minutes viewing online video. That represents more than 40 percent of the U.S. population. So given the clear trend to more consumption of "over the top" video, it is perhaps inevitable that a reexamination of the video business case should occur logical to some observers.

To put matters simply, some might argue that telcos should not have gotten into entertainment video, much less IPTV, at all.

As someone who has argued that most telcos will not make much profit--if any--directly from video services, but who nevertheless sees no way for telcos to avoid getting into the linear, multichannel video business, here's the rebuttal to the "over the top" video is the way to go argument.

One might--and executives have--similarly debated the wisdom of replacing copper access infrastructure with optical fiber access as well. And the logic is quite similar.

In the access services market, telcos and cable will for some time essentially trade market share. Cable will gain voice share while telcos gain video share. Those are huge markets and the revenue attached to them likewise is huge.

To really take significant share, telcos will have to replace the copper drops with some form of optical access, whatever the "last 100-feet" or "last 5,000 feet" technology happens to be. The decision is a strategic one; not driven by the sheer "return on investment" thesis for the one new service.

In its most-basic form, the argument is just this simple: fiber investments will allow telcos to take enough video share from cable operators to offset voice line losses. It's a strategic answer to one question: "do you want to be in business in 15 years?"

The argument for most telcos (AT&T and Verizon have enough scale to support a different business case) is simply that without fiber access, incumbent telcos will not be able to trade share effectively.

Fiber also creates the foundation for better competitiveness in the broadband access business as well, as speeds continue to increase. But again, that is an "invest to support a business I already have" argument, not an "invest to create a new business" logic.

So back to IPTV. Telcos could have chosen some other delivery platform than IP to support their initial multichannel video efforts. Verizon did. But Verizon also has an optical access network supporting three distinct wavelengths already. So devoting one wavelength for linear video just makes sense.

Other providers have decided that two wavelengths makes more sense (at least for the moment). In that case, on the assumption that an all-digital, all-IP platform is used, IPTV simply becomes one more IP application in a two-wavelength network.

Of course, "IPTV" can mean lots of things. In the sense we have been discussing it, it is just a transmission protocol. Over time, the "IP" platform is important for supporting interactive applications as well, but we are some distance away from the point where "interactive" television features represent material revenue opportunities.

The exception, of course, is targeted advertising. That arguably is a greater opportunity for cable operators than for telcos, at the moment.

Still, should telcos have avoided the fiber investments that make IPTV possible, or should they simply have plumbed for some way to monetize "over the top" video? That's an even less compelling argument.

The most-recent comScore found that 80 percent of online video viewers spent fewer than three minutes viewing video per day. Compare that to the average of more than four hours of U.S. daily TV viewing per person.

And usage is not the big issue. Usage does not necessarily mean revenue for a network access provider, even if it does represent an advertising or subscription opportunity for Web-based content packagers. One might argue that telcos could have invested in their own "over the top" content efforts, but that still rests on the assumption that big pipes exist to deliver that content.

Whatever telcos decide to do in the "over the top" area, they still could not have avoided investing in optical access for other reasons, primarily because virtually all of the new service or application revenues are based on broadband connectivity.

Given that imperative, the payback for optical access in the near term rests heavily on new linear video revenues.

The multichannel video business represents well over $100 billion in annual service provider revenues, exclusive of advertising revenue. All over the top providers together do not likely make more than several hundreds of millions in current revenue.

The other rationale for offering linear video is that the payback from optical access does not rest entirely on revenue gains. Part of the return comes from avoided customer churn and partly from reduced operating costs.

The argument that telcos should never have invested in linear multichannel video can be made. It just isn't clear the revenue upside supports the case. That doesn't mean over the top video isn't a growing opportunity of some type. It simply remains the case, however, that the amount of revenue all other emerging forms of video can generate pale before what is possible by taking some share of the existing $100 billion-plus multichannel video share.

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