IPTV's Revolution May Be on Hold
By Burt Helm
When Disney's (DIS ) The Incredibles hit theaters last fall, it got a helping hand from SBC (SBC ). The telecommunications giant threw in its own marketing dollars, sponsoring Incredibles giveaways linked with phone service and using the speedy character, Dash, to promote its high-speed Internet service. Now, at the end of this year, SBC will unveil an incredible debut of its own: IPTV, a form of TV that uses Internet technologies. So, Disney would be happy to help out there, right?
Maybe not. And that's unfortunate because SBC has a lot riding on its IPTV project. Indeed, the entire telecom industry is hoping IPTV will be the next great frontier for its business. Thanks to new broadband technology, telecom outfits and cable companies can deliver TV, phone, and Internet access over the same high-speed pipes into customers' homes.
PLAYING HARD TO GET.
The new capabilities could lead to entirely new ways of watching TV. Because IPTV uses huge centralized servers to deliver video into consumers' homes, it can support a nearly unlimited number of channels and allow customers to pick from an à la carte channel selection. It can even offer multiple camera angles for sporting events and make thousands of old movies, TV shows, and events available "on demand" at the push of the button.
IPTV differs from earlier forms of Internet-based TV in that, while the video signal is encoded just like data over the Web, it travels solely over SBC's own servers and network. Viewers will find the experience akin to watching digital cable, rather than streaming video on the Web.
But improvements like these can happen only if content providers -- media companies and movie studios like Disney -- play along. So far, it seems, they're not. Disney didn't return calls from BusinessWeek Online seeking comment, and it hasn't signed with any outside distributor to provide its movies for video-on-demand. Most studios have agreed to only limited video-on-demand distribution, fearing it could cut into revenues from rentals and DVD sales -- now generating bigger income streams than the box office itself.
So far, the telcos are moving ahead with their plans and say they'll make final agreements with studios later. SBC, Verizon (VZ ), and BellSouth (BLS ) are planning three of the biggest IPTV deployments in the world. When completed, SBC's service will extend to 18 million homes in 13 states and cost an estimated $4 billion. It also puts the telecom in direct competition with cable companies who are, in turn, venturing onto Baby Bell turf by offering phone service (see BW Online, 5/10/04, "Telecom Turmoil").
But SBC's challenges highlight the difficulties telecommunications and cable players face as they converge on potential dollars in the high-tech TV market. At this early date, no one can tell how many subscribers will sign up for IPTV, but roughly 100 million households now subscribe to some sort of digital TV, either satellite or cable. With the big studios and other content providers uneasy about jumping on board, it may be impossible for the new technology to truly come into its own.
SBC is learning that the hard way. Capabilities -- such as à la carte channel selection -- promoted by Chief Executive Ed Whitacre in the fall of 2004 have fallen by the wayside, at least for the initial launch of the new service, according to Lea Ann Champion, senior executive vice-president of IP operations and services at SBC. And it could be some time before video-on-demand reaches its full potential.
IDEAL IN THEORY.
Not that SBC isn't working overtime to round up content for the fledgling TV service. On Mar. 22, it added five TV executives to its new programming department: Chris Lauricella and Richard Levine from DirecTV (DTV ), Richard Wellerstein from iN Demand Networks, and Amy Friedlander and Martin Sansing from Intertainer, one of the pioneers of video-on-demand technology. They join division head Dan York, a former programming exec from iN Demand Networks, and John Penney from HBO, who were both hired in the fall of 2004.
While SBC acknowledges it has completed no programming agreements, York says deals for basic-channel programming are "very far along," and he expects to pay rates comparable to what a small or midsize cable company pays providers for basic channel carriage -- a 15% premium on rates paid by huge cable companies like Comcast (CMCSA ), according to two industry analysts.
Working out deals for higher-tech services like video-on-demand is tougher. In theory, this model seems ideal for movie and TV studios: Each could dump its film and TV-show archives onto SBC's massive servers and gain revenue from programs they never before had a way to showcase.
But it doesn't come so easily. Thirty-three years ago, HBO was founded on such a concept. Now it creates its own programming and maintains its own powerful presence in TV, apart from the studios.
"The studios feel that HBO became successful owing largely to their [movies]," says Joe Boyle, a former vice-president for communications at iN Demand who now runs his own New York City-based public relations firm. More recently, the studios have considered the success Apple Computer (AAPL ) has had with its iTunes service for digital music. They hesitate to help another company create a dominant consumer brand in digital video.
SBC's new hires know this story all too well. Three of the five, as well as York, have backgrounds in video-on-demand. And the histories aren't exactly pretty. Current video-on-demand agreements, like those worked on by iN Demand Networks, where York and Wellerstein come from, carry significant restrictions.
Nearly all studios refuse to release a movie for on-demand until 45 days after its DVD debut. And iN Demand, along with other video-on-demand distributors, has seen its share of video-on-demand revenues slip from a 50-50 split with the studios to a 60-40 split.
The situation was equally rough at Intertainer, Friedlander's and Sansing's former employer. IT had pioneered video-on-demand technology in the mid-1990s and had worked out a 50-50 revenue split with Sony (SNE ), Time Warner (TWX ), and Universal, which were also investors in the company.
But in 2002, the three companies decided they would rather control their own content. They severed all ties with Intertainer and partnered instead with Metro-Goldwyn-Mayer Studios (MGM ) and Paramount Pictures to create their own service, called Movielink. In September, 2002, Intertainer shut down and is currently in the early phases of a $1.6 billion antitrust suit against its three former shareholders.
SWEET WORDS, SMALL GAINS.
With the exception of Friedlander, who negotiated Intertainer's initial agreement with Sony, this marks the first time that any of these executives, including York, have taken a lead role in negotiating with the providers. In their previous positions -- according to representatives at DirecTV, Intertainer, and iN Demand -- all operated primarily as liaisons with studios to maintain established agreements.
SBC has been doing its best to soften the toughest partners, like Disney, as demonstrated by its 2004 promotion of The Incredibles. York says SBC will have a similar cross-promotion with a Fox movie this summer.
Disney is apparently slowly warming up to the idea of video-on-demand. So far, it has made content from ABC and ESPN available through a partnership with privately held TVN Entertainment Networks, which manages video-on-demand for several cable companies.
"VIRTUAL VIDEO STORE."
But aside from a partnership with the Web site CinemaNow to stream video over the Web, Disney has kept its movies to itself. And since 2003, it has used its own video-on-demand network, called Moviebeam. The service works only on special hardware that consumers must rent directly from Disney, in addition to paying a per-movie fee.
But SBC's plans for a "virtual video store" of on-demand content, as one executive called it, seem less certain. At January's Consumer Electronics Show in Las Vegas, York told analysts that SBC wants to "reinvent television" with never-before-seen on-demand options -- but he now says SBC is still deciding whether to negotiate the deals on its own or go through an aggregator like iN Demand or TVN Entertainment Networks when it makes its debut at the end of the year. That's what Verizon did. On Feb. 21, it announced it will partner with TVN for a similar service.
While SBC has the technology and money to create one of the largest "virtual video stores" in history, it will take some tricky footwork with partners to accomplish that ambitious goal. Otherwise, many of those virtual shelves may end up sitting empty for some time to come.
Helm is a reporter for BusinessWeek Online in New York