DBS vs. BELL: A LOSING PROPOSITION?

about 1.5 million subscriptions to direct broadcast satellite (DBS) services like those offered by DIRECTV Group Inc. and DISH Network since becoming resellers for those companies in 2003. But now telcos are installing fiber access networks to roll out IPTV, which would compete with their DBS wholesale partners. In turn, DBS providers may challenge the ILECs for broadband revenue.

DBS companies are being forced to develop a broadband alternative, which is a losing proposition for both the RBOCs and the DBS providers, says Victor Schnee, president of Probe Financial Associates Inc.

Thats because the competition may be too much for the market to support. For the telcos and cablecos, the triple-play smack-down already has left wrecked profits in its wake. Theyre cutting prices and offering people more to stay, says Schnee.

The DBS carriers originally tried to offer broadband over satellite to monetize their constellations, only to discover technical issues with two-way communications in the medium. So they went to HDTV instead and allied with the telcos, says Schnee. Now that the telcos have abandoned them, they have been forced into making a decision on broadband. The last thing you want to do if youre a telco is have the DBS guys compete with you in the broadband space.

Probe expects DISH and DIRECTV to turn to wireless broadband service providers to offer Internet to the 2.5 million homes already penetrated with television. Potentially an alliance with broadband wireless access wholesale providers could be explosive.

Probe expects DBS companies to find plenty of new customers in the broadband space via alliances, too. Broadband is sitting out there as a revenue stream, although its still a relatively slow-growth business at 30-40 percent penetration, says Schnee. Adoption correlates with price, and allying with a wireless provider could be the ticket. Its something that looms as a real threat to cable and the telcos, but they wouldnt be doing this if it werent for the telco plans for 30 [million] to 40 million IPTV homes.

Still, all hope is not lost for the DBStelco wholesale initiative; in fact, DBS carriers may want to keep strategic options open for recapturing the full momentum of their alliance with the RBOCs. For starters, the RBOCs have adopted a high-risk strategy in their fiber buildouts. Verizon Communications Inc. will pay something north of $2,000 per subscriber for its television play, Schnee notes. There is enormous risk in what the fiber to the home or node will cost, he says, adding that it will take 15 or 20 years to recover the cost of these builds through depreciation. It will be a tough haul for them to show a big improvement in overall results, even if the programs are relatively successful. The RBOCs are thus paying a premium to get into a business where there are no new customers. They have to win customers from the cablecos.

The complexity of IPTV is another concern and may add yet more risk by putting the RBOCs further behind the competition. IPTV is complex and interesting, and it will get developed, but getting the subscriber experience right will take a year longer than anyone says, Schnee notes.

And finally, IPTV opens up new avenues of competition and nontraditional companies who can capitalize on the standards. Web TV content providers may compete directly with the RBOCs using a last-mile strategy, says Schnee. The independent content world threatens DBS and the telcos alike, so IPTV has implications five years out for competition.

This, when the television market is getting close to saturation with two or three competitors in each market. IPTV now that is what I call a really risky move, says Schnee. I think theyll build to 6 million homes, get the cream of the market, then stop and declare mission accomplished in the 2007-2008 time frame. And the DBS companies will become allies again.

Intelsat Offers Instant IPTV

Intelsat introduced in April a new satellite-based content delivery and management service for telcos looking to enter the IPTV market.

Called Ampiage, the service packages the acquisition, aggregation, encoding, encapsulation and encryption of licensed TV programming from content providers and has the ability to redistribute it in MPEG-2 or MPEG-4 format, allowing telcos to establish or enhance their digital programming lineups quickly and with low capital investment.

This is a game-starter for phone companies looking to launch IPTV services for their subscribers and make a video play, says David McGlade, CEO of Intelsat.

Ampiage originates from Intelsats Video Operations Center and distributes programming to regional telcos, which deliver it via xDSL, fiber and other broadband networks.

A small telco would find it difficult to build an infrastructure that has the suite of capabilities afforded by Ampiage at a cost that would yield a profitable business case, says Stephen Spengler, senior vice president, sales and marketing at Intelsat.

Ampiages open architecture enables operators to either leverage existing equipment (including set-top boxes) or choose new equipment from multiple CPE providers.