IPTV Today—and Tomorrow

Although IPTV, the telephone company's (and ISP's?) great hope for the triple-play future, has so far failed to take the world by storm, its future seems assured. Indeed, it may in the long term be the only way video content is distributed.

by Gerry Blackwell [March 15, 2007]

To date, IPTV has been something of a disappointment. According to Colin Dixon, practice manager for IP Media at The Diffusion Group (TDG), a Plano, Texas-based consulting and market research company, growth of the IPTV subscriber base has lagged most forecasts, including TDG's.

"We had said it would reach about one million in the US and Canada, but it didn't. It was much less, probably fewer than 700,000," Dixon says. "For 2007, we were expecting about 3.5 million in the US. We thought Verizon and AT&T would be in full deployment. They're not. [The subscriber base] will maybe be in the 1.5 million range by the end of this year."

JupiterResearch, which does not conduct formal research to determine market size but does monitor the IPTV space closely, is even more bearish. "It's still a really small number," says senior analyst Joe Laszlo. He guesstimates that fewer than 500,000 American households subscribe to IPTV service.

Dixon says there are between 60 and 70 IPTV operators in the US, but most of them are small rural telcos. The biggest of these, SureWest, may have as many as 20,000 IPTV subscribers, he believes. The exceptions to the dominance of small telcos in the IPTV market are Verizon, which began offering its FiOS TV service in September 2005, and AT&T, which began offering its U-verse TV service in June 2006.

ILECs not innovating
But both ILECs have moved ahead more slowly than expected. Dixon estimates AT&T has "a few thousand subscribers at most," while Verizon IPTV subscribers number in the tens of thousands. Qwest, the only other major player left after intense industry consolidation, has yet to announce a coherent IPTV strategy, Laszlo says.

Why has IPTV growth been slower than expected? Two main reasons, Dixon believes. First, the big telco operators have discovered that offering pay TV service over their networks is technically a tricky business and it has taken them longer to stabilize their services than they expected. Second, many have held back, waiting for economical IPTV set top boxes based on system-on-a-chip products compatible with MPEG-4, the audio-video data compression standard. Those products are just starting to ship now.

"MPEG-4 is very, very important to this market," Dixon says. "Especially since HD is now a requirement not a luxury."

The current standard for data compression in digital television is MPEG-2. MPEG-4, which uses more advanced compression algorithms, requires much less bandwidth to deliver a single stream of standard or high definition (HD) television. Most pay TV operators believe they will ultimately need to deliver at least two, possibly three HD streams to each home to accommodate multiple TV sets and consumers wanting to record one stream while watching one or two others.

Many operators have deployed IPTV on networks that use ADSL2, which only delivers a total of 5 to 12 Mbps of bandwidth to each household—not enough to deliver HD content. Even the 25 Mbps made possible by the next-generation copper wire networking technology, ADSL2+, may not be enough. "The only way they can do HD is based on MPEG-4," Dixon says. "And even then it's marginal."

I want my IPTV
Consumer acceptance is not a major factor in the current slow progress of IPTV, he says. In fact, operators can be almost assured of grabbing 10 percent to 15 percent market share just by offering an alternative to cable in markets where operators have alienated customers with poor service, exorbitant prices or restrictive channel selection. "But from there," Dixon adds, "it will be very, very tough going. Then they'll have to give very good differentiation between themselves and existing suppliers."

The easiest way will be to offer heavily discounted prices. If IPTV operators want to get deeper penetration than 10 percent or 15 percent they will likely have to offer comparable triple-play services—phone, high-speed internet and TV—at 30 percent less than traditional competitors, Dixon says. Another way is to offer less restrictive channel selection and/or exclusive or niche programming. SureWest, for example, has had success with a package of channels targeting ethnic groups within its communities.

Consumer surveys conducted by Jupiter Research last year also suggest that IPTV providers will need to offer significantly lower prices than competitors and/or better channel selection. "IPTV operators are up against very familiar, well-established products," Laszlo says. "[Their services have] to be at least as good as [satellite and cable] and they have to offer some distinct benefits."

One of IPTV's strengths is that it makes it easy for operators to provide video on demand (VOD) service, which is increasingly valued by consumers. But VOD is not exclusive to IPTV, not even the VOD-based virtual PVR services tried by some IPTV operators in China and the Middle East. With a virtual PVR, the operator records all content broadcast over a given period, usually a week. Subscribers can in effect go backwards in a program guide and watch any program broadcast in the last week. But cable providers could do the same if demand warranted, Dixon points out.

Other advanced applications that IPTV theoretically enables—the ability to see telephone caller ID information on a TV screen, for example, or the ability to program a PVR from a website or cell phone—have made little impact on consumer thinking yet, although they may in future.

"It's not that none of the advanced applications is ever going to work, that they're all doomed to failure," Laszlo says. "It's just that they're not automatic home runs." IPTV providers need to do a better job of demonstrating and selling the advantages, and it's difficult to do that in a 30-second TV spot or a brochure stuffed into a telephone bill, he says.

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