Hardware vendors were all over TelcoTV this week pitching ad-insertion gear, but one startup is hoping to stand out by turning targeted advertising into a turnkey service.

U.K.-based Packet Vision Ltd. started out in 2004 building ad-insertion hardware, a rackmounted box called the PV1000 that combined a media server and an ad splicer. The server stores the ads, while the splicer inserts them into the programming stream. The goal was to slim down the amount of gear needed to do ad insertion.

But in September 2006, as new CEO Charlie Horrell came on board from Thomson S.A. (NYSE: TMS; Euronext Paris: 18453), Packet Vision switched to the service model.

"The question was: Do you want to be in a recurring business or a one-off box business?" says Richard George, Packet Vision's general manger for North America. "The business model is now a transactional model. As the opportunity grows, from basic ad insertion to addressibility, we track with them."

The change also gets Packet Vision out of a crowded equipment market. Plenty of other companies offer splicers and ad servers -- among them, Arris Group Inc. (Nasdaq: ARRS), BigBand Networks Inc. (Nasdaq: BBND), C-COR Corp. (Nasdaq: CCBL), Harmonic Inc. (Nasdaq: HLIT), and, through the Terayon acquision, Motorola Inc. (NYSE: MOT).

Packet Vision can sell the service itself, as it did to Matanuska Telephone Association Inc. , a small Alaskan telco.

But the company is also pursuing partnerships. Juniper Networks Inc. (NYSE: JNPR), which has aspirations of its own in IPTV ad insertion, lists Packet Vision as a partner. And this week at the TelcoTV conference, Packet Vision announced a partnership with SES Americom , working with its IP-Prime content aggregation service. (See SES Picks Packet Vision.)

All the fuss over ad insertion comes from the potential riches carriers see in targeted ads. An IPTV model "enables the possibility of moving from the CPM [cost per thousand viewers] model to a click-through model, and there's a 25x premium there," says David Price, vice president of business development at Harmonic Inc. (Nasdaq: HLIT).

That's a potential revenue source for the smaller telcos offering IPTV. It's also got potential in bigger buildouts; Verizon Communications Inc. (NYSE: VZ), for instance, would like to experiment with dynamic ad insertion on FiOS TV. (See TelcoTV: Verizon Targets Ads.)Cable providers do targeted ad insertion today. The hope among carriers is that IPTV ad insertion could go deeper, eventually targeting specific households or even viewers, based on viewing habits.

"Right now, ad insertion is something that's done in the head-end for a regional or service group. We're going to get stream densities where you could start streaming to individual users," says Kevin McKinnon, a systems technologist with Motorola.

By making ad insertion into a service, Packet Vision is playing off a trend of creating turnkey services for carriers -- particularly the smaller telcos that want a quick entrée into IPTV. A similar type of service is available on the content side, where an aggregator offers packages of channels to a telco. Examples include Avail Media Inc. , the IP-Prime service from SES, and the newly launched ViP-TV from EchoStar Satellite LLC (See EchoStar's IPTV Play.)

"There's a philosophical link between us and IP Prime," George says.But the advantage Packet Vision saw in services -- recurring revenues -- could prove problematic, says Adi Kishore, an analyst with Heavy Reading.

"The downside is that you're risking the whole thing just like your service provider is," Kishore says. "You're putting the upfront money in yourself and hoping for the returns to pay for it. For a startup, it's a risky approach."

Kishore is bullish on the prospects of targeted ads, though, and sees benefit in vendors like Packet Vision helping to get service providers into that business.

Packet Vision is small -- just 24 employees -- but hopes to double in size during the next year. One quirk of the company is that it's never done a venture funding round. It has raised $12 million from individual investors such as its founder, Patrick Christian, and Bookham Inc. (Nasdaq: BKHM; London: BHM) founder Andrew Rickman.

But its early funding has included one venture firm: Mangrove Capital Partners , one of the early investors in Skype Ltd.

— Craig Matsumoto, West Coast Editor, Light Reading