SBC Awards Microsoft $400M IPTV Deal

Microsoft Corp. (Nasdaq: MSFT) today announced a monster $400 million IPTV contract with SBC Communications Inc. (NYSE: SBC), one of about 10 carriers that has been trialing the software giant's TV-over-broadband management software system (see SBC Selects Microsoft for IPTV).

The deal is part of SBC's $4 billion fiber buildout program, called Project Lightspeed, that will see the carrier build high-speed connections to as many as 18 million U.S. households by the end of 2007 (see SBC Sheds Light on 'Lightspeed'). Construction will start in the first quarter of 2005, with Alcatel SA (NYSE: ALA; Paris: CGEP:PA) as chief contractor (see Mais Alors! Alcatel Bags $1.7B SBC Deal and SBC's IPTV Still up for Grabs).

The aim of Lightspeed is to deliver a range of high-speed IP services, including VOIP, super-fast Internet access, and a range of TV and video services across a single connection.

"Our service will change the way people experience TV," said SBC's CEO Edward Whitacre in a prepared statement released this morning. "Finally, customers will watch what they want, when they want, from a virtually unlimited and interactive content selection. We will deliver integrated communications and entertainment services to enhance the digital lifestyle of our customers."

According to SBC, the IPTV service is planned to include "instant channel changing, customizable channel lineups, video on demand, digital video recording, multimedia interactive program guides, event notifications, content protection features and more."

The carrier, which has been testing Microsoft TV's IPTV Edition system since June (see SBC's $6 Billion Banquet), will start field trials in mid-2005, and plans to launch a commercial service before the end of next year.

But while the deal is said to be worth a whopping $400 million, is it really that great a deal for Microsoft? And has SBC jumped too soon with its choice?

It seems the announcement will come as a surprise to many, at least in its timing. Huw Price-Stephens, an independent consultant in the TV and video-over-DSL market, is at the TelcoTV event in Orlando, Fla., and says there was no indication or talk among those at the show that any announcement by SBC was imminent. "I talked to a number of people about SBC and the general view was they were still evaluating. I'm quite surprised -- I didn't expect this announcement just yet."

Price-Stephens adds that while it was generally acknowledged that Alcatel, even though it is the lead Lightspeed integrator, was not in the running to win this contract, it was still too early to give Microsoft an edge. Experts say the Microsoft TV platform is still early in its development, and it has lacked a major commercial reference client.

Of course, now it's got one with SBC, and that's a great validation for Microsoft, says Price-Stephens, but he's surprised SBC "has gone down that route," and so quickly.

Although there's a big number attached to the deal, such long-term contracts often change terms over time and leave major room for negotiation. "It sounds a lot," notes Price-Stephens, "$400 million. But if this is a contract to cover up to 18 million homes with the platform, and provide support and maintenance, it doesn't add up to a lot per household."

To be precise, it adds up to about $22.22 per household if all 18 million homes took the service. This could be a classic case of Microsoft sacrificing margins to get into a huge potential growth market. And for SBC, it could be operating under the "You don't get fired for using Microsoft" logic.

But Microsoft TV's marketing chief, Ed Graczyk, says the $400 million doesn't presume all 18 million households will take the IPTV service, but instead covers the number of IPTV subscribers SBC expects to sign up during the next 10 years.

He says the IPTV platform is licensed on a per unit (household) basis, and includes the software, support, maintenance, and initial custom integration work that'll be needed to get the platform up and running. It doesn't, however, include any Windows servers or customer premises equipment (CPE).

"I can't reveal the number of units the contract covers, other than to say it's in the millions. We've priced it competitively, but I wouldn't say it's a low-ball deal. We're pleased with the value per unit we're getting."

Graczyk adds that this is a binding contract, but that there are "get-out clauses" for both parties should any terms or conditions not be fulfilled. SBC isn't specifying the number of households covered by the initial contract.

The 10-year deal gives Microsoft, which has encountered some problems with its main trial in Europe at Swisscom AG (NYSE: SCM), the credibility it craves in an increasingly competitive market (see Alcatel Wins NGN Deal in China, Swiss IPTV Trial Hits 'Glitches', Video Smokes in Amsterdam, and BT Puts IPTV to the Test).

It also means that Alcatel, one of Microsoft's major rivals in this sector, will now have to integrate Microsoft's software into its access infrastructure at SBC. The French carrier says it was selected because it has a flexible and open access platform. The deal has to disappoint members of Alcatel's IP video team, which has been working for nearly two years to develop its own product, the Open Media Suite (see Alcatel Unveils Open Media Suite, Skystream, Alcatel Team for IPTV, Alcatel Denies iMagic Fadeout, and Alcatel, Concurrent Partner on Video).

Another vendor that had bid for the deal is Siemens Communications Group, which has built a broad IP TV system based on its own technology and a series of partnerships, particularly with experienced IP TV middleware player Myrio Corp. (see Siemens Gears Up for IPTV).

And although the company wouldn't comment on its involvement, UTStarcom Inc. (Nasdaq: UTSI) is believed to have had its mVision system in SBC's labs (see UTStarcom Launches IP TV System). Again, SBC isn't commenting on which companies were involved in its lab trials or in the competitive bid process.

The next big IPTV account that's up for grabs is likely BellSouth Corp. (NYSE: BLS). (See Analyst: Copper Is BellSouth's Gold.) Verizon Communications Inc. (NYSE: VZ) has already chosen Motorola Inc. (NYSE: MOT) to provide its TV and video services network infrastructure, though it is taking an altogether different approach to SBC's (see Verizon Says, 'Hello, Moto').

Graczyk won't say whether Microsoft TV has seen or responded to an RFP from BellSouth, noting only that "we're engaged in one way or another with every major operator that's looking to offer these sorts of services."

Other carriers currently testing Microsoft's IPTV platform, in addition to Swisscom, include Telecom Italia SpA (NYSE: TI), BCE Inc. (NYSE/Toronto: BCE), and India's Reliance Infocomm Ltd. (see Microsoft IPTV: Now That's Italian!).

To cast your vote in this month's Next-Generation Services poll -- "IP TV: Will It Work?" -- click here.

— Ray Le Maistre, International News Editor, Light Reading

For further education, visit the archives of related Light Reading Webinars:

keelhaul42 12/5/2012 | 1:04:03 AM
re: SBC Awards Microsoft $400M IPTV Deal >>>>>>>>>>>>>>>
At least Gore was techno-save enough to
understand the issues!
If that comment was meant seriously allow me to sell you a bridge connecting Brooklyn with Manhattan. Cash only, please ...

dsb 12/5/2012 | 1:04:04 AM
re: SBC Awards Microsoft $400M IPTV Deal At least Gore was techno-save enough to
understand the issues!
dsb 12/5/2012 | 1:04:05 AM
re: SBC Awards Microsoft $400M IPTV Deal not only that, but he is a technophobe!!
keelhaul42 12/5/2012 | 1:04:06 AM
re: SBC Awards Microsoft $400M IPTV Deal >>>>>>>>>>>>>>
What do you expect with "W" as president? Fair and open markets that serve the little guy? HAHAHAHA. Where is their campaign contribution?
What did you get with Bill Clinton? What do think you would have gotten with John Kerry?
RBOCS are very accomplished at protecting their turf no matter who is in charge.

Seriously, the industry is ossified. It needs shaking up. Start thinking of ways to do that.
Throwing darts at (your choice of target name here) does not help.

paolo.franzoi 12/5/2012 | 1:04:07 AM
re: SBC Awards Microsoft $400M IPTV Deal
Boy you are hysterical.

Given that this is not working the way you would like it, it must not be being done. Is the world flat?

rjmcmahon 12/5/2012 | 1:04:07 AM
re: SBC Awards Microsoft $400M IPTV Deal Unfortuneately, you won't accept Keller, Texas as the starting point of that revolution.

No structural separation. No carrier neutral colos. The number of premises is way too small. How many ISPs will be allowed? How many video and audio providers? How many IXCs?

Will Keller be nothing more than another failed Orlando project that was tried in 1994? Isn't it better for the RBOCs if it does fail? They can then claim to regulators that the reason they aren't deploying the fiber is because there is no market force to fund the infrastructure. In the meantime they keep the status quo, our monthly bills, intact.

Keller seems like a scam to me. It doesn't scale in anything other than the amount of press releases it generates. Empty promises and propaganda from political types is what it looks like.
paolo.franzoi 12/5/2012 | 1:04:08 AM
re: SBC Awards Microsoft $400M IPTV Deal
Unfortuneately, you won't accept Keller, Texas as the starting point of that revolution.

rjmcmahon 12/5/2012 | 1:04:10 AM
re: SBC Awards Microsoft $400M IPTV Deal What do you expect with "W" as president? Fair and open markets that serve the little guy? HAHAHAHA. Where is their campaign contribution?

My hope is that people who have amassed billions of dollars could fund one real broadband project, even if only in there own backyard. That project would set the example for others, though future projects would need to raise the money via municipal revenue bonds.

Without a real and live example, it seems that our industry is adrift without direction.
materialgirl 12/5/2012 | 1:04:11 AM
re: SBC Awards Microsoft $400M IPTV Deal What do you expect with "W" as president? Fair and open markets that serve the little guy? HAHAHAHA. Where is their campaign contribution?
rjmcmahon 12/5/2012 | 1:04:16 AM
re: SBC Awards Microsoft $400M IPTV Deal Where's the article about SBC announcing a VoIP offering? A hisotrical analysis of that would be interesting. Would it go something like?

It starts in 1995 or so, when some SV mavericks read new regulation due to come out of Congress. It promises to enable competition in the communications industry. Mavericks know that telco industry is under regulatory capture. They believe this Telco Act will create a new market with regulations in their favor. One problem they see is that the funding source for the incumbent enemy is our monthly phone bills.

Brave SV mavericks seed a bunch of warriors and name them CLECS, BLECS and DLECS. They create a new killer weapon and arm these competitors with it. The call it VoIP. "Use this weapon, and the promiseland of free voice will be available to all and your enemies will go broke!" they exclaim. They gets the attention of Wall Street and the 401k money flows. Many realize that Wall St. lives on pro forma earnings and holds a rare few accountable, hence most take the money and run.

Established telcos see the VoIP "threat", laugh a bit, then they take it and use it for their own advantage. They convince federal regulators that VoIP proves competitive markets already exist, and hence they must be allowed to further mononpolize access. The FCC rubber stamps the deal.

Now mavericks have lost the battle. They have their money so they move on to other things. They make statements like the US is too vast and regulations are too conflicting as they leave.

Incumbent Telcos have this new weapon called VoIP which was promised to give free voice calls. It will only take a bit longer before they dismantle it and use their strengthened monopoly position to raise our rates. They begin their victory dance by giving $400M of rate payers' money to another proud and victorious monopolist, named MSFT.

and the saga continues...
rjmcmahon 12/5/2012 | 1:04:16 AM
re: SBC Awards Microsoft $400M IPTV Deal So SBC proclaims they are going to spend some $4B over 4 years on deploying fiber, the cost of which is driven by labor. Now they promise 10% of that, $400M of ratepayers money, to MSFT.

In the end, what jobs are being created for our industry or what value is being created for consumers? Sad.
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