Video Profits on Pause?

CHICAGO – Light Reading Live – Service providers gathered in Chicago yesterday to get the lowdown on the Triple Play scene, only to be faced with a stark message: You can't afford not to do it, but once you have, don't expect to make much money from your new video service capabilities.

For the more than 160 attendees who had just been hearing about the potential offered by video in the voice/data/video combo, that message from Harmonic Inc. (Nasdaq: HLIT) broadband access networks division VP David Piehler, who has worked with telcos and cable operators, put into context the size of the challenge faced by operators sizing up the triple-play opportunities.

"You've no idea how much the MSOs have to pay content owners such as ESPN for their feeds," warned Piehler, who said that while the cable operators might drive a lot of revenue from their video and broadcast capabilities, most of that goes back out the door to the major content suppliers in license fees. "The MSOs look at VOIP as a better profit opportunity," he added.

Event moderator and chief analyst at Heavy Reading, Scott Clavenna, was stunned by Piehler's insight into the economics of the video services. Yet his message remains that carriers cannot afford not to make the leap into the video services sector, a sentiment backed by event speakers Mark Marinkovich from Allied Telesyn Inc., Geoff Burke from Calix Networks Inc., and Ralph Biesemeyer from Intel Corp. (Nasdaq: INTC).

"There is no upside to doing nothing about video," said Clavenna. "Sitting back and not moving will lead to a drop in average revenues per customer and a loss of market share. The cable companies will just come and take your customers away."

"As a service provider, you have to be offering the full range of services to the consumer market to be competitive," agreed Allied Telesyn's Marinkovich.

That message has clearly hit home with even the biggest players. As the Light Reading Live event was taking place, BellSouth Corp. (NYSE: BLS) was telling Reuters that it will begin video service trials over its DSL lines within the next year. And at the same time, a major MSO, Cablevision Systems Corp. (NYSE: CVC), was piling the pressure on Verizon Communications Inc. (NYSE: VZ) by cutting the price of its triple-play package to $90, the same price that Verizon charges for a voice/Internet access combo.

But while there's major pressure on carriers to develop a triple-play strategy, there are a number of hurdles to overcome in putting that package on the table, noted Clavenna. Jumping into the video services sector comes replete with business, technology, deployment, and support risks. Clavenna noted that, for some operators, the potential downsides of trying to compete in the triple-play arena were making them think about exiting the fixed-line market altogether.

"I talked to one operator that said video was too scary. They were considering dropping their fixed-line business altogether and concentrating on wireless."

Such operators need help from vendors and integrators to get their strategy right. "There are a lot of hardware and software elements that need to be certified and integrated," noted Marinkovich, "and the carriers must get help from third parties as they get into video."

But it's not all doom and gloom for the video hopefuls. Marinkovich observed that the cost barriers for entry have fallen dramatically in the past few years, and that "there are a lot of entertainment dollars on the table" for the operators that can nail down a solid business plan.

And the potential to capture those revenues and win (and retain) customers has the world's operators excited about triple play, according to the results of research carried out by Heavy Reading. Clavenna noted that of more than 400 service providers surveyed about the importance of certain new services in 2004, only VOIP, cited by more than 30 percent of respondents, came out ahead of triple play, which was chosen by just fewer than 30 percent of the carriers.

Those figures varied in different regions, noted the analyst. Asian operators, which have a more mature broadband sector, cited triple play as the most important, while European operators are still mostly focused on driving further revenues from vanilla broadband access services. VOIP was considered the most important new service by nearly 40 percent of North American carriers.

— Ray Le Maistre, International Editor, Boardwatch