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IPTV MiddleWARs: Far From Over

Rick Thompson
Heavy Lifting Analyst Notes
Rick Thompson
4/27/2006

Those thinking that Microsoft Corp. (Nasdaq: MSFT) has sewn up the IPTV middleware space should think again. Granted, it’s nearly impossible to beat Microsoft at marketing, especially given its prominence in Tier 1 IPTV deals. But how do the other IPTV middleware players, who have built the market thus far, compete? In three ways:

  1. Standalone execution in Tier 2 and Tier 3 accounts.
  2. Partnership-based execution, with incumbent telecom vendors, in Tier 1 accounts.
  3. Continued innovation of IPTV middleware as the market evolves.
IPTV deployments continue to roll out worldwide, driven primarily by European and Asian rollouts. In North America, IOCs still lead the way as RBOCs are working through the early stages of initial deployment. The number of IPTV subscribers in non-Microsoft accounts is large, and the only way to get the attention of telcos worldwide is to keep growing the global subscriber base.

With that said, it’s interesting to point out that three of the world’s largest IPTV deployments, totaling roughly 1 million subscribers, are supported by home-grown middleware.

Fastweb SpA (Milan: FWB), Telefónica SA (NYSE: TEF), and PCCW Ltd. (NYSE: PCW; Hong Kong: 0008) have all rolled out and scaled their IPTV service offerings with middleware developed largely in-house. This is mainly due to the fact that when they started their service rollouts, off-the-shelf middleware solutions were limited in availability and in some cases immature.

This has changed and third-party middleware suppliers are ratcheting up the number of IPTV subscribers every day. Myrio Corp. , acquired by Siemens AG (NYSE: SI; Frankfurt: SIE) last year, is probably the leader of this pack, and therefore best positioned to take on Microsoft. Although Siemens/Myrio is tight-lipped on the total number of IPTV subscribers it supports, I estimate it to be in the range of 130,000–190,000 across its customer base of 80+ service providers. Belgacom SA (Euronext: BELG), with 40,000 subscribers (adding 600 subscribers per day), is the largest of these deployments, while most others are US IOCs. Microsoft likely supports less than 10,000 in various stages of trials and early deployments. Thus, the middleware market is far from sewn up by Microsoft, as it doesn't come close to the number of active subscribers worldwide served by its smaller competitors and carrier home-grown software.

Two other trends could shape the market as well:

  • First, service provider home-grown middleware platforms are likely reaching their scaleability, manageability, and service-differentiating thresholds, potentially opening up doors for significant middleware business. As the number of subscribers scales and the rate at which new services have to be added to stay differentiated, it is costly for service providers to maintain and further develop in-house designs. Not to mention, they are significantly challenged to keep pace with market-driven innovation. Lucent Technologies Inc. (NYSE: LU)’s newly-signed deal with Telefonica, for the future support and development of the Imagenio middleware, is the first example of this. Where Lucent magically comes up with IPTV middleware developers is a separate issue.
  • Second, open is the new closed, meaning that next-generation middleware platforms are being designed with interfaces more open to higher-layer services and applications. This is critical in enabling service providers to roll out differentiated services (beyond broadcast IPTV and basic VOD) by allowing application developers to quickly build services/apps on top of open middleware platforms. Siemens/Myrio is working on a next-generation platform due out this summer that is based largely on this principle. Telus Corp. (NYSE: TU; Toronto: T) and Cisco Systems Inc. (Nasdaq: CSCO)’s investment in Widevine Technologies Inc. , although not a middleware provider, is another signal that openness is a priority throughout the IPTV ecosystem.
Middleware alone isn’t a cash cow but has a lot to do with owning the service and selling other equipment as part of the larger IPTV investment. To that end, incumbent equipment vendors are putting the middleware pieces of their end-to-end IPTV stories in place. Here’s a taste of where the behemoths are at:

  • Alcatel (NYSE: ALA; Paris: CGEP:PA) was first to articulate a strategy, largely based on its Microsoft partnership. This has served it well to date, but it could be dangerously close to the software giant if execution becomes a problem. It has its own software in its back pocket if things go awry and long-term options with the Lucent/Orca Interactive Ltd. partnership and newly defined Lucent/Telefonica relationship given the pending ALA/LU merger.
  • Cisco remains relatively agnostic on the middleware front, which could prove to be smart, as the IPTV market is still in its early stages. Cisco can also leverage the extensive middleware partnerships that Scientific Atlanta has in place. Scientific Atlanta’s IP STBs are designed primarily to support Microsoft and Siemens/Myrio middleware.
  • Huawei Technologies Co. Ltd. ’s end-to-end IPTV story is relatively weak, to be honest, although it is working with Cascade Ltd. on the middleware side for some initial deployments in China. Huawei does not view IPTV as high of a priority as its peers do, and is growing its revenues significantly in areas outside of IPTV.
  • Lucent is late in getting its IPTV story together, but has recently partnered with Orca, a respectable middleware player. The Telefonica Imagenio middleware opportunity is another positive point for Lucent, depending on what it translates into in the field.
  • Nortel Networks Ltd. is struggling with its IPTV position, and its recently announced Minerva Networks Inc. middleware partnership isn’t enough to give it much momentum. An acquisition of Siemens Network Communications business, as recently speculated, could bring it a long way in the IPTV world.
  • Siemens made the right move with Myrio middleware and, combined with its infrastructure products and home networking CPE products, is piecing together a good IPTV strategy. Enabling the Myrio team to execute without getting bogged down in Munich-driven strategy will be key to its success. A speculated Nortel acquisition could slow things down and add confusion.
Microsoft has challenges beyond the middleware components of its end-to-end platform. For example, its fast channel change capability is table stakes, not a differentiator. Also, that capability requires a significant hardware investment and suffers from performance issues related to changing between non-adjacent channels.

Don’t get me wrong, Microsoft will be a major player in IPTV, but it is beatable. It will be important for service- and network-layer infrastructure vendors to stay close to Microsoft. Just how close is the question.

— Rick Thompson, Senior Analyst, Heavy Reading

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