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MSOs to Fight IPTV With IPTV

Is there really a market for IPTV?

I was recently asked this question by a Wall Street analyst. My response: yes, but that's not really the question to ask. The market for TV entertainment is enormous – as evidenced by the more than 60 million cable video subscribers in the U.S. alone. The significant question is whether those current satellite and cable video subscribers will find the telco IPTV offering compelling enough to switch their video providers.

It's a big question. Although the ultimate success of telco video remains to be seen, the threat to the MSOs' core video business is very real, and the MSOs Heavy Reading has interviewed recently are taking the telco video threat very seriously – perhaps more seriously than even the big telcos anticipate. Clearly, cable will not sit idly by while the telco IPTV threat mounts.

The bad news for cable operators – but good news for telcos – is that responding to the IPTV threat will not be easy. The biggest challenge facing U.S. cable operators is that, despite the much-discussed $95 billion in plant upgrades spent during the 1990s, the MSOs are essentially out of capacity on their RF plant. This means that boosting their channel lineup and adding competitive high-definition (HD) programming will require additional capital spending and redesigns of their networks.

Due to the period of heavy capex spending they just completed, MSOs are under tremendous scrutiny by Wall Street and unable to simply throw additional money and equipment at their bandwidth problem. In other words, they must make use of what they have – with more efficiency.

Enter switched digital video (SDV) as the near-term savior, with the cable MSOs' own flavor of IPTV as their end game.

SDV combines the bandwidth efficiencies of compressed digital content with switching, which enables content to be streamed to users who request it, rather than broadcasting all available channels to all users at once – an inherently wasteful architecture, since each set-top box (STB) selects only one channel to watch at a time. According to cable equipment vendors, MSOs can free up about 50 percent of their used spectrum (some say even more) by moving from a digital broadcast to a digital switched architecture.

Thus, SDV solves a major near-term problem for cable operators, but it is only a first step in the long-term migration to a new architecture, known as the Next-Generation Network Architecture, or NGNA. NGNA is CableLabs ' effort to migrate to an open, converged, IP-based network – including a migration to IPTV. Ironically, IPTV suppliers such as Microsoft Corp. (Nasdaq: MSFT) actually began their IPTV efforts by targeting MSOs. They moved over to the telco market only after cable IPTV efforts stalled and cable STBs went a proprietary route instead.

Cable IPTV networks will be less expensive than today's proprietary network approach. For example, the early IPTV STBs marketed to telcos today are already significantly less costly than the mature non-IP STB products sold to MSOs, such as those from Motorola Inc. (NYSE: MOT) and Scientific-Atlanta Inc. . The major "catch" is that the MSOs must spend money to upgrade their networks to take advantage of lower-cost IP, something that investors are discouraging them to do.

There is little question that the MSOs will move to IPTV: The competitive threat from telcos and the inevitable rapid advancements in IPTV technology will spur them to follow the telcos' lead. Still, NGNA itself is not a hard-and-fast specification, but more of an umbrella vision that is applied to multiple CableLabs specifications with multiple timelines, including Docsis 3.0 (next-gen cable modems), PacketCable (cable's take on IMS), OpenCable (interactive services), and CableHome (the networked home). The bottom line is that, for the next couple of years, the telcos – as greenfield operators in the video market – will be able to enjoy a technology lead over the incumbent MSOs.

In the end, the challenges faced by 21st-century telcos and cable operators are very similar. It should not be surprising, that in the end, their network architectures will look quite similar – and more evidence that terms such as "telecom provider" and "cable MSO" are themselves becoming obsolete in 21st-century communications.

— Sterling Perrin, Senior Analyst, Heavy Reading

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