Going Big-Broadband: The Case for Telco as Video Content Provider

SUMMARY

The local phone company's business is changing. The days of the local monopolies following the breakup of AT&T are gone, as technological and market forces have put the local exchange carriers (ILECs) on the defense in their core voice business, and are now looking for ways to offer new services to keep customers from going to alternative carriers. The biggest threat to the phone company has originated from the cable Multi-Service Operators (MSOs), who were first to offer wide-spread broadband services in the US and, in many cases, have been offering voice services to the customers to go with their video and data.

2004 can be called the start of the "big-broadband" era for the telcos. They announced their first real serious initiatives to deploy fiber across large swaths of their footprint. They announced plans to build out video networks, even as they pushed resale agreements for satellite video. Clearly, things are changing.

This report examines these changes and attempts to analyze the case for telco as a content provider, focusing mainly on video services. It is broken down in the following sections:

• Analysis of how core telco business is in serious decline
• The history of telco video
• The case for new telco video services
• A financial analysis of telco video (positive and negative scenarios)
• Analysis of the major ILECs and IOC video plans

TABLE OF CONTENTS

• Executive Summary
• Methodology
• Introduction
• Telco Core Business Under Attack
• So What Now?: It's All About the Bundle
• The Past: History of Telco Video
• The Now: The Telco Case for Video Content
  • The Advantages of Telcos in the Video Space
    • All IP network
    • Switched Network
    • Unbundled Video
    • Four-Play
    • Price Competition
  • What About the Hurdles?
    • Can They Convince Consumers?
    • Must Convince Content Providers
    • Unproven Technology
    • Large Investment Needed Without Guarantee of Customers
    • Government Regulatory Potential
  • Eyeing the Cable Guys
  • The Financial Argument for Telco Video
• Telco Video Content Profiles
  • SBC
    • Video Offering
    • Capital Expenditure and Subscriber Expectations
    • Network Specifics
    • Partnership with Microsoft
    • SBC and Yahoo
  • Verizon
    • DirecTV Partnership
    • Fios
  • Bellsouth
  • Independent Operating Carriers

List of Tables

• Table 1. Telco Phases From 1990
• Table 2. US Telecommunications Revenues by Category 1999-2003 (in US$ Millions)
• Table 3. Current Bundled Service Providers: Incentives to Buy Bundled Package
• Table 4. Breakeven Analysis for Telco Video Investment (Positive Scenario) 2005-2010
• Table 5. Breakeven Analysis for Telco Video Investment (Negative Scenario) 2005-2010

List of Figures

• Figure 1. ILEC Access Lines 1984-2002
• Figure 2. Under 30 Adoption of Mobile Phones in US
• Figure 3. Local and Toll Calls 1988-2002 (000s)
• Figure 4. ILEC Revenues 1999-2003 (in US$ Millions)
• Figure 5. Bundled Services: What Are They Bundling?
• Figure 6. Telco Services Strength vs. Growth Potential
• Figure 7. Growth Potential vs. Investment Required
• Figure 8. Cable vs. Telco In Four Main Service Areas: Video, Data, Voice, Wireless
• Figure 9. SBC Fiber Network Variants
• Figure 10. SBC IP Video Network vs. a Broadcast Network
• Figure 11. SBC Project Lightspeed Video Network
• Figure 12. Microsoft IPTV Diagram
• Figure 13. Verizon Fios Fiber To the Home Network