[opendtv] Telco David Takes on Goliaths
- From: Mark Aitken <maitken@xxxxxxxxxx>
- To: OpenDTV <opendtv@xxxxxxxxxxxxx>
- Date: Wed, 14 Dec 2005 15:14:39 -0500
Cables next big competitor???
December 12, 2005
Telco David Takes on Goliaths
California-Based Pioneer in Video Delivery Achieves 20%
Penetration
By Daisy Whitney <mailto:daisywhitney@xxxxxxxxxxx>
The day before Thanksgiving, a small California telephone company
conducted a trial of high-definition television services, running a feed
of Discovery HD Theater on two 50-inch-plus Panasonic HDTV sets side by
side. One set received the channel's signal from a satellite provider
and the other received it via the phone company's own Internet protocol
infrastructure.
Story continues below...
The result?
The little guy won.
The IPTV version of Discovery HD Theater delivered by Sacramento-area
telephone company SureWest actually looked better than the satellite
one. The picture was crisper, brighter and clearer around the edges, as
judged by this reporter. The telco's engineers were pleased. After all,
the delivery of video services has become a cutthroat business, with new
competitors cropping up daily, threats rising from every corner of the
wired world and all of the players looking to grab a slice, or even a
sliver, of the potentially lucrative market for delivering entertainment
services to ravenous consumers. Providers will take any edge they can
get, including a slightly better HD signal.
As a smaller telco, SureWest, which has offered video for three years in
the fast-growing Sacramento area and plans to add about 17 HD channels
in the next few weeks, doesn't command the attention that behemoths with
swagger and might, such as AT&T, BellSouth and Verizon, do in the telco
TV world.
But SureWest, in its own way, is a major player.
"SureWest is by far the leader in deploying [IPTV in the U.S.]," said
Jeff Heynen, an analyst for broadband and IPTV at Infonetics Research.
SureWest got started early, has been progressive with technology and has
been able to capitalize on somewhat of a "feel-good" opportunity because
it's the local telephone company rather than a massive regional Bell
operating company, Mr. Heynen said.
By year-end, SureWest will have poured about $200 million into its
fiber-optic broadband system.
And it's starting to pay off. SureWest offers 260 channels of video to
nearly 85,000 customers via its fiber infrastructure and has almost 20
percent video penetration.
Those hearty numbers are indicative of the potential for smaller phone
companies to battle incumbent cable and satellite operators. That 20
percent penetration is particularly powerful given some analyst
estimates of take rates for all telcos. Brahm Eiley, an analyst with
Convergence Consulting in Toronto, predicts that by the end of 2009
phone companies as a whole will have taken only 5 percent of the pay TV
market. Cable companies, meanwhile, will capture 20 percent of the
residential phone market, he said.
That makes SureWest a bit of an anomaly. But it has achieved a
relatively high penetration rate for a variety of reasons, said Fred
Arcuri, SureWest senior VP and chief operating officer. There's strong
population growth in the region and the bundle of services is
attractive, he said. Most customers opt for at least two to three
services from SureWest, and the company also offers cellular, giving it
a quadruple play. Customers receive a discount when they sign up for
more than one service.
SureWest offers voice, video and data for about $110 a month, Mr. Arcuri
said, about 15 percent less than local competitors AT&T (formerly SBC)
and Comcast.
That lower price is a good selling point because the vast majority of
consumers care most about the price of services rather than bells and
whistles, Mr. Eiley said. "[Telcos] have to be highly competitive on
prices," he said. "The truth of the matter [is that] for most consumers,
what [they get] for the price is really the key to get into the market."
So SureWest is going for the pocketbook, but at the same time it is
preparing for the future, when the bells and whistles will likely become
more important to consumers.
Mr. Arcuri knows full well that his company can't compete right now on
many advanced services. SureWest doesn't have access to CBS's 99-cent
on-demand prime-time shows, which competitor Comcast will offer. Nor
does it have the depth of VOD content that Comcast has with its 3,800
programs comprising 2,200 hours. SureWest's VOD library is sparse in
comparison-about 400 hours, mostly consisting of movies.
If telcos do want to compete for the higher-end consumer, they still
have a ways to go, said Paul Rule, president of VOD research firm
Marquest Research. "A bare-bones VOD offering can hardly be expected to
peel away upper-end cable subs," he said. According to a recent Marquest
study, 79 percent of higher-end customers-those with digital cable and
broadband-said they believe the cable company would do the best job of
offering a bundled triple play of services, while only 11 percent
thought the phone company would do best. The other choices were spread
among Internet service providers (7 percent), satellite operators (2
percent) and the electric company (1 percent).
Mr. Arcuri acknowledged that SureWest isn't ready to play the high-end
game yet. But the telco is shoring up its advanced services with HD this
year and plans to offer an integrated DVR in the first quarter of 2006.
Furthermore, he contends that SureWest's advantage lies in the triple
play because Comcast has yet to offer IP voice service in the area.
Comcast believes it has other advantages. It offers a dual-tuner hi-def
DVR, 14 HD channels, broadband, more than 250 basic and premium
channels, more than 50 channels of commercial-free music, and
multicultural programming, said Erica Smith, spokeswoman for Comcast in
Sacramento.
SureWest has a hefty international lineup too, with 38 international
channels and 24 pay-per-view international channels, as well as local
Hispanic-oriented programming.
SureWest started out as Roseville Telephone in 1914, operating as a
small rural telephone company until the mid-1990s when it migrated into
additional services such as data.
The company entered the video market in 2002, when it purchased assets
from bankrupt overbuilder WinFirst. WinFirst was among a crop of
overbuilders that entered the scene earlier this decade with ambitious
plans to build fresh cable plants from the ground up. But the company
bit off more than it could chew and went belly-up.
SureWest landed a foothold in video with WinFirst's 20,000 "marketable"
video homes. About 4,500 of those already were video customers. In three
years, SureWest basically quadrupled those numbers, rising to 85,000
marketable homes and nearly 16,000 video customers.
Mr. Arcuri thinks SureWest's success is due to several factors.
First, it already had the infrastructure in place in the way of trucks,
technicians, a call center and billing support.
It's also operating in the sweet spot. Sacramento is one of the
fastest-growing areas in the country, as San Francisco and Bay Area
residents escape escalating home costs and move north, where property
still approaches affordability. According to U.S. Census Bureau
population estimates released in June, two Sacramento-area cities were
ranked among the 10 fastest-growing cities: Elk Grove was second and
Roseville 10th.
That influx of people means the market opportunity increases and the
cost to pass homes decreases. As new homes are built it's easier for a
service provider to lay fiber in the "open trenches" instead of digging
up the ground around existing homes.
Also, as customers move into new homes they are in a shopping and buying
mode for services.
A recent study by home builder Lennar Communications Ventures found that
half of all new home buyers upgrade and switch communications providers.
They are also heavy users. About 69 percent of new home buyers are
broadband users, compared with 38 percent of the general public. In
addition, 38 percent of new home buyers own HD sets, compared with 13
percent nationwide. "These people's minds are open. These customers are
really in play," said David Kaiserman, president of Lennar
Communications Ventures in Miami.
Mr. Arcuri said SureWest has partnered with local builders to market its
services.
Like many smaller telcos, SureWest has chosen to rely on a combination
of equipment from various technology providers. While many large telcos
have said they will use Microsoft's end-to-end solution, Microsoft isn't
targeting small phone companies.
So smaller operators opt for a best-of-breed approach, which affords
flexibility in architecture and pricing, said Bill DeMuth, chief
technology officer for SureWest. That also means if a piece or part
doesn't work it can easily be jettisoned or replaced.
That makes all the difference for a small company, because it provides
leverage the company otherwise would not have.
SureWest's headend, housed inside an air-conditioned room in its
headquarters, is a testament to that open philosophy, peppered with
racks of equipment bearing the names of vendors such as Kasenna,
Minerva, Irdeto, Big Band and Cisco.
"It is a completely open architecture," Mr. DeMuth said. "We can mix and
match various pieces of a network based on our needs and what we feel is
most cost-effective."
Nor does SureWest want to use the same equipment as its competitors. The
set-top boxes it uses from Amino look nothing like the clunky boxes most
cable customers have in their homes. The Amino boxes are the size of a
thick sandwich.
SureWest has become something of a model for other telcos. Mr. DeMuth
said more than 100 telephone companies internationally, including Korean
Telephone and Verizon, have visited the lab in Roseville.
The lab is not glamorous. It consists mostly of plywood walls with
dozens of mundane-looking pieces of equipment and boxes from various
vendors. Soon that lab will be testing MPEG4 equipment. SureWest wants
to start transitioning next year to MPEG4 compression, considered the
next-generation TV format because it allows a service provider to
deliver more channels using less bandwidth.
More bandwidth also means SureWest will be able to offer more of those
increasingly important bells and whistles.
http://www.tvweek.com/news.cms?newsId=9024
--
><> ><> ><> ><> ><> ><> ><>
Regards,
Mark A. Aitken
Director, Advanced Technology
<>< <>< <>< <>< <>< <>< <><
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