[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%

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 
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 

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 

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.


><>   ><>   ><>   ><>   ><>   ><>   ><>

Mark A. Aitken
Director, Advanced Technology

<><   <><   <><   <><   <><   <><   <><

Sinclair Broadcast Group
10706 Beaver Dam Road
Hunt Valley, MD 21030
Business TEL: (410) 568-1535
Business MOBILE: (443) 677-4425
Business FAX: (410) 568-1580
E-mail: maitken@xxxxxxxxxx
Text PAGE: page.maitken@xxxxxxxxxx
HTML PAGE: 4436774425@xxxxxxxxxx

If mankind were to resolve to agree
in no institution of government,
until every part of it had been
adjusted to the most exact standard
of perfection, society would soon
become a general scene of anarchy,
and the world a desert.

~ ~ ~ Alexander Hamilton ~ ~ ~


This email message and any files transmitted with it contain
confidential information intended only for the person(s) to whom this
email message is addressed.  If you have received this email message in
error, please notify the sender immediately by telephone or email and
destroy the original message without making a copy.  Thank you.

You can UNSUBSCRIBE from the OpenDTV list in two ways:

- Using the UNSUBSCRIBE command in your user configuration settings at 

- By sending a message to: opendtv-request@xxxxxxxxxxxxx with the word 
unsubscribe in the subject line.

Other related posts: