IP nightly

Telcos get set to revolutionize the TV habits of the nation.

Kelvin Shepherd is a farm boy through and through. He was born near Fleming, Sask., now a town of about 100 whose distinction is that it was depicted on the back of the old $1 bill. Its telegraph poles, railway tracks and grain elevator came to represent the quintessential Prairie town. “Unfortunately, the loonie has killed all that,” says Shepherd, president of consumer markets at MTS Allstream Inc., Manitoba's telephone company. These days, the farm boy from Fleming calls Winnipeg home, but he hasn't entirely escaped the hardships of Prairie life. The Red and Assiniboine rivers jumped their banks in late April, and the floodway surrounding the city is underwater. “We're in the centre of a very large lake,” says Shepherd from his 17th-floor office, overlooking CanWest Global Park. “Fortunately, it doesn't affect our TV service.”

Flooding around Winnipeg is nothing new. But what's a telco in the middle of the Prairies doing offering TV service, when its counterparts in Toronto or Vancouver can't do the same? The short answer is that this country's biggest telcos have been caught asleep at wheel. “We saw TV as a growth opportunity, and we wanted to build on our technology investment,” says Shepherd. MTS has spent $300 million rolling out a broadband network, and as a result the company (TSX: MBT), which reported profit of $213.7 million on revenue of $2 billion in 2005, is on the front lines of the IPTV–short for Internet protocol television–revolution. This powerful technology promises to be the biggest thing to hit home entertainment since the invention of the cathode ray tube. “IPTV is a very important new stage in the development of consumer home entertainment,” says James Brancheau, managing vice-president of media industries and adviser services with Gartner Industries Research in Boulder, Colo. “We're moving into an age of remarkable experimentation.”

In the short term, IPTV gives consumers more flexibility than ever to subscribe to the channels they want and to watch their favourite shows when it best suits them. Over the longer term, it means total customization of the TV experience–programming from a smorgasbord of content that spans the globe, right down to locating a specific episode of CSI: Miami or 24 the moment you want to watch it. Because it is Internet based, IPTV also opens the door to downloading shows and feature films directly from the TV networks, specialty channels and Hollywood studios that create them–bypassing cablecos, telcos and those networks, such as CTV and Global, that rebroadcast content under licence. “Distribution of entertainment,” says Stowe, Vt.-based author and consultant Tom Evslin, “is about to undergo a radical transformation.”

MTS launched IPTV in 2003, and since then it has signed more than 50,000 subscribers to a feature-rich service that offers over 200 basic and specialty channels. “From Day 1 it's been very popular,” says Shepherd. “Once our customers try it, they love it.” One of the reasons MTS TV has experienced such good pickup is because the telco has signed deals with most major Hollywood studios to provide their latest releases over its video-on-demand (VOD) service. “This week we signed Warner Bros. and Sony,” says Shepherd. Those deals will boost the number of titles available on its rotating VOD library to about 220, including Harry Potter and the Goblet of Fire and North Country.

Next door in Saskatchewan, it's a similar story. When SaskTel launched IPTV in 2002, it was the first North American telco to deploy the technology over an entire network. (Aliant, in Eastern Canada, began dabbling with IPTV before SaskTel, but to date the service is only available in parts of Halifax.) Why was SaskTel, which today has 45,000 IPTV subscribers, in such a hurry to get its stick on the ice? “We had no doubt cablecos were going to move into voice with VoIP,” says Mike Anderson, vice-president of digital interactive video with Regina-based SaskTel. “We chose to protect ourselves by taking the offensive.”

Today SaskTel is able to offer a triple play–voice, Internet and video–while rival cablecos Shaw Communications Inc. and Access Communications have yet to reply with a comparable service. Also, because SaskTel bundled high-speed Internet with IPTV, it has a 76% share of Saskatchewan's Internet access market. “U.S. telcos would kill for that kind of market share,” says Anderson.

Outside Manitoba and Saskatchewan, the idea of buying TV services from a telephone company may sound a bit unorthodox. But the whole world is about to follow in the footsteps of MTS and SaskTel. “TV is going to change more in the next five years than in the last 50,” says Christine Heckart, general manager of marketing for Microsoft TV, which sells an IPTV software platform that has been adopted by some of the world's biggest telcos, including Bell Canada. “Today, it's where the PC was in the 1980s, before the Internet.”

Last year, Canada's telephony industry was turned upside down when the biggest cablecos, including Vidéotron Ltd., Rogers Communications Inc. and Shaw launched VoIP (voice-over-Internet protocol), a technology that makes it possible to make local and long-distance calls over a high-speed Internet connection at a fraction of what it costs to use conventional telco lines. The move gave many Canadians their first opportunity to subscribe to a residential phone line from the same company that supplied their TV signal.

This year is expected to bring the counterattack–as domestic and international telco giants, led by AT&T Inc., Deutsche Telecom and British Telecom, introduce IPTV to tens of millions of customers in their home markets, denting cableco revenue. “Both VoIP and IPTV are disruptive technologies,” says Evslin, in that they force carriers to rethink their business models. “But because IPTV is more complex and requires greater bandwidth, it's been slower in coming.” Bell and Telus Corp. are expected to launch IPTV services in the second half of 2006, making it possible for residents of Ontario, Quebec and Western Canada to subscribe to TV packages from their telephone company. Why this year? “Until now, the big service providers were not ready,” says Heckart. “Also, market pressures were not there.”

Television (including pay-per-view, VOD and satellite) in Canada is an $8.4-billion business, in revenue terms just behind wireless ($10.2 billion) and wireline local calling ($8.8 billion). But how aggressive are Bell and Telus likely to be against Rogers, Shaw and Vidéotron? After all, this could be a banner opportunity for Bell to strike back at Vidéotron in the hyper-competitive Quebec market, where the cable operator has over the past 18 months stolen tens of thousands of voice customers from Bell. But the more likely scenario is that we're not likely to see anything earth-shaking from the telcos. “Neither Bell nor Rogers play the price game,” says Jon Arnold, a Toronto-based telecom consultant. Analyst Brian Sharwood, with Toronto-based technology consultancy SeaBoard Group, concurs: “Bell and Rogers don't want a price war in Ontario.” That means the majority of consumers will not see much change, at least in pricing of TV services, when Canada's biggest telcos launch IPTV.

Some analysts expected Bell to roll out IPTV in February, but so far this country's biggest telco has not moved beyond technical trials in Toronto and Montreal. “I'm very excited with what I've seen,” says Bradley Fisher, vice-president of consumer services development at Toronto-based Bell Canada. “The platform is extremely flexible, but we need to prioritize which features are most important.” Once the technical questions have been resolved, how will Bell lure TV customers away from Rogers and Vidéotron? “The marketing plan is still in its infancy,” says Fisher.

Analysts agree the key to success and long-term survival in a world where telcos sell TV and cablecos sell voice is bundled services. The trick, however, is striking the right balance between price and features. “Bundling has worked very well for us,” says SaskTel's Anderson. “A customer is less likely to drop your wireless service if he knows breaking up his bundle means paying more for his TV and Internet.” Adds MTS's Shepherd: “Bundling is extremely important in growing revenue and reducing churn.”

But Bell Canada doesn't quite see it that way. In 2004, it offered a $5 long-distance plan covering Canada and the United States to customers who subscribed to two other digital services, but the promotion ended abruptly a year later. Why? “It was designed to help us reach a critical mass of multi-product customers,” says Bell spokesman Mohammed Nakhooda, who adds that customers who signed up for the digital bundle continue to receive it. Analyst Jeffrey Fan, with UBS Securities Canada in Toronto, says the more likely reason Bell discontinued its digital bundle was that it was not helping the bottom line. And while the absence of a competitive bundle in Quebec will likely continue to bleed Bell Canada, in Ontario it can rest easy knowing it's up against a relatively friendly rival in Rogers. Last year, for example, Bell and Rogers became partners when they launched a joint venture to offer wireless broadband across Canada. “Duopolies can act like monopolies until a third or fourth player comes into the market,” says Evslin.

So what's it going to take for consumers to see real competition in the TV marketplace? Aggressive deregulation by the CRTC is part of the answer. Consider that until France's telecom rules were liberalized six years ago, that country was a broadband backwater. Today, French consumers have access to high-speed Internet–the backbone of VoIP and IPTV–that is significantly faster and cheaper than it is in North America. The reason is that regulators forced France Telecom to allow independent service providers to install equipment on its network, and capped how much the telco could charge for renting communication lines. This competitive environment spawned a new generation of telecom companies, led by Iliad. It offers 81 IPTV channels, unlimited VoIP and high-speed Internet for US$38 per month. It's a similar story in Hong Kong, where PCCW offers 110 IPTV channels for US$15 per month–about a quarter of what you would pay in North America. Brancheau says that if North American telcos hope to find a market for IPTV, they will need to emulate these overseas companies by offering deep discounts and innovative services. “They will have to hit the same value propositions,” he says. “Otherwise, they're going to run into resistance from customers who already subscribe to cable or satellite.”

A third factor, however, could drive consumers to IPTV like Teri Hatcher to an Oprah interview: the lure of watching whatever they want, whenever they want, without the constraint of a content aggregator like a telco or cableco. In the United States, the rush toward disintermediation has already begun, with Hollywood studios signing deals to distribute content over the Internet. Last year, Apple signed one with Disney to make a number of hit prime-time shows, including Desperate Housewives and Lost, available for download from iTunes, its popular online music store, for US$1.99 per episode. ABC is allowing some prime-time shows to be downloaded from its website. Warner Bros. is experimenting with file-sharing software to distribute shows and movies. And at this year's Consumer Electronics Show in Las Vegas, Google Inc. announced plans to open an online video portal where consumers can download content from CBS, the NBA and Sony BMG. “For video producers and anyone with a video camera, Google Video will give you a platform to publish to the entire Google audience in a fast, free and seamless way,” Larry Page, Google's co-founder and president, told the trade show.

It all sounds great, but in Canada it's not easy to download prime-time television shows because CTV and Global own exclusive distribution rights. But analysts predict it's just a matter of time before that changes. “With IPTV, you don't need as many people between the creator and consumer of content,” says Evslin. He predicts telcos and cablecos are dinosaurs whose role in the coming age of telecom will be significantly diminished. “Those who succeed will recognize they're in the business of dumb pipes,” he adds. “Consumers will search the web to find the content they want.”

The idea of having their video business hollowed out by the Internet does not sit well with MTS and SaskTel. They are both working to boost their VOD libraries and add interactive features to their TV services. “In the next few months, we're going to make it possible to read e-mail from your TV screen,” says Shepherd of Winnipeg's MTS, who is sure to continue riding the crest of Canada's digital wave at least a while longer. And who knows? If the one-dollar bill ever comes back, it may feature one of his telco lines delivering an IPTV signal to a Prairie home, instead of railway tracks running toward a grain elevator.