• Illustration: IPTV Architecture
• Sidebar: What's in an IPTV Trial?

Three telecommunications companies plan to deploy services based on Microsoft TV IPTV Edition, Microsoft's platform for delivering live television and on-demand video over Internet Protocol (IP) networks, by early 2006. These planned deployments emerge from an early-adopter program begun in 2003, during which Microsoft convinced partners to provide hardware and services and helped potential customers conduct trials. IPTV Edition stands a better chance than past Microsoft TV efforts because it focuses on a motivated customer segment (telephone companies) and proven feature set (video). Nonetheless, IPTV is still untested in the market, and unforeseen technical or business factors could stall adoption.

Platform Requires Infrastructure Upgrade

After achieving little success with its platforms for TV operators, Microsoft revamped its strategy in 2002 to focus on two platforms—one for today's cable TV market and one focused on broadband providers.

Foundation Edition, available since June 2003, is intended for cable TV providers and includes a searchable onscreen program guide, as well as technology for operators to build interactive Web-like pages that can be embedded in the guide. Unlike past Microsoft TV platforms, which required cable companies to deploy expensive new set-top boxes in customers' homes, Foundation Edition works with the current cable TV infrastructure. Microsoft has had some success with this approach: in the United States, for example, Comcast has started to roll out the software and plans to deploy it to about 500,000 households in Washington State by the end of May 2005.

IPTV Edition, announced in Oct. 2003, is a more ambitious project to enable the delivery of live TV and other video material, such as movies on demand, over IP networks. Microsoft pitched IPTV Edition to telephone companies as a way to offer video services, allowing them to meet the "triple threat" posed by cable companies, which are adding voice-over-IP to their video and data services. Microsoft also proposed IPTV Edition to cable providers as a way to lower their costs in the long run, because it would let them use a single infrastructure for video, voice, and data.

Unlike Foundation Edition, IPTV Edition requires providers to invest in an upgraded infrastructure, including a managed IP network for delivering video, servers to encode and distribute video content in an IP-compatible format, and a set-top box that resembles a DSL modem with additional video processing capabilities. In addition, IPTV assumes that most providers (particularly those in North America and Europe) will upgrade the "last mile" from the edge of their IP networks to consumers' homes—otherwise, customers will not get the quality, reliability, and choice of channels that they're accustomed to from satellite or cable. (For a high-level architectural diagram of IPTV Edition, see the illustration"IPTV Architecture".)

Early-Adopter Program Showing Results

Rather than launching IPTV Edition and then trying to find customers willing to invest in the required hardware, Microsoft offered it to potential purchasers on a trial basis, giving both them and Microsoft time to determine its technical readiness and market demand. (Microsoft has not disclosed exact terms for participating in the early-adopter program, but says that potential customers pay an amount "in the seven figures" to participate in the trials.)

About 18 months into this early-adopter program, Microsoft has been able to attract several key IPTV partners to perform tasks for which Microsoft lacks resources or expertise, such as building specialized hardware or selling IPTV in conjunction with other telecommunications equipment, and has convinced three customers to deploy IPTV or portions of it by early 2006: Bluewin (a wholly owned subsidiary of Swisscom that specializes in broadband Internet access), SBC, and Verizon.

Hardware and Infrastructure Partners

Since announcing IPTV Edition, Microsoft has enlisted partners in the following areas:

Client devices. Several consumer electronics companies (Panasonic, Philips, Thomson) and TV set-top box specialists (Motorola, Scientific-Atlanta) have agreed to build set-top boxes that will enable the delivery of next-generation TV services to consumer television sets over two-way broadband IP networks. Microsoft says it has also enlisted unnamed Asian manufacturers to manufacture low-cost boxes that IPTV Edition providers can label as their own.

Initially, IPTV Edition will follow the traditional cable TV model, in which providers give or lease the client boxes to consumers, then recover the cost of those boxes through subscription fees. However, chipmakers such as Intel, Sigma Designs, and ST Microelectronics are building IPTV-enabling chipsets for use in PCs (such as future Media Center PCs) and consumer electronics devices, such as televisions, DVD players, digital video recorders, and game consoles. This could pave the way for lower-cost services: consumers would be purchasing the IPTV clients themselves, so service providers wouldn't need to recover the cost of rolling out set-top boxes.

Encoding. Harmonic, Inc., and Tandberg Television are providing hardware-based encoders that take video streams from TV broadcasters or other sources (e.g., a library of films for on-demand viewing) and convert them into MPEG-2 (today's digital video standard), MPEG-4 (H.264), or Windows Media Video 9 (VC-1) for delivery over IP networks.

Infrastructure. Telecommunications hardware providers Alcatel, Juniper Networks, and Lucent are working with Microsoft to ensure and demonstrate that IPTV Edition works with their equipment, such as routers and digital subscriber line access multiplexers (DSLAMs, used to connect multiple DSL lines to a high-speed backbone network).

The partnership with Alcatel, announced in Feb. 2005, also has a significant sales and systems integration component. Previously, Alcatel had been selling its own IP-based TV solution, the Open Media Platform. As part of its deal with Microsoft, Alcatel will no longer sell this platform, but will instead resell (and slowly convert existing customers to) IPTV. The two companies will market IPTV jointly to "tier-one" telecommunications companies (defined as having several million customers), while Alcatel will market it to smaller firms.

Customers

When Microsoft first announced its IPTV development plans in Oct. 2003, only two companies—Bell Canada and Reliance Infocomm (of India)—announced plans to conduct trials. Since then, three others that subsequently tested the system—Bluewin, SBC, and Verizon—announced plans to begin actual deployments by early 2006. (Verizon is actually deploying a combination of Foundation Edition and IPTV Edition.) Several other firms, including BellSouth and Telecom Italia, are conducting trials as well. (For more information on what happens during a trial, see the sidebar"What's in an IPTV Trial?".)

Although Microsoft does not reveal exact pricing for IPTV, it charges customers based on the number of subscribers expected to access the service. SBC said it would spend US$400 million over 10 years on the solution.

No cable companies have signed on to conduct IPTV Edition trials, suggesting they are not yet willing to swap out their current infrastructure for the long-term cost savings promised by IPTV Edition, but that they would rather use platforms (such as Foundation Edition) that work with their existing systems. However, Microsoft believes that the cable industry will eventually move to a complete IP-based infrastructure, at which time IPTV Edition will be a logical solution for them.

Why Is This Time Different?

Long-time observers will recall that promised deployments of past Microsoft TV platforms never panned out. In 2001, for instance, Microsoft said that AT&T Broadband (in the United States), United Pan-Europe Communications (Netherlands), NTS (United Kingdom), Rogers Cable (Canada), and TV Cabo (Portugal) had binding commitments to deploy an interactive TV platform called Microsoft TV Advanced in up to 15 million homes. However, because of financial difficulties and other business factors, only TV Cabo offered a broadly available commercial service based on this platform, and Microsoft never revealed how many customers signed up to use it.

IPTV is more likely to succeed than these past platforms for several reasons.

Riding a wave. The telecommunications industry has just come through a period of consolidation and is relatively stable. Moreover, in the United States, a series of court decisions and Federal Communications Commission (FCC) rulings in 2004 mean that telephone companies no longer need to share certain assets, such as switching gear and new fiber networks, with potential competitors, removing one business roadblock to infrastructure upgrades.

At the same time, many telephone companies are feeling pressure to offer new services because mobile phones and Voice-over-IP services are eroding their traditional voice markets and cable is steadily increasing data bandwidth.

IPTV Edition is timed and priced to ride this wave of expenditures: for instance, SBC's US$400 million IPTV Edition software purchase is a relatively small part of its larger infrastructure upgrade, which it estimates will cost between US$4 billion and US$6 billion.

In contrast, many cable companies ran into serious financial difficulties after 2000. Industry consolidation followed, and many planned upgrades, for services such as interactive TV, Web surfing, and online commerce, never happened.

Features with proven demand. Even when cable companies did upgrade their infrastructures from analog to digital, they didn't perceive demand for the types of interactive features enabled by Microsoft's earlier TV platforms. Instead, they used the extra bandwidth to offer more channels to subscribers.

Unlike Microsoft's past platforms, IPTV Edition is focused mainly on a better TV-watching experience, with features such as near-instant channel changing and the ability to display multiple channels of video on a single screen. (For example, a channel guide can show what's playing on each channel, even as the user is watching a different channel.)

IPTV Edition also offers features that help providers save money. For example, it supports bill presentment and subscriber self-provisioning so that customers can look up their current billing information on the TV screen rather than making a phone call (which costs the provider more than US$7 on average).

What Could Go Wrong?

Even if several companies launch commercial IPTV services by early 2006 as planned, a few key factors could still hamper its success.

Customer experience. Some IPTV Edition trials were plagued by problems such as crashing set-top boxes, fan noise, and a slight delay in live TV broadcasts (stemming from the time it takes to encode the signal into an IP-compatible format). Although all of these trials involved prerelease hardware and software, and Microsoft worked with customers to resolve these glitches, new problems could arise as IPTV Edition undergoes its first widespread commercial deployments.

Bandwidth. Although it's possible to deliver an IPTV stream over a DSL connection with less than 2Mbps of bandwidth, doing so has serious limitations: for instance, customers will only be able to watch one channel of regular-definition TV on all sets in a single household. To make IPTV services competitive with today's digital cable offerings, consumers will need bandwidth of 13 to 15Mbps or higher—this will allow them to watch (or record) one high-definition and three standard-definition broadcasts simultaneously, while still leaving room for data transmission. High-bandwidth DSL is already fairly common in some markets, such as South Korea and Japan. However, in Europe and North America, adoption of IPTV will be gated by how quickly telecommunications companies increase their customers' bandwidth, which could be subject to delay for a wide variety of financial, regulatory, and technical reasons.

Content acquisition. Because most telephone companies have not offered video services before, they must sign new deals with providers such as TV networks and movie distributors, further adding to their upfront costs.

Business model. In side-by-side demonstrations with today's digital cable systems, IPTV Edition offers some fairly compelling advantages, such as quicker channel changing and multiple picture-in-picture views. However, these advantages are probably not enough to convince customers to pay more for TV services. Therefore, telephone companies will have to use pricing and bundling to compete with cable and satellite, lowering margins and increasing the time necessary to cover the costs of the infrastructure buildouts.

Resources

Microsoft's IPTV Edition page is at www.microsoft.com/tv/content/Solutions/IPTV/mstv_IPTV_Overview.mspx.

Comcast's deployment of Foundation Edition is covered in "Comcast Deploys Microsoft TV" on page 30 of the Dec. 2004 Update.