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The Skype-TV Connection
VoIP is forcing telcos to go Hollywood.

Michael Stroud
02.09.05

Since Skype invaded my life, I understand why the telcos are so desperate to take over my TV set.

My kids' nanny makes one-hour phone calls for free every day to her family in Hungary. I myself plan to call my family and office in Los Angeles for free when I'm in France next week. And a buddy I told about Skype a week ago is already calling a Canadian business partner every day, for free.

Worldwide, about 67 million people have downloaded Skype. How long until one billion people realize that they can make unlimited free calls to their friends? How long until everybody does? One, two years?

Until then, I can still switch my entire office over to a Voice-over-IP service like Vonage, and save around $500 a month on my employees' phone bills—and while I'm at it, port my phone number and incoming calls to my laptop at Starbucks. Hell, I could even Skype over Verizon or Sprint's EVDO networks—getting unlimited broadband internet AND voice calls for around $80 a month.

So what's all that got to do with TV? Everything. There's no margin in voice calls any more, and the telcos know it. If they want to survive, they've got two options: bundle commodity services together (wireless and wireline voice and broadband internet); and start zapping lots of video down their fat pipes. In other words, get into the TV business.

It hasn't been lost on the Bells that while the fees they command for voice calls have been collapsing, cable companies have been raising their programming fees, year after year. That's because—satellite notwithstanding—cable operators have remained monopolies in their markets, while the telecommunications market has exploded with competition.

This is a qualitatively different situation than the telcos faced ten years ago, when they announced expensive and impractical trials to bring video-on-demand, interactive TV, and other services to homes. Or when Hollywood super-agent Michael Ovitz contracted with Nynex, Bell Atlantic, and SBC in 1994 to develop interactive services over phone lines. Then, the telcos were dilettantes with deep pockets. Today, it's succeed or die.

You can still be skeptical about Verizon's and SBC's publicly announced plans to invest billions of dollars to offer IPTV to consumers. But don't doubt that this time they will stick to their TV plans to the bitter end. If they fail, they will either buy a cable company or be bought themselves. After all, ten years ago, who could have imagined that mighty AT&T's long-distance business could go for a paltry $16 billion?

In their battle to implement IPTV, the telcos' advantage over cable companies is the same as their disadvantage: they're starting from scratch.

"The telcos are in the enviable position today that they don't have this massive legacy investment in all this cable video technology like cable companies do," said Ed Graczyk, marketing and communications director for Microsoft Television, which is providing the underlying software for SBC's and Verizon's IPTV services. Cable companies, Graczyk said, have "billions invested in the underlying technology and services."

Cable networks are designed primarily for programming; broadband internet was added later and uses a different architecture. Because interactivity was added as an afterthought, uplink speeds are slow.

SBC and Verizon plan an integrated, open IPTV architecture that will offer lightning-fast user interaction with the network and nearly limitless channel possibilities. Think instant channel changing (no one- or two-second delays after you click the remote control), thousands of on-demand channels, multiple picture-in-pictures, and multiple camera angles.

Cable companies won't take this lying down. They're planning to ultimately upgrade their own networks to IPTV, although they're tapped out from their massive investments to go digital.

For both sides, the Holy Grail is offering so-called Triple Plays or Grand Slams: packages of three or four services that will reduce customer churn and create the economies of scale they need to profit in an intensely competitive environment. For Verizon, that means offering wireless and wired voice services, broadband internet, and television. For Comcast and Cox, it means adding telephone service to their cable and broadband internet services.

For both cable operators and telcos, telephone service will be the commodity product and perhaps even the loss-leader they need to drive consumers to more profitable multimedia services. Because if they try to gouge you for your phone calls, you can be sure they'll turn you into a Skyper, too.

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