Change Is Good

this is the year we begin to see major telecommunications carriers rolling out IPTV—television delivered over IP networks. Based on the same networking technologies used for the Internet and business and educational data networks, IPTV (Internet Protocol Television) will standardize distribution of TV over carrier and cable networks to deliver new and profitable services.

However, IPTV will require significant investment in network upgrades for carriers and service providers, and it will create a new era of customized, user-controlled TV viewing that strikes fear in the hearts of advertisers.

Following is a brief look at how IPTV will impact the key players involved.

For telephone carriers and cable operators, IPTV is the next escalation in a battle that has been brewing for over a decade. Carriers like Verizon and SBC see their business under attack by cable operators like Comcast and Cox Communications, which have lead the market in pay-per-view video and high-speed data services for home users and now are offering telephone service over their networks as well. On the cable side, operators are starting to migrate to IPTV from older analog and digital networks because it is less expensive to deploy and easier to manage. Analysts at In-Stat/MDR project that by 2007, the number of IPTV subscribers will reach 15.6 million.

Unlike broadcast, satellite and cable TV, which deliver every available channel to every consumer, IPTV is customized television in which only the channel or channels selected are delivered to each subscriber. In addition, IPTV is truly bi- directional, because the same network that brings the signal to subscribers can transport commands or information from subscribers. This fundamental difference will transform TV viewing for consumers. It presents both opportunities and challenges for broadcasters and advertisers.

For consumers, IPTV will offer new incentives to continue reducing their reliance on a handful of big networks and to explore the growing roster of channels that offer special- interest content. The driving factors are content availability and user control. Network audience shares have steadily declined with the rise of cable channels, which now run the gamut from HBO, ESPN and Showtime to dozens of foreign-language and special-interest channels. Along with more variety, viewers now can control when they watch with time- shifted viewing through devices like TiVo. IPTV makes on-demand television viewing the norm, giving every subscriber access to any program anytime.

With a two-way link between viewer and content provider, IPTV also will enable new viewing services that boost service provider revenues. Because it is based on standard technologies, IPTV opens up creation of new services to a far larger community, making it possible for developers to customize the viewer experience or build new services using some of the same tools they now use to develop software for the Internet. For example, viewers may be able to choose from multiple camera angles during concerts or sporting events, or display multiple thumbnail views of different football games around the edges of the main game being watched.

With IPTV’s network-based personal video recording (PVR), viewers also can build their own custom viewing schedules, just as they create custom playlists on an iPod digital music player. Other services might include integrated Internet and e-mail access via TV and TV-based caller ID and call directories with integrated telephone or videophone services, as well as video home monitoring. With an explosion in services, the technology represents a massive revenue opportunity for service providers. In-Stat/MDR projects that worldwide IPTV service revenues will grow to $10.2 billion by 2007.

Advertisers challenged by TiVo’s fast-forward capabilities will have to learn to adapt to the new level of viewer control. Product placement within mainstream programs will take on new importance when advertisers know that viewers are skipping through ad breaks. Another strategy is to ride the wave of expanding content to participate more directly in special-interest programming. We’ll see more how-to shows on topics like auto maintenance, healthy living or home improvement produced by—not just sponsored by—advertisers.

Imagine, for example, a schedule of home-improvement seminars jointly produced by Home Depot, Black & Decker and Kelly Moore Paint, or fitness programs produced by Bowflex and GNC. In such programming, the vendors become teachers rather than simply salesmen and have the chance to significantly improve the quality of their customer relationships. Today’s studios and content providers can help advertisers become mentors by lending their production, promotion and distribution talents to such efforts.

Like any significant change in a force as important as tele- vision, IPTV will be disruptive—but change can be good. Early deployments by small carriers show that even early IPTV services are quite popular with viewers. For their part, carriers, content providers and advertisers should embrace it as a new opportunity for higher revenue and stronger, more lasting customer relationships.

Mark Gray is chairman and CEO of Kasenna in Mountain View, Calif., which develops software for broadband video delivery.