For Your Viewing Pleasure

By Eugene Bukoveczky | June 21, 2007 AAA

After 75 years as a one-way medium, television is now on the verge of becoming a fully-interactive experience as it migrates to the internet. Video on demand gives viewers an unprecedented degree of control over what to watch and when to watch it. While the concept is still in its early stages, forecasts of rapid take-up of such services by consumers has attracted a lot of attention, and money, from tech and media companies around the world.

Internet TV Gaining Traction
Internet Protocol Television (IPTV) is seen as a major boom to traditional telecom operators who are looking for something new, and potentially profitable, to offset the declining revenues from their voice telephony business. It is generally bundled into a package marketed as "Triple Play" - a combination of broadband internet access, internet voice telephony and now internet on-demand television. Demand for this service is expected to surge over the next few years.

According to market-research firm iSuppli, the number of IPTV subscribers worldwide will reach 105.8 million by 2011 from 3.4 million in 2006.

Forecasts like this appear to be confirmed by the take-up numbers recently reported by Verizon Communications (NYSE: VZ) and AT&T (NYSE: T) for their fledgling IPTV services.

During the first quarter, Verizon reported it is adding 2,200 new subscribers per day to its Fios service and should be on target to reach 9 million subscribers by the end of the year. AT&T also reported that it is signing up about 2,000 subscribers per day for its U-verse IPTV service.

Hardware Suppliers Expected to Cash In
While the predicted rapid take-up of IPTV by consumers could be a money-maker for traditional, frontline telecoms, its also expected to benefit the makers of the hardware needed to beef up existing networks to handle IPTV. Of the $41 billion projected to be spent on network equipment this year by the telecoms, $9 billion will be directed at IPTV enabling hardware. By 2011, a full 20% of telecoms budgets could go toward IPTV hardware according to iSuppli.

Who's Likely to get a Piece of the Pie?
In a recent research note, broker Thomas Weisel Partners LLC, ranked Ciena Corporation (Nasdaq: CIEN) and Nortel Networks (NYSE: NT) as its favorite hardware picks to benefit from the spending spree on IPTV. Other equipments suppliers like Cisco Systems (Nasdaq: CSCO), Alcatel-Lucent (NYSE: ALU) and Juniper Networks (Nasdaq: JNPR) have also been identified as likely beneficiaries.

Profitability Still Far Off
While the hardware makers could experience an immediate boost in profits from IPTV, don't expect the telecoms to be making a profit right away. Recently, Swisscom (NYSE: SCM) who was one of the first company's to launch an IPTV service, disclosed that it doesn't expect to make a profit from its Bluewin TV service until late 2009.

Content Remains The Issue
Now we come to the sticky issue of content. A precedent may have been set last February when Viacom (NYSE: VIA) went after popular video website YouTube (which happens to be owned by Google (Nasdaq: GOOG)) over YouTube's distribution of Viacom's copyrighted material. Naturally, content providers are going to get a cut of the revenue generated by pay-to-view IPTV services, but its unclear what that split will be.

Also, some premium content may be blocked from IPTV altogether. Recently, AT&T filed a regulatory complaint against Cablevision Systems (NYSE: CVC) for denying AT&T's IPTV service access to popular sports programming covering teams like the New York Knicks, Boston Celtics and New York Rangers. With IPTV constituting a direct competitive challenge to cable, expect more sandbagging on content under the control of the cable operators.

The bottom line
Given that IPTV is still in its infancy, it'll likely continue to experience the sort of uneven growth you'd expect from a startup venture. However, there's no denying the fact that, after 75 years, traditional television is due for a much needed face-lift. The runaway success of services like YouTube proves that point-and-click video is the way forward.

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