The Internet TV pipe dream
Phone companies are banking on interactive television. But the payoff could be many years off.
NEW YORK (Fortune) -- Faced with eroding businesses and defecting customers, phone companies have been trumpeting the arrival of IPTV, or Internet Protocol Television.
By combining the interactivity of the Internet with the simplicity and ubiquity of television, IPTV will unleash new forms of entertainment (think YouTube on steroids), information (pull up all kind of sports stats on your TV screen while watching the big game), and of course, advertising (targeted, interactive ads tailored to each household or even each viewer).
The mere prospect of IPTV already has some on Madison Avenue salivating, for it could revive a television ad market buffetted by viewer fragmentation and commercial-skipping technologies such as TiVo.
Meanwhile, the specter of Net television has had a chilling effect on cable company stocks on concerns that phone companies such as Verizon (Charts) and AT&T (Charts) will begin offering video at deep discounts, steal lots of customers and, in turn, force their cable competitors to lower prices.
A contrary opinion
And yet telecom and media executives offer a more pessimistic - or realistic - view. A recent survey by consulting firm Accenture found that only 4% of telecom, broadcasting and media executives think IPTV will generate significant revenue in the coming year.
None of the phone-company managers surveyed thought IPTV would boost revenue in the next 12 months - and, perhaps most surprising, only about half are confident Net television will generate revenue in three years' time.
"We started to see a gap between what telecom executives were saying and doing and what their equipment and software providers were saying, and what was being hyped in the press," says Greg Douglass, global managing director of Accenture's media and entertainment practice.
Douglass does believe the phone companies eventually will see additional monies from their television gambits but he suggests it is going to be a long slog.
First, he notes, the companies need to build new networks at huge capital expense, which Verizon and AT&T are in the process of doing.
Then, he says, the phone guys need to keep spending to make sure the networks are reliable and offer consistent quality - nobody is going to tolerate disruptions when it comes to TV programs.
But one of the biggest problems will be the deep discounts phone companies are going to have to offer to attract customers.
In Keller, Texas, for example, Verizon is charging about $100 a month for a package of voice, video and data services, not a whole lot more than many households pay for just phone calling and high-speed Internet alone.
PCCW (Charts), the Hong Kong-based telephone company, has roughly 549,000 IPTV customers, yet it doesn't claim big revenue from TV. Why? Because collecting revenue may not be the most important thing to the phone companies, at least for now.
Instead, the telcos are focused on hanging on to customers who are switching to voice-video-data packages offered by cable companies, new Internet-based telephone operators such as Vonage (Charts), and wireless services.
That can't be heartening to telecom investors, who would like to see TV sales offset declining revenues.
Cable investors beware, too: Douglass says the cable companies have behaved as expected, aggressively dropping prices in markets where Verizon and AT&T have begun offering video services. "The cable companies have been swift and aggressive," he says.
But Douglass ultimately is optimistic about IPTV's ability to evolve into a revenue-generation machine. (So, in some ways, he does believe the hype.) He says the interactive nature of IPTV is going to lead to new add-on services for which telephone companies can charge premiums.
And by the way, cable and satellite players are looking at technologies that will allow them to offer similar services. "The consumer may end up spending more in the future than they do today because they get more," he says.
When those new services will come along is unclear, but we're willing to bet they are years off. Before media companies start investing in offerings that take advantage of the IPTV platform - say, providing consumers with the ability to watch a football game from four different camera angles - they are going to wait for that platform to be reaching millions of customers.
Whatever happens, one thing is for sure: the phone companies are going to need a zippy name for their video service. A separate Accenture survey of 6,000 consumers worldwide asked respondents if they knew what "IPTV" was. Some 4% said they thought IPTV was a reality television show.
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