November 22, 2004 4:00 AM PST

Video gamble for the Bells

With the touch of a button, a high-definition TV screen splits into five separate screens, each showing a different view of San Francisco Giants slugger Barry Bonds taking practice swings at the plate. Seemingly without effort, he lofts a home run into the bleachers.

The metaphorical overtones of the video are hard to miss. The clip is part of a carefully orchestrated demonstration aiming to show off the prowess of SBC Communications' pending Internet television service, due out next year--and the phone giant is swinging for the bleachers itself.

Like the other Baby Bells, SBC is spending billions of dollars to upgrade its network in a bid to fend off cable television giants that are stealing its customers. In the next year, it hopes to turn the tables by converting its antiquated infrastructure into a digital dynamo, serving everything from high-speed Internet access and phone service to multichannel high-definition TV.

News.context

What's new:
The Baby Bells are spending billions of dollars to become TV providers because selling voice lines is a dying business.

Bottom line:
SBC and other old-line phone companies face fierce competition from cable providers, which are selling telephone service as well as entertainment offerings. Video could give them the ammunition to fight back.

"If we are going to build the IP (Internet Protocol) pipe, we want all the revenue streams," said Ralph Ballart, vice president of broadband at SBC Laboratories. "The great thing is that several technologies are coming together now. We're very happy about that."

The wall between the cable and telephone industries is rapidly crumbling, as each begins to issue challenges in the other's backyard.

Cable companies such as Comcast and Cox Communications have already begun to push telephone services over broadband connections, encroaching on local monopolies maintained by the Bells for roughly a hundred years. Now the Bells--SBC, Verizon Communications, BellSouth and Qwest Communications International--are preparing to strike back with TV services.

"There's no question they have to do this, competitively, because their core business is so much under threat," said Jim Penhune, an analyst at Strategy Analytics.

Industry pundits have predicted the collision of the two industries ever since the Internet first brushed the public consciousness more than a decade ago. Now those forecasts are becoming a reality, thanks to growth in broadband services and new software applications that run equally well over digital cable, advanced DSL and optical fiber lines.

In the latest sign of convergence, SBC, the nation's second-largest phone company, on Wednesday said it will pay $400 million to use Microsoft's IPTV software to power its Internet TV service, slated for launch late next year.

Analysts said last week's deal represents a watershed for both companies and a new challenge for cable companies facing increasing competition from satellite-based rivals.

"It may not be at every household...but neighborhoods closer to the central offices, such as apartment buildings and dorms, will have that access," said Richard Doherty, research director at The Envisioneering Group.

Buy now, save later?
To offer TV, the Bells are going to have to pay.

Ordinary telephone signals use very little bandwidth, running over copper lines installed years before the high-speed Internet was ever envisioned. Thus, the network is insufficient to offer high-quality television broadcasts for the vast majority of people who use it.

Asymmetric digital subscriber line (ADSL) service--the most widely deployed high-speed Net technology currently in use by the phone companies in the United States--tops out at 8mbps, but is generally offered at much lower rates in most commercial services. The technology is considered barely passable for delivering a single video transmission and not nearly robust enough to match cable or satellite TV, both of which offer hundreds of channels at once.

The bandwidth shortfall has led some phone providers, notably Verizon, to push for a complete switch-out of its copper infrastructure in favor of a pure fiber-optic network. That's expected to eventually superpower Verizon's network to 100mbps in major cities--more than enough to run phone lines, high-speed Internet and multiple digital television channels, including new high-definition transmissions.

The Bell giant will spend $800 million this year to lace a million homes with super-fast fiber-optic service, called Fios. By the end of next year, Verizon plans to reach an additional 2 million homes and begin selling pay TV to its customers. They can also receive broadband Internet access at the breakneck speed of 5mbps for about $35.

We think (fiber-optic cable) future-proofs our network."
--Verizon spokesman
Mark Marchand says better
to upgrade now than later

"Everybody in the industry knows and believes that fiber is the overall answer, long-term," said Mark Marchand, a Verizon spokesman. "The real question becomes, do you do it now or later? We want to do it once. We think this future-proofs our network."

Although fiber is widely considered the most potent option for the phone industry, replacing existing copper networks is costly and time-consuming.

As a result, most of the Bells other than Verizon are turning to hybrid

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