IPUrbia

Microsoft’s latest move into the video market is definitely going to make things interesting over the next few years. Recent CES announcements included an (expected) upcoming addition to the Xbox 360 platform that allows for it to be used as an IPTV set top box. As they already do a significant portion of the backend infrastructure for AT&T’s IPTV offering, this gives them an end-to-end solution to take to cable and telco’s to compete with Scientific Atlanta and Motorola, who more or less own that portion of the market.

If this was anyone other than Microsoft, then I would expect it to fizzle sooner rather than later. The set-top box is traditionally supplied with the service and cable companies, at least, try to limit the range of platforms that they have to support for both technical and customer service reasons; it is not traditionally a BYOB (bring your own box) sort of affair. I am interested to see how the economics of this will work out as, in terms of set top boxes, $500 is well above market and definitely limits this rollout to current owners of the Xbox 360 platform. Still, I would assume that they already have some sort of partnership lined up, probably with AT&T, to roll this out in a reasonably big fashion who would be happy to avoid bearing the financial burden of supplying set-top boxes to their customers.

Still, I think that the telcos and cable companies would be well advised to not integrate this into their offering. The first (and relatively minor) reason is user interface: television has a beautiful user interface (up and down for channels, etc…) that is universally familiar and elegant in its simplicity. Microsoft’s history of user interfaces is less than stellar and tends to have a great love of complexity; the Xbox 360’s existing interface is difficult to master for occasional gamers as it is, being geared towards the more hard-core gamer who will buy dozens of games over the life of the platform. Even for current owners of 360’s, I am unconvinced that this is an attractive offering: set-top boxes are already bundled in with service or available for a measly $5 monthly fee, making a platform upgrade a financially unattractive position. There are also the practical problems of a bundled, all-in-one platform. Can you record a show while playing a game? What happens to your DVR when you grab your Xbox 360 to go to a gaming party? Integration is not a technical panacea that it is often made out to be.

The second (and critically important) reason is that this offering is the mother of all Trojan horses to cable companies and telcos. Microsoft is notorious for its black-widow style industry partnerships. The Xbox 360 already has mechanisms for Internet-based content delivery; if this becomes an industry-standard mechanism (price and user interface guarantee that it won’t become the sole standard anytime soon), look for Microsoft to leverage it as a platform for video on demand, bypassing cable company offerings. This would be disastrous for cable companies, for whom it is difficult to over-exaggerate the financial importance of their video on demand platforms. Microsoft’s IPTV platform is intentionally benign to cable companies at this point, but I think that one would have to be both naive and ignorant of Microsoft’s historical business practices to believe that it will stay that way.

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This is an older link, but somehow I missed the news that MobiTV is playing around with providing HD-TV over wireless (WiMAX) networks and now has even partnered to create a video on demand over WiMAX solution. Judging by the total lack of specs, technical details, or anything that wasn’t written by a marketing team, I’m suspicious of the short term and even the long term viability–HDTV is magnitudes more demanding on a network than Mobi’s current cellular technology that delivers grainy video to a cell phone.

Although I could be wrong, I don’t expect for wireless to be able to carry IP HD-TV anytime in the near–or even not so near–future. Each HDTV channel is a minimum of 8Mb/s and can go up significantly, depending on quality, compression, etc. WiMAX can theoretically go up to 40Mb/s per channel, but this is shared among all the subscribers on the radio and assuming great distance and line of sight (real-world scenarios will probably give 10Mb/s as a good baseline). With “burstable” Internet applications (web surfing and so forth), the shared bandwidth is not that much of an issue; streaming applications such as television are much more problematic because they require 8Mb/s non-stop for extended periods of time. Given these statistics, even in the best of scenarios it is unlikely that you can support more than 5-10 simultaneous HD streams off of a WiMAX radio at a time. The radio density required to support 8pm primetime would absurd, even with WiMAX, and is simply economically infeasible.

This does illustrate a fundamental weakness to wireless: shared, low bandwidth last mile connections. Cable works well as a shared infrastructure because it can carry lots of data; ADSL2 (used for AT&T’s IPTV product) works because, although it provides a meager 20Mb/s link, it is a dedicated 20Mb/s point to point link. WiMAX’s mediocre bandwidth combined with shared infrastructure simply cannot carry the amount of data necessary provide video applications. MobiTV either is ignoring the economics of their solution, have some wicked compression scheme, or are using a different definition of HDTV than the rest of the world. Given the suspicious lack of technical details and high emphasis on marketing buzzwords, I am guessing both economic ignorance and a not-quite-so high definition TV.

My pessimism aside, I truly hope that I am wrong and a viable solution is on the horizon. I like wireless simply because it lowers the economic barrier of market entry and increases competition–something that is badly needed in telecom. A viable IPTV over WiMAX solution would radically change the marketplace in a lot of very positive ways. Still, given the typical gap between marketing and reality in the wireless industry, I’ll not be holding my breath waiting for this to come to fruition.

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An interesting patent–although by no means novel–that I came across that has some interesting implications for the future of the Internet: dynamic ad insertion by transparent proxies. This is, of course, trivial to anyone who is remotely competent with squid, which is sometimes used to simply remove ads.

In a lot of ways, I’m vaguely surprised that ads are still generally left intact downstream from the content provider. Not that I’m condoning hijacking ads–the practice is/would be more than a bit unethical in my book, but so is a number of other practices common in telecom by the ILECS and cable MSOs. Simply put, there is a lot of potential revenue for last mile providers tired of content providers getting a free ride on their pipes. I do realize the potential litigation nightmare–advertising and content use is a tricky issue–but, judging by the lack of lawsuits against ad-blockers and such, this might actually be able to slip by.

Again, I’m not in any way condoning this–an Internet where the ISP replaces all of the ads on the site you are viewing with their own advertisements pretty much kills the advertising-supported model that is the backbone of the current Internet economy. I think, however, that it is perhaps just a matter of time before a company heads down this route and, with the FCC giving transit providers carte-blanche jurisdiction over content carried on their networks–the content providers would probably not get a lot of support from the current administration. Yet another reason why Net Neutrality is a must for a viable Internet economy.

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Peter’s post here about the cash-heavy battle for the static market of TV subscribers brings up a couple of interesting points about the ongoing showdown in the video industry, although I don’t agree with his pessimistic synopsis about the futility of throwing cash into the video market to fight over subscribers in a relatively static market that may potentially disentigrate on the submarine torpedo of Internet-based content.

I’m less inclined to think that the telco’s are as stupid as we sometimes make them out to be. They have generally been a little bit slower on the technology side, but somehow, when the market is ripe, they show up onboard with the relevant technology and offerings. So why television? and why now? and why the rush and the expense?

One easy (and mostly accurate answer) is triple-play bundling packaging voice, video, and Internet together (and sometimes mobile) into one package. This is the new advertising gimmick of the industry and quite a brilliant one at that. Residential subscribers are a fickle bunch and triple-play packages have been a great tool for upselling a current subscriber base into a range of add-on services; doubling or even tripling the potential revenue for a given customer. Since (potentially) most, if not all of these services, can run over the same physical infrastructure, this also does a good job of more effeciently monetizing the expensive outlay of physical buildout.

The downside (or upside) of triple-play is that it is now almost a matter of survival in the telecom industry. In a world of triple-play, both the cable companies and the telephone companies are attacking each other’s core markets; anyone not locking their customers into a triple-play package is leaving their customer base unprotected to competive market that can leverage the combined purchasing power of three to four services to undercut pricing on any given package. Given the commodity nature of the industry and the general mediocre customer satisfaction levels, price is a major factor, if not the major factor.

Of course, the battle is over a bit more than mere subscribers–the battle, after all, is for complete domination of the communications industry. In the end, the company with a near-monopoly on communications subscribers can leverage their subscriber to control content, absent, of course, some sensible Net Neutrality provisions. Over the next few years, as mergers, partnerships, and bankruptcies thin the already lean marketplace, Net Neutrality will become all the more important of an issue; from the AT&T merger conditions, 2009 will be the year to watch when their (meager) self-imposed Net Neutrality provisions expire.

Still, Peter’s comments about the disentegrating marketplace do accurately describe a valid threat, and it is somewhat of a race to establish a significant market dominance that can control third party interlopers. Internet video is very much in its infancy, lacking enough substantial content that is compelling enough to replace CSI or Hero as weekly traditions in many an American platform: after all, how many people are ready to tune in on a weekly basis for an hour of “Coke and Mentos”? There are also significant problems with quality and the network providers are being very careful to choke the the amount of Internet bandwidth to kill the possiblity of realtime HD video content. The biggest obstacle to online video–and not a trivial one–is real monetization that can actually support a distribution network and content providers; current offerings can’t even successfully create enough revenue to sustainably support the infrastructure cost of distribution, let alone content. There is a complete end-to-end business infrastructure for traditional television that cannot be replaced or co-opted overnight.

Still, all of these obstacles can change and are changing. Video technology is maturing and is now to a “watchable” level even at relatively modest bitrates; in a few years, HD quality is not unfeasible. And, made-for-Internet video content is maturing; while it is not yet good, it definitely surpasses the much of what is availble on television. Most importantly, the networks have had some success distributing both via direct-to-web ad supported models and pay-per-view via iTunes. Given time, Internet video will mature and be able to establish itself as a legitimate replacement for traditional television.

It is, in many ways, a race: if Internet video establishes itself in a very real sense before a single “victor” emerges, then the gamble has been lost and the telco’s and cable companies will have to retreat to their current role of infrastructure. However, if a single or a couple of extremely dominent companies emerge (as will happen) before any real viable Internet video option emerges, then the telecommunication companies will become gatekeepers and premium content providers will have to pay dearly for access to their audience. It is precisely because they understand the nature of the game and the stock-holder hell awaiting the second place winner that the telecom companies are throwing big money after network upgrades and infrastructure overall. After all, a nice slice of a static market is still much better than no slice at all.

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