SBC’s play for DirecTV is met with skepticism

Feb 24, 2003  •  Post A Comment

SBC’s proposal to purchase DirecTV was greeted by skepticism on Wall Street, in part because of the perplexing possibility of integrating two such divergent technologies as satellite and phone.
The Baby Bell’s interest in the satellite provider is not surprising given that telephone companies are under increasing pressure to offer bundled television services to compete with cable’s growing encroachment into their core telephone business. But SBC’s attraction to DirecTV is only the latest in a series of dalliances the Regional Bell Operating Companies (RBOCs) have had with satellite companies. Effectively merging the two technologies presents some challenges.
Cable operators have steadily marched into RBOCs territory during the past few years to the tune of 2.5 million telephony subscribers today, according to the National Cable Telecommunications Association.
That compares with only a handful of video customers that telephone companies have acquired. Most of those customers come from smaller, rural telephone companies that offer the coveted triple play of voice, video and data with many of the bells and whistles cable can offer, even video-on-demand.
The major telcos have yet to enter the television business, with the exception of Qwest on a limited basis. SBC’s courting of DirecTV is the first formal acknowledgement by an RBOC that the Baby Bells need to be in the video business to survive.
But the deeper the two companies look, the more they will see large operational challenges, said Geoff Burke, director of marketing services for Next Level in Rohnert Park, Calif. Next Level is a key equipment supplier for video over telephone networks.
“I really question the efficiencies and strategic issues at hand. The more services you add onto your existing networks the more you are able to leverage your own resources,” he said. Since SBC and DirecTV do not share a network, SBC would need separate crews for satellite service and for DSL service, he said.
While the initial combination of the companies would be a quick and dirty way for SBC to offer TV services bundled with phone and data, SBC and DirecTV can integrate their technologies down the road, said Robert Aksman, analyst with TV consultancy Filter Media. SBC could conceivably build a set-top box to deliver DSL service and receive all the satellite channels. That solves the biggest problem plaguing the satellite business-the lack of a back channel to deliver two-way interactive services like VOD.
“That’s where [SBC] would need to go,” Mr. Aksman said. “What remains to be seen is if they are forward thinking in that they need to start bundling or that they need to create a very robust integrated TV service.”
Such a box makes sense because that’s how cable has delivered its trio of services, through one wire, said analyst Jim Stroud with Blackbird Communications. Devising such a set-top box would be technologically complicated and would increase the box price possibly by as much as $50 to $100, he said. Still, the rewards from bundling over one wire are high and SBC would likely subsidize such a cost, he said.
SBC did not return calls for comment.
The idea of a combo box is glamorous but impractical, Mr. Burke said. One signal needs to travel 22,000 miles above the Earth and back and the other travels underground. “That’s a complex thing to handle-a complex circle going on, handing off the signal from one network to another beamed above Earth,” he said.
The phone business historically hasn’t had much success in its attempts to mesh with video providers. Eight years ago AT&T partnered with DirecTV to market the satellite service, a union that didn’t succeed because it was based solely on branding without any real synergies, said Bruce Leichtman, analyst with Leichtman Research Group.
In the mid-1990s US West (now Qwest) purchased Continental Cable, which was then spun off to MediaOne, which was then sold to AT&T, which was then sold to Comcast. Bell Atlantic courted TCI before TCI was sold to AT&T then to Comcast. “This idea of marketing has been around, but it hasn’t really worked,” Mr. Leichtman said.
In the case of SBC and DirecTV, because the two services aren’t delivered on the same pipe they aren’t closely related to each other. “Maybe over time people can be convinced a telephone is a viable medium for delivering video, but that won’t happen overnight, because it’s not the same mechanism,” Mr. Leichtman said.
Still, the interest SBC has in DirecTV should drive the business of video over telephony. Technology providers and equipment suppliers such as Alcatel and Next Level are shoring up their product suites as both large and small telcos move more decisively into the television business.
Next Level counts 118,000 video subscribers, including 45,000 users with Qwest in Phoenix and Denver and the remainder coming from 50 independent operators across the United States along with some deployments in Canada.
The majority of television services provided by telcos are delivered using VDSL technology, which stands for very high bit rate DSL. The architecture can deliver about 26 megabits per second per home in most cases, which allows for service to three TV sets simultaneously, high-definition TV, VOD, DSL and phone service. Because the bandwidth is dedicated, every channel delivered over the phone network is digital.
“The quality of the video you get over telephone infrastructure is better,” Mr. Leichtman said. Next Level is slated to roll out VOD service on its equipment for the first time with All West in Utah this month. In early February telecom equipment supplier Alcatel announced plans to purchase iMagicTV, which provides middleware for interactive TV services, including VOD.
“We purchased iMagic because we are seeing a tremendous need and interest by telephone companies to offer this whole triple play,” said Peter Merriman, director of business development, broadband entertainment, for Alcatel in Ottawa, Canada.
Irdeto Access in Holland plans to introduce at the National Association of Broadcasters Convention in April an updated version of its conditional access system designed for delivering video services over the telephone network.
SeaChange in Maynard, Mass., provides VOD servers for cable systems and also has developed a server that enables VOD over telephone networks. “Even though we have had this product ready, we felt here is a turn in the market happening,” said Channing Lai, director of product marketing with the company.
SBC is not the only company that has been interested in DirecTV. News Corp. remains a suitor and EchoStar nearly purchased DirecTV until the deal fell apart late last year. If it had gone through, the two satellite companies would have freed up some satellite bandwidth to deliver additional interactive services, though they still would not have been able to offer VOD over satellite.