A lot is riding on broadband television for the big telecommincations operators. But while the industry dreams of new revenue models and interactive services, some basic technical issues could limit the profitability of internet protocol television (IPTV).

Today, most telecommunications TV services do not serve more than a few tens of thousands of users. Telefonica and France Telecom manage Europe’s largest deployments, each with 200,000 customers. But even this represents just a 5 per cent penetration of their respective broadband customer bases, and is tiny by traditional broadcast measures.

“IPTV is only just getting off its feet in Europe. We estimate that there are currently only 2m IPTV lines worldwide, but we predict this is likely to grow to 30m in the next three years. Where mobile communications were in the mid-80s, IPTV is now,” says Peter Newcombe, Nortel’s president of Carrier Services EMEA.

The technology is proving harder than expected to integrate with existing networks. “Even leaders such as France Telecom and Telefonica will readily admit they are facing high hurdles,” says Kenny Van Zant, executive vice president of marketing at Motive, a network management software company.

Technical hitches have already delayed some high-profile launches, such as at Swisscom and SBC in the US. And many carriers are simply waiting for others to solve the problems before investing.

Equally critical is the provisioning process which remains slow and costly. Typically, this means sending a technician to the customer’s premises. “The current average rate is six hours for an installation, driven largely by the need to do in-home wiring. Provisioning also requires lots of manual processes that are slow and prone to error,” says Mr Van Zant.

Operators hope that self-provisioned TV services will eventually drive down these costs, as happened with DSL modems. But until then, the very act of provisioning can make the service unprofitable.

Just as important, carriers lack a way to troubleshoot the service remotely. This means call centre agents lose a lot of time on diagnosing a problem or, worse, a technician must be sent. “If a customer calls complaining about a bad picture, how do you troubleshoot it in a short time? This could make that customer unprofitable for a month or two,” warns Martin Thunman, CEO of PacketFront, a broadband network vendor.

Likewise, it is too early to judge whether telco TV will live up to its promise of slowing the decline in wireline revenues and reducing the rate of churn.

Optimists point to the success of Fastweb, the Italian alternative carrier, which enjoys average per-user video revenues (ARPU) of over €6 per month. But PCCW in Hong Kong, which has 500,000 IPTV subscribers, reports a monthly video ARPU of €12.

The innovative features that promise to deliver revenues seem far off for the moment. “When you’re working on the stability of middleware, pricing and other skeletal issues, doing innovation is less urgent,” says Mr Van Zant.

Ed Graczyk, head of marketing for Microsoft’s TV division, believes the first generation of IPTV services will look just like traditional television services. “Many new features are already available in the first generation, but they would be overwhelming to consumers,” he explains. “Over the next 24 months, you’ll start to have things you don’t see in cable or satellite TV.”

Nor is there compelling evidence that broadband TV reduces churn for network operators. “Nearly everyone will be switching from a pay package to IPTV – so they can just switch back if they are dissatisfied,” says analyst Michael Kende of Analysys. Fastweb reports that churn for its video customers is roughly the same as for its other broadband customers.

Content providers also consider the broadband TV opportunity to be immature. “IPTV is still at the stage of being just another broadcast medium,” says Angel Gambino, a vice president at MTV Networks Europe. “Right now, the economics of operating on a straight broadcast platform works for everyone; it’s an established business model,” she adds.

But Ms Gambino believes IPTV will become compelling as on-demand services are developed. “We haven’t gotten to where we’re using its full creative potential,” she says. Doing so will require new business and marketing models, which take time to perfect.

Steve McKay, chief executive of IPTV vendor Entone, agrees. “What we have now are a lot of expectations of what will come in the future. But five years from now, video on demand will simply be the way we watch TV,” he says.

But Mr McKay thinks getting to that point will depend on the the will of the telcos. “They need to break out of experimenting and start asking themselves how they can kill the competition. They won’t create shareholder value until they do,” he says.

Others seem more resigned. As one incumbent said: “Doing IPTV is just a matter of whether you want to die fighting or not.”

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