IPTV: Big Potential -- but When?


By Ari Bensinger In the good old days, one called the phone company for phone service and the cable operator for TV. Well, times are changing. Reflecting technological innovations, traditional voice-oriented telecom operators are launching TV programming, while cable operators offer voice services.

The new holy grail of the communications industry is the triple play: the ability to offer customers data, video, and voice. For the past several years, telecoms (through digital service lines, or DSL) and cable providers (via cable modems) have battled for the high-speed data customer.

IMPROVING SPEEDS. But cable operators upped the ante during 2004 when they began to successfully launch voice over Internet protocol (VoIP), completing their triple-play package. That left telecom operators with essentially no choice but to offer TV service.

Enter Internet protocol TV, or IPTV, a method of delivering TV and on-demand rich-media content using an IP network. With IPTV, phone carriers can leverage their existing infrastructure investment by offering video services to their growing DSL subscriber base. IPTV will differ from today's Internet streaming video, because it'll provide better quality of service, similar to that of TV. IPTV will arrive via a special set-top box -- supplied by telecom-services companies -- connected to TVs.

From a technological standpoint, the DSL lines that connect the vast majority of telecom broadband subscribers (known as ADSL for asymmetrical digital subscriber lines), aren't a viable transport medium for delivering video transmission since they have data speed limits of about 8 megabits per second (Mbps). To improve that, carriers are using a hybrid of fiber and advanced DSL technologies to reach the subscriber premise.

NEW REVENUE NEEDED. The latest digital-compression techniques are helping to reduce the bandwidth requirements needed to offer video service. The digital encoding industry is in transition to MPEG-4, designed to eventually lower the channel bit rate by nearly 50% compared with the current MPEG-2 technology. Besides tech issues, other significant hurdles include franchise approvals from the regulatory agencies and video-content agreements with the media companies.

While not commercially available in most U.S. markets, all of the major Bell operators are actively testing IPTV technology to create much-needed new revenue streams. SBC Communications (SBC

; ranked hold; recent price: $24) is upgrading its copper lines with very-high-speed DSL (VDSL), which can offer speeds up to 50 Mbps, depending on customer location.

BellSouth (BLS

; sell; $26) is pulling fiber to the curb, which is closer than a node, but still not all the way into the home. From the node, the carrier uses ADSL2+ technology, which allows about 12 Mbps of bandwidth capacity on a single copper strand. BellSouth eventually aims to boost capacity to up to 24 Mbps by applying a technique called bonding, which uses two copper strands instead of one.

UNLIMITED OFFERINGS. Verizon Communications (VZ

; hold; $33) plans to spend billions of dollars during 2005 to equip 2 million homes, on top of 1 million serviced last year, with a superfast fiber-optic service called Fios.

Unlike cable and satellite video, which are simultaneously broadcast whether anyone is watching a channel or not, IPTV delivers only channels that someone is viewing. In addition, existing bandwidth can be switched if needed for some other application. This architectural difference allows IPTV to theoretically offer an unlimited number of channels, creating the capability for a more diverse content offering over current broadcast alternatives.

Most important, in our view, IPTV will customize the customer's viewing experience. Being tapped into the IP network, carriers can offer extensive data information, such as live stats in a sports program or breaking stories in a newscast. Customers will be able to transmit photos or videos from their PC right onto the TV, or send instant messages to friends who are watching at the same time. In addition, IPTV is best suited to interact with enhanced services like video on demand and Internet telephony.

SET-TOP SHORTAGE. So, what's the potential size of this market? Multimedia Research Group, an independent research outfit that focuses on new communication technologies, forecasts IPTV subscriber revenue growing from $635 million in 2005, to more than $1 billion in 2008.

However, we at S&P would note that the exact timing of widespread commercial deployment remains uncertain. As we have seen in the wireless sector with 3G, major industry transitions, especially technological ones, usually experience unforeseen delays. Indeed, international carrier Swisscom recently stalled its commercial launch of its IPTV service from the second half of 2005 to an undetermined date next year, largely due to a lack of suitable set-top boxes and technical difficulties with software from Microsoft (MSFT

; strong buy; $26).

From a deployment standpoint, we think it's much easier for the cable operators to expand their cable telephony footprint than it is for the telecom operators to build out their IP video customer base. Even if the two largest domestic IPTV carriers, Verizon and SBC, reach their long-term deployment targets in a timely manner, the total addressable IPTV market would cover only a portion of these carriers' consumer access-line base. It's growing increasingly clear, in our view, that deploying a complete IP video infrastructure will prove very capital-intensive.

LIKELY BENEFICIARIES. At least for the near term, we view IPTV as not nearly robust enough to match cable or satellite TV, both of which offer hundreds of channels at once, including many high-definition offerings.

Longer term, we see the convergence of video and data providing tremendous opportunity to equipment vendors able to adapt to the changing characteristics of communications traffic. Communication-equipment companies that we expect to benefit from IPTV include Alcatel (ALA

; hold; $13), Harmonic (HLIT

; hold; $6), Scientific-Atlanta (SFA

; strong buy; $37), Motorola (MOT

; buy; $22), and Cisco (CSCO

; buy; $18).

Required Disclosures

In the U.S.

As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 30.2% of issuers with buy recommendations, 57.5% with hold recommendations and 12.3% with sell recommendations.

In Europe

As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 34.4% of issuers with buy recommendations, 46.8% with hold recommendations and 18.8% with sell recommendations.

In Asia

As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 33.3% of issuers with buy recommendations, 47.2% with hold recommendations and 19.5% with sell recommendations.

Globally

As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 31.0% of issuers with buy recommendations, 55.4% with hold recommendations and 13.6% with sell recommendations.

5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.

4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.

3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.

2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.

1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.

Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index, in Asia the S&P Asia 50 Index, and in Malaysia the KLCI or KL Emas Index.

For All Regions:

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Additional information is available upon request.

Other Disclosures

This report has been prepared and issued by Standard & Poor's and/or one of its affiliates. In the United States, research reports are prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"). In the United States, research reports are issued by Standard & Poor's ("S&P"), in the United Kingdom by Standard & Poor's LLC ("S&P LLC"), which is authorized and regulated by the Financial Services Authority; in Hong Kong by Standard & Poor's LLC which is regulated by the Hong Kong Securities Futures Commission, in Singapore by Standard & Poor's LLC, which is regulated by the Monetary Authority of Singapore; in Japan by Standard & Poor's LLC, which is regulated by the Kanto Financial Bureau; in Sweden by Standard & Poor's AB ("S&P AB"), in Malaysia by Standard & Poor's Malaysia Sdn Bhd ("S&PM") which is regulated by the Securities Commission and in Australia by Standard & Poor's Information Services (Australia) Pty Ltd ("SPIS") which is regulated by the Australian Securities & Investments Commission.

The research and analytical services performed by SPIAS, S&P LLC, S&P AB, S&PM and SPIS are each conducted separately from any other analytical activity of Standard & Poor's.

S&P and/or one of its affiliates has performed services for and received compensation from SBC, BellSouth Verizon, Microsoft, Harmonic, Motorola and Cisco during the past 12 months.

Alcatel and Scientific-Atlanta are not customers of S&P or its affiliates.

Disclaimers

This material is based upon information that we consider to be reliable, but neither S&P nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. With respect to reports issued by S&P LLC-Japan and in the case of inconsistencies between the English and Japanese version of a report, the English version prevails. Neither S&P LLC nor S&P guarantees the accuracy of the translation. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Neither S&P nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.

Analyst Bensinger follows telecommunications equipment stocks for Standard & Poor's Equity Research


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