Cable’s channel capacity constraints are taking center stage as DirecTV prepares to launch 100 channels of HDTV. MSOs are under pressure to keep up with DirecTV and, to a lesser extent, DISH Network, which aims to stay within shouting distance of DirecTV on the number of HD channels it carries.
MSOs are adding HD channels, but they’ll need widespread deployment of switched digital video over the next year or two before they can compete – but not necessarily match – HD channel for HD channel with DirecTV.
All the while, the telcos have been largely silent on the issue, other than offering some perfunctory statements that they’ll provide subscribers" what they want."
That’s a bit curious, considering one promise of fiber-to-the-home is to render more than enough bandwidth to offer hundreds of HDTV channels. IPTV, although less proven, carries with it the promise of “unlimited” channel carriage.
So why isn’t Verizon screaming from the mountaintops that it will match DirecTV channel for channel? It’s got “better” technology (near limitless FTTP bandwidth) than cable to compete with DirecTV, correct?
To answer that question, we’ll explore three theories:
Theory #1: It costs too much.
Even with tens of thousands of miles of fiber, much of it running right to consumer homes, it will cost Verizon money to add HDTV channels. Here’s a Cliff’s Notes version of how Verizon’s video network works:
The company has two major national video headends, where it downloads signals of all national program networks, including HDTV networks. Those national headends are connected to regional video hub offices via fiber. The fiber that constitutes Verizon’s national backbone has more than enough capacity to carry hundreds of new HDTV channels.
Each regional video hub office basically serves a single market. So Boston has its own video hub office, Tampa has one, suburban Philadelphia has one, and so on.
At those offices, local broadcast signals are ingested, including the HDTV feeds of local broadcast TV stations, plus other local access channels and regional sports networks. Like cable, the entire bevy of “local” channels, perhaps 20 to at most 40 channels (many of which are in analog), are sent to the home, along with all the national digital and HD channels. But between the regional video office and the home rests the central office, the final processing center for video signals before they hit a subscribers’ set-tops.
For the sake of argument, let’s say each central office serves about 20,000 homes, akin to a cable headend. In a market with 400,000 homes passed, there would be 20 central offices processing analog and digital signals. The analog signals sail through the central offices to subscriber homes. The digital and HD signals are sent through QAMs (for modulation) once they reach the central office, before heading to the home.
Let’s say there are 180 standard-definition channels Verizon is offering. Each QAM can handle 10 SD channels, so 18 QAMs are necessary to handle 180 SD channels.
Verizon carries about 24 HDTV networks. Figure two HDTV channels can fit into a single QAM, meaning Verizon needs 12 QAMs to process 24 HD channels at each central office.
Now, suppose Verizon wanted to triple its HDTV count to 72 channels. It would encounter some minor satellite signal downlinking costs at its two national headend sites, but nothing compared to cable’s downlinking costs at hundreds and hundreds of regional headends across the country.
Verizon would have no capacity problems shipping the extra HD channels from the national headends through to the regional service offices to local central offices. The issue is the QAMs in the central office.
Verizon would need an additional 24 QAMs on top of the 30 it currently has at each central office to handle another 48 HD channels. Figure $1,000 as a ballpark cost for a QAM today. Adding another 24 QAMs at any central serving office would cost $24,000.
So how many Verizon central offices are video-capable? The company will end the year at 9 million homes passed for FiOS TV. At 20,000 homes per central office, that’s roughly 450 central offices activated for video across 9 million built homes.
Adding 24 extra QAMs to 450 central offices would cost about $11 million. To retrofit the entire build (18 million homes), would cost about $22 million, ballpark. All that is nothing more than a rounding error, compared to the $22.9 billion Verizon is spending on FiOS over five years. It’s even a drop in the bucket compared to current yearly FiOS spending ($5 billion plus), which is front loaded in the early years.
Even so, it’s possible Verizon never budgeted, or at least didn’t account this soon into the FiOS lifespan, for additional capital devoted purely to keeping up with DirecTV’s HD ambitions.
Theory #2: It’s a pain.
Well, maybe not a pain so much as unease over "legacy" technology, the a sense that QAMs are so dreadfully 2002.
Verizon entered the video business using traditional “cable” technology: fiber, QAMs, coax in the home. But it is running its VOD streaming traffic through an IP network, where no are QAMs needed. And the company plans to go all-IP at some point in time, likely in the next three to five years.
The next step in that evolution could take place on Feb. 18, 2009, broadcast TV’s digital transition day, a day when Verizon has pledged it’s going all-digital.
Once Verizon goes all-digital, it gets back some analog channel space. Those analog channels are now also sent in digital form. But instead of buying a handful of more QAMs to handle the “new” (formerly analog) digital channels, Verizon could start moving lesser viewed digital networks over to the IP platform in 2009.
Eventually, all the channels would be moved onto IP. (For the moment, we’ll leave aside the potential conundrum of rapid channel change between HDTV channels on an IP network. There can be several seconds of latency when ordering IP-delivered VOD programs. A five-second delay in ordering VOD or switching to a niche video channel may not matter much, but a five-second delay switching between two HDTV football games would be excruciating).
If you’re of the mind that you’ll go all-IP in a few years, it doesn’t make much sense to buy 20,000+ extra QAMs when you won’t be using them in your network in a few years. All that testing, channel syncing, quality control with new QAMs, central office by central office activation, who needs it?
Theory #3: Verizon doesn’t need all those extra HD channels to achieve its business goals.
Heresy, you say? Perhaps.
But consider the engines driving Verizon these days. The first is wireless, the golden child of the current asset mix. Enterprise is doing pretty well, and the two, combined, make up more than two-thirds of the company’s revenue.
The other one-third is the residential voice, video and data business, where FiOS TV and FiOS data gains are matched against dwindling DSL additions and landline losses. That's a zero-sum game. HDTV is just one subcomponent of the FiOS TV picture.
The FiOS package attributes are pristine pictures, top-shelf data speeds and a reliable network. HD is not a top selling point in that package as it now is for DirecTV, and isn’t carrying the weight of the company’s future fortunes on its shoulders.
More importantly, Verizon appears more than capable of meeting its subscriber goals with its current “just-good-enough” HD lineup. Why else would this statement come from Verizon?
“We’ll be adding a few more HD channels along with some special interest SD channels this quarter,” a Verizon spokesman told TVPredictions.com in September. “Beyond that, we’re planning a major expansion in our HD, sports and multicultural offers that will track with the removal of analog content from our system. The rollout of these new offerings will begin next spring.”
It sure looks like 100 channels of HDTV is not a must-have today.
But what do the numbers say? Verizon will likely add 800,000 FiOS TV customers this year, ending the year with around 1 million subscribers. It’s not a stretch to think Verizon could add 1.2 million subscribers in 2008 and 1.5 million in 2009 to reach its 3 million to 4 million 2010 subscriber goal a year early.
Over the next three years, Verizon has plenty of work to do in gaining new franchises, laying fiber to another 9 million homes (many of them in urban areas), and training hundreds of technicians and CSRs in new FiOS markets on the new technology and new services. Nothing in their past 12-month history tells them the lack of HD channels is killing them in the marketplace.
The point is: They are making their numbers anyway.
Verizon is in a different position than mainstream cable MSOs. The company is not defending a video business, like cable. DirecTV’s 100 HDTV channels is a direct assault on cable’s video business, forcing MSOs to respond. Verizon’s video business, even at 1 million homes, is but a fraction of the 65-million-home territory cable is defending.
One other admittedly diabolical thought comes to mind regarding DirecTV and Verizon HD. Maybe it doesn’t matter to Verizon if DirecTV signs up “in play” HDTV subscribers from cable before Verizon gets them. Maybe Verizon likes the idea of DirecTV stealing cable subscribers, because some will only be with DirecTV temporarily.
Think about this. If DirecTV steals a cable subscriber on the strength of DirecTV’s HDTV service, some of those subscribers likely will abandon the cable triple play. Where do they get broadband and phone service? Verizon.
Maybe they even are in FiOS territory, today, and can get FiOS data when they switch. Verizon, by virtue of being DirecTV’s marketing partner, gets insight into who is or isn’t a DirecTV subscriber. They know where many of those subscribers are, an inside perspective that’s convenient for direct mail and email pitches.
Remember, too, that Verizon doesn’t have to panic. The company can upgrade to more HD channels on its own capex schedule, or leapfrog to MPEG-4 in new launch markets, getting more HD channels in the same specrum for roughly the same cost.
At some point, it will be able to match DirecTV, HD channel for HD channel. And it will have a FiOS data service DirecTV can’t offer, wireline and/or wireless phone bundles, plus the pitch of a fiber plant that’s not subject to rain fade.
Verizon is poaching satellite customers today, even without the verbal marketplace promise of 100 HD channels. Imagine what happens when they do have 100 HDTV channels.
Epilogue
There are HD and FTTP mavens in the blogosphere proclaiming to be aghast that Verizon isn’t moving more quickly on HDTV. From where they sit, it’s an understandable question.
The answer is a swirling tapestry of reasons. And that tapestry serves to remind us that no matter the alleged superior attributes of a technology (particularly the oft-repeated mantra of infinite channel capacity), there are laws in physics, laws in economics and laws in business that still dictate strategy.