New kid on the TV block promises real competition.

Kristen Mabry of Bowie, MD may be five-feet-four-inches tall and weigh less than 100 pounds (45 kg.) but, believe it or not, she represents a serious threat to U.S. MSOs Comcast and Time Warner. Fed up with the high monthly cable and Internet bills she was paying, Kristen switched to Verizon's FiOS (which is a hybrid offering of cable and Internet technology) in late 2006. "It is much cheaper, we get the shows we want, when we want them, plus all the interactive stuff," she said. After years of hype, the era of Internet-delivered television has finally arrived in major markets like Germany, the U.K. and Hong Kong, and is beginning to take off in the U.S. As a result, business models are evolving to reflect these new opportunities.

The global leader in IPTV penetration, with over 500,000 subscribers in a country of 6.5 million, is Hong Kong Telco PCCW, which has been particularly aggressive in attracting and copyright-protecting major global, branded content. In the U.S., that success has inspired the entry of fixed-line Telcos Verizon and AT&T. These companies are entering video because their core voice market is under siege: Voice over Internet Protocol (VoIP), an Internet-based phone service, lowered voice revenues at the U.S. Telcos by seven percent in 2005.

Verizon's FiOS video offering, which is a hybrid of Internet and cable delivery, is more widely deployed than AT&T's UVerse, having already reached 175,000 TV subscribers by the end of 2006. Verizon is now in 16 U.S. states but is awaiting authorization to enter key markets including New York City. AT&T's UVerse, which is a purely Internet-based delivery mechanism, has been much slower to deploy beyond its test markets of San Antonio, TX and Houston, TX. Currently, the AT&T package offers only two services in its bundle: high-speed Internet and television. But according to the company's spokeswoman, AT&T plans to add VoIP at a later date.

Internet-delivered television offers consumers several advantages over traditional multi-channel offerings and the Telcos intend to challenge the cable and satellite companies. Advantages include greater interactivity, video-on-demand, more efficient compression, triple-play (broadband Internet, phone and TV) and IP-based converged services.

One of the major winners in this new landscape will be the content owners. According to Phil Schuman, founder of Santa Monica-based High View Media and former co-president, Universal Studios Television Distribution, "More distribution should grow the pie for everyone, whether for niche programming or tentpole."

But in order to compete with the heavy hitters (namely the MSOs and satellite operators), these new competitors may need to offer premium films and sports. According to Schuman, "As a new entrant, building up to 'me-too' is truly the first priority. New entrants have to 'pay to play.' They have to invest in the short-term in order to launch and renegotiate content deals once scale is achieved."

In a speech at an industry conference in November, Terry Denson, vice president of Programming and Marketing for Verizon FiOS TV, suggested that programming strategy should focus on comprehensiveness--offering everything available from cable and satellite competitors, plus key niche categories for underserved audiences.

In addition, advanced technology can differentiate the offering. This may include: high-definition channels and movies (HDTV sets will continue to proliferate with the U.S. shift to digital signals scheduled for 2009); time-shifting (free on-demand and DVR services are already growing rapidly in penetration and developing additional variants, such as subscription and download-to-own packages); place-shifting (remote access to TV programming such as Slingbox, via broadband, mobile, and remote DVR services are strong growth areas, though a lucrative business model has not yet emerged); triple/quadruple-play packaging (quadruple-play packages include wireless as well); and interactive content (games, voting and user-influenced programming are popular with younger audiences, while gambling and shopping is a proven revenue generator for companies like the U.K.'s BSkyB).

There are certainly challenges for these new entrants, who do not have nearly the same leverage as their competitors for "must have" content and are rumored to be paying higher prices for premium content acquisition. Moreover, some broadcasters are setting a significant cash precedent for retransmission consent as well as seeking to lock into long-term agreements on linear channels at high rates. According to Albert Lin, a telecom analyst at the San Francisco-based American Technology Research, "At this early stage, Verizon is paying a relative premium for TV programming, compared with large cable operators." For its part, Verizon told analysts that it is able to negotiate rates roughly on par with direct-broadcast satellite providers, who also typically pay more in license fees than cable companies.

Telephia, a San Francisco-based supplier of consumer research to the communications and new media markets, predicts that IPTV and FiOS will struggle in 2007 to become mainstream revenue opportunities for U.S. Telcos, with short to medium-term profits from IPTV expected to be modest at best. Outside the U.S., many IPTV services have resorted to low-priced services and bundles to drive initial subscriber uptake. In the U.K., BT Vision has seen slow uptake partially because of the steep 139 [pounds sterling] (U.S.$250) cost to purchase the set-top box. On the other hand, in France--which accounts for nearly half of Western Europe's IPTV subscribers--penetration has been driven by the aggressively low entry price, combined with the major pay-TV services willing to embrace new distribution channels.

IPTV services are building a user base for a distribution platform that will, in the future, be able to offer many more services and opportunities for revenue generation. Content owners will surely watch very closely in 2007 to see the acceptance of IPTV. The hope is that there will be more households like Kristen Mabry's, where, she said, "I am watching more TV now than I ever did before."