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Telecoms Show Off Television Over Internet

At the telecommunications conference here this week, a visitor could be forgiven for thinking he missed a turn and walked into the wrong trade show, a more glamorous one that dealt with entertainment rather than the plain old telephone system.

Every other booth at TelecomNEXT, which ended Thursday, had some demonstration of how phone companies can deliver video programming. A visit by the chief executive of The Walt Disney Co. (DIS) underlined that for the companies here, the future of "telephone" is spelled "television."

"IPTV has gotten the imagination of a lot of service providers," said Robert Balsamo of equipment provider Calix Networks Inc.

IPTV, or Internet Protocol Television, is the main way phone companies are getting into video delivery. The technology overcomes one of the disadvantages of phone lines — they can carry only a few channels, compared with hundreds for cable.

An IPTV set-top box sends messages up the phone line, telling the delivery system which channels to send back down. That way, the system only needs to deliver the few channels you're actually watching.

Although this can result in a delay while switching channels, Microsoft Corp. (MSFT), a major supplier of IPTV software, said its latest version overcomes much of it.

Once channel switching and other technical hurdles, like the susceptibility of phone lines to interference, are overcome, most viewers won't be able to tell if they're watching TV from a modern cable system or IPTV.

IPTV does have some technical advantages, but they're rather small and won't matter to most consumers, according to Ted Henderson, a Stifel Nicolaus analyst.

But Henderson also believes IPTV doesn't really need a technical advantage to compete with cable. Convenience matters a lot to consumers, and being able to get wireline phone service, wireless phone service, broadband Internet and television from one company, the so-called quadruple play, is sure to appeal to them, he said.

Verizon Communications Corp. (VZ) said this week it has signed up 30 percent of available households in Keller, Texas, just six months after launching its TV service there.

That figure will be "daunting" to cable companies, Henderson said, noting that a typical cable penetration rate is 50 percent, and about 20 percent of households have satellite TV.

It isn't entirely clear, however, that telephone companies can repeat elsewhere the successes of Keller, an affluent, newly built suburb of Dallas.

Furthermore, Verizon is not even using IPTV, but taking the much more costly route of drawing fiber optics into customers' homes, bypassing the bottleneck of the phone lines. That means it can use technology more similar to cable and also provide Internet service at very high speeds.

AT&T Inc. (T), the country's largest telephone company by number of subscribers, has been testing IPTV in a few households in San Antonio and plans to roll it out in more markets this summer.

Cable companies are countering by partnering with Sprint Nextel Corp. (S) to add wireless service, complementing the telephone services they've been rolling out for their own quadruple play.

Besides the technological hurdles of TV service, the phone companies have a legal obstacle.

Cable service is provided under deals with county and city governments. It's time-consuming for the phone companies to negotiate their own deals at the local level — Verizon has noted that even if it obtained one local franchise a day, it still would take years to provide video to all its customers.

That slow process has been short-circuited by new laws in Texas and Indiana that allow applicants to obtain video franchises from the state rather than local commissions. Virginia has approved a similar law, but it has yet to go into effect, and the phone companies are hoping for more such laws.

The franchise battle is toughest for the big telephone companies, who have to deal with thousands of local governments.

But the charge into IPTV is actually being led by smaller telephone companies, many of them serving rural areas. Apart from having just a few franchises to obtain, they have smaller systems that can more easily adopt new technologies.

Calix, a Petaluma, Calif., company that supplies mainly smaller phone companies with broadband and IPTV equipment, estimates that its customers have about 100,000 TV subscribers in the United States. Most of them are on IPTV, while the rest provide service over fiber similar to Verizon's.

One Calix customer is the Pioneer Telephone Cooperative Inc. It has 53,000 phone lines in rural central and western Oklahoma. It started providing IPTV in July 2004 and now has 5,300 TV customers.

Pioneer got into IPTV because it noticed that people were using landlines less in this era of cell phones, said spokesman Scott Ulsaker.

"This allows us to extend the lives of our copper lines," he said.