Internet Protocol TV making inroads in Europe

AMSTERDAM -- Wart Fransen points a remote control at a little box atop his television and firmly presses down on the button to change the station.

There's a delay of about a half-second, and then the new channel comes on. The image is frozen in place for an instant before it begins to run smoothly.

Fransen is now watching TV over his telephone line, a technological marvel. But he's not that impressed.

"I use it now and again, definitely for soccer," he says of the service that came bundled with his $50 -per-month high-speed Internet connection. "The remote is really slow. But I think the image is better than cable."

European phone companies, like their American and Asian counterparts, are dreaming of a future in television using a technology known as Internet Protocol TV, or IPTV. Most of these companies are boosting the capacity of their copper phone wires with next-generation versions of DSL broadband technology, though some homes are getting IPTV service over new fiber-optic cables.

The foray into video is a counter strike against the cable TV companies that have broken into the phone business using another IP technology known as Voice over IP, or VoIP, stealing customers and driving down prices. Yet despite the obvious business logic of returning fire with television, phone companies face a greater challenge, as IPTV and video over DSL are relatively unproven technologies as compared with VoIP.

Even so, while IPTV is just getting off the ground in the United States through AT&T Inc. and some rural phone companies, European and Asian carriers have already built a substantial base of television customers.

By the end of 2006, the number of IPTV subscribers in Europe is expected to reach 3.3 million, up from less than a million a year earlier, the Gartner Group estimates. The research company forecasts that number will double in 2007 and mushroom to 17 million by the end of 2010.

Hong Kong's PCCW Ltd. is the world's largest IPTV company, with more than 650,000 customers. France has the most IPTV subscribers of any country, with more than 1.6 million as of earlier this year, spread between France Telecom SA and start-ups like Iliad SA and Neuf Cegetel SA. Spain's Telefonica SA claims more than 300,000 users.

More recently, Swisscom AG launched subscription TV in Switzerland, while Germany's Deutsche Telekom AG introduced the service in Germany, France, Hungary, and Croatia. Both Swisscom and DT, as well as AT&T, are using an IPTV platform from Microsoft Corp., confident they have resolved software and hardware glitches that slowed their deployments. Britain's BT Group PLC is expected to launch Microsoft-based IPTV services soon.

"A number of pieces are falling into place at the same time," Gartner analyst Adam Daum said, calling his firm's projections for the IPTV market "conservative."

As compared with the United States, where phone and cable companies are looking to reap $100 or more per month for a "triple-play" of phone, television, and Internet service, most European telecoms are planning to charge the equivalent of just $38 to $63 for the bundle.

Daum said the European companies see IPTV as a tool to lure cable customers and then generate new revenue later by selling premium services such as movies on demand and specialty sports packages.

"Many subscribers hate their cable companies, and at least 10 to 15 percent would be willing to leave immediately if they were offered a choice," he said.

IPTV breaks down a video stream into data packets, similar to those used for most other online traffic, from e-mail to Web pages and music downloads. The video packets are sent to a set-top box that acts as a decoder, the end result looking and feeling a lot like cable TV.

One European telecom frequently cited as an IPTV success story is Italy's FastWeb SpA, which has roughly 200,000 subscribers and forecasts it will turn a profit in 2007.

But any number of things could go wrong, as evidenced by VersaTel. The money-losing Dutch carrier failed to meet its targets and is now being acquired by Sweden's Tele2 AB, another alternative telecom.

VersaTel is controlled by tycoon John de Mol, creator of the "Big Brother" reality series. It began its IPTV rollout midway through 2005 after buying exclusive rights to broadcast Dutch soccer games for three seasons.

Sports are seen as the perfect fit for IPTV, since fans are prepared to pay to watch live games, and matches are not as vulnerable to pirating as movies: once the final score is known, nobody wants to see anything but the highlights.

But VersaTel only recently surpassed the 100,000-subscriber mark it had set as its goal for the end of 2005, suggesting the company may have overestimated the importance of sports.

Fransen, a VersaTel customer, says he bought his subscription simply because it was the fastest Internet connection available at that time. The co founder of a website traffic measurement company called Opentracker.net, he frequently works from home and the soccer was "a nice bonus," he said.

But he also has kept his slower cable Internet connection as backup for $25 per month, and said he'd rather drop the IPTV service than pay more.

There are other pitfalls.

One is Microsoft, which despite devoting tremendous energy to IPTV also hopes its Windows Media Center software will enable computers to fill the same role as set-top boxes, bypassing the telecom companies to watch video over the Internet.

Another threat comes from Amazon.com Inc. and Apple Computer Inc.'s iTunes, both of which recently began selling movie downloads. The explosive growth of free video from YouTube and other websites may prove even more dangerous if consumers find different ways to route that media from computer to TV.

As cable operators do, AT&T and European phone companies are designing their networks to give preferential treatment to their own video traffic as a way to ensure quality.

Some critics have called for governments to adopt "Net Neutrality" rules that would restrict such practices so that consumers are free to choose providers without worries about quality.

But so far, officials in the United States and Europe haven't seen the need to impose new laws or regulations. In April, the European Commission said it would "closely monitor attempts to call into question the neutral character of the Internet."