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On-Demand May Be Path For Qwest
By Roger Cheng
The Wall Street Journal
Wednesday, March 14, 2007

As Qwest Communications International Inc. Chief Executive Dick Notebaert weighs the company's future direction, he may be betting that the TiVo Inc. generation of on-demand viewers will come to dominate television consumers.

With fewer consumers watching broadcast television when shows are actually on the air, the Denver-based telephone company may forgo spending billions to build a broadcast TV service -- a gamble that larger peers Verizon Communications Inc. and AT&T Inc. are undertaking.  Instead, it could opt for an on-demand platform that could take hold as consumer viewing habits shift in a when-I-want-it direction.

"I don't need 200 channels," Mr. Notebaert said in an interview.  "I don't even need 20.  I only need the programs I watch on occasion."

The model of delivering television and movie programming directly through the Internet has its advantages.  By avoiding broadcast TV, Qwest would circumvent the need to get permission from cities -- where demands have ranged from fees to more unusual requests such as direct fiber connections to public swimming pools.  The company, however,
would still have to sign deals with television and movie studios, which could prove difficult because many of them have taken to posting their content on the Web.

Rory Altman, a director at consulting firm Altman Vilandrie & Co., said the cost for such a project would be significantly less than the investment that Verizon and AT&T are committing.  Qwest would continue to rely on its existing partnership with DirectTV Groups Inc. for live TV.

The telephone companies face increasing pressure from the cable industry, which has invaded the Bells' traditional business with a cheaper Internet phone service.  Verizon and AT&T -- which, like Qwest, were formed from remnants of the old Bell telephone system -- began to upgrade their networks in recent years, but Qwest wasn't in a financial position to make such an investment.

Verizon is spending $18 billion to fully connect many of its homes directly to the network via fiber.  The higher connection speed will enable FiOS, a higher-speed Internet service and television service similar to the cable model.

AT&T, meanwhile, is spending $4.6 billion to upgrade parts of its network with fiber lines and install software and equipment, which enables a live Internet TV offering called U-Verse.

Qwest, which has seen its financial fortunes rebound, is watching the AT&T deployment closely and may end up using the same technology.  For now, the company's satellite partnership is what keeps it competitive with cable's "triple-play" bundle of Internet, phone and television services.

The company faces the stiffest competition in crowded markets such as Phoenix and Omaha, Neb., where privately held Cox Communications Inc. operates, and Denver, Minneapolis and Seattle, where Comcast Corp. has a presence.

Whether Qwest goes the AT&T path or the on-demand route depends on when total consumer-viewing habits will change toward time-shifting, or grabbing live programming and watching it at a more convenient time.  Mr. Notebaert said it could happen in as few as three years.

"If the timeframe is short, we would be better off continuing to expand bandwidth and not deploying capital for IPTV," he said.  "Basically, it's once you accept time-shifting as the norm."

The notion of an on-demand delivery mechanism is part of a concept called "video bypass," referring to the alternate delivery of content outside the normal broadcasting method.

There are other examples.  Google Inc.'s YouTube, which streams free videos to computers, is considered a low-end version.   Microsoft Corp. offers television-show downloads through its Xbox 360 videogame system.

Qwest owns the delivery mechanism for video, so it is logical for the company to want to derive additional revenue from it.  But critics say they believe that Qwest will need to step up its capacity upgrade for such a service to work.  While Mr. Notebaert says he believes current network speeds would be sufficient to deliver high-definition video by compressing the data, others are more skeptical.

"They have an inherent technical problem there," said Gerry Kaufhold, an analyst at market-research firm In-Stat.  The challenge lies in having enough capacity in the lines to carry large high-definition signals fast enough so there is minimal lag time between when someone presses a button on their remote and when the program starts running.

Qwest could eliminate the bandwidth problem by streaming content in advance to the set-top box's hard drive, Mr. Kaufhold said.  He noted that the service could work well in many of Qwest's more-sparsely populated rural cities, where the cable presence isn't strong.

For now, Qwest will continue to devote most of its capital toward increasing the bandwidth of its network and the quality of its facilities.  But the company's rollout will likely be more conservative than its peers.

"We would like to have bandwidth the day before you need it, and not two years," Mr. Notebaert said, adding that good timing would aid in preserving profits and a return on investment.

Mr. Notebaert's vision is similar to the product AT&T offers to regions where U-Verse won't be available.  HomeZone utilizes a television set-top box that integrates satellite signals from EchoStar Communications Corp. and a DSL feed from AT&T.

Altman Vilandrie's Mr. Altman said that while HomeZone represents a reasonably integrated product that should help defend AT&T's customer base, it's not a viable long-term solution as demand for higher-quality video heightens.

"In the long run, customers will be savvy to the quality of the stream," said Mr. Altman, who works with many telecommunications companies.

Mr. Notebaert warned that it was too early to be making comparisons to HomeZone, and he stressed that its product would likely be different.

Write to Roger Cheng at