FastWeb Shifting Gears

FastWeb reported its 2006 earnings yesterday. Its presentation reflected its transformation from a consumer oriented company to an enterprise oriented company that has been enabled by the completion of its network expansion. The details of its fourth quarter 2006 results are available at http://company.fastweb.it/index.php?sid=53.

FastWeb added 105 thousand subscribers in the fourth quarter of 2006, giving it a total of 1.062 million. Its ARPU per residential customer was €797 per year, which is about €100 less than 2005. The ARPU from video subscribers was €296 per year in the fourth quarter, which is about €20 less than 2005. The decreases are generally the result of the introduction of lower cost offerings.

FastWeb stated that the number of broadband connections in Italy grew from 6.8 million to 8.4 million in 2006. FastWeb's share grew from 11 to 13 percent and the share of the other competitive providers grew from 5 to 7 percent. Telecom Italia's share shrunk to 67 from 71 percent.

FastWeb will implement its agreement with Sky in Italy in April that will permit FastWeb to offer all of the Sky TV channels over its broadband network. It will also permit Sky to offer FastWeb broadband services. The FastWeb and Sky services will be billed separately. FastWeb will provide an integrated decoder that supports both FastWeb and Sky video content.

In the second half of 2007, Fastweb will offer a new self installed home networking capapbility for both the residential and the SOHO markets. It will use Ruckus Wireless MIMO WiFi technology that has been optimized for video traffic.

FastWeb is also working on a mobile component so that it can expand its triple play strategy to a quadruple play strategy. Its MVNO agreement with Vodafone is on hold while Vodafone waits for rulings on local number portability. FastWeb has declared that it will take an alternative path if the Vodafone deal falls through that could include acquisition or the deployment of its own mobile network.

FastWeb is also seriously considering deploying WiMAX to extend its reach to 90 percent of the market. It has successfully completed trials expects to launch using wholesale services depending on resolution of spectrum issues in 2007. It also plans to deploy WiMAX into areas without broadband coverage today in 2008 and 2009.

While FastWeb is putting strong emphasis on its new enterprise offerings, it remains quite serious about the residential market. It expects 45 percent of its revenue to come from this market in the long term.

Its IPTV strategy is based on offering a profitable as opposed to a market entry service. It is keeping its prices up and formed an alliance with Sky to support this strategy. Its primary competition is a strong free to air digital terrestrial service today.

We expect that FastWeb's strategy will continue to produce strong results. Telecom Italia is clearly a strong competitor that plans to deploy VDSL. As long as FastWeb can get competitive wholesale access to this new VDSL service from Telecom Italia, it should do well.

U.S. Cable Upgrades Set-top Boxes

In the U.S., Comcast, Cox, and Time Warner are adopting set-top boxes that support Docsis Set-top Gateway (DSG) technology and OpenCable Application Platform (OCAP) middleware.

DSG uses DOCSIS cable modem technolgoy for out-of-band video signaling. It enables cable operators to send and receive data from subscriber set-top boxes that include electronic program guides, emergency alerts, and downloadable conditional access.

The OCAP middleware provides a standard interface that can support common third party applications across multiple set-top boxes and across multiple cable operators.

DSG and OCAP bring many of the advantages of IPTV to the cable companies. The cable companies will slowly deploy this technology, using it mainly to support new digital subscribers. It is quite unlikely that they will make a wholesale swap out. This means that the IPTV networks will continue to have significant technical advantages over cable networks in terms of deployed capability.

Cisco Goes to the Boonies

Cisco is now offering an IPTV package with satellite transport company SES Americom. This package is intended for the approximately 1,000 small, rural U.S. independent telcos. The offering will include content and the hardware and software to support it.

This is a curiosity for Cisco. The small U.S. telcos are a very competitive market with the lowest prices around. These companies have very small data networks, so they are not going to buy many CRS's, so there is not much upside for Cisco on the network side. The tier one carriers globally are Cisco's natural market, not the U.S. independents.

Accenture: IPTV on the Rise

Accenture has released its third IPTV bulletin available at:

http://www.accenture.com/Microsites/Internet_Protocol_TV/Research_and_Insights/IPTVMonitor3

This issue contains the results of a survey that focuses on the level of confidence in IPTV services. The study makes two key conclusions:

• Confidence is strong that IPTV will generate significant revenue within three years. Confidence in shorter term revenue prospects are lower, but on the rise.
• Network operators expect content to generate the lion's share of revenue. Other industry players believe that advertising will be the leading revenue generator.

This study (as well as Accenture's previous IPTV studies) is well worth reading. The conclusions appear reasonable to us. Most network operators are in a ramp up phase, so they are building a subscriber base that will generate significant revenues. In fact, advertising revenues are not likely to be significant until their subscriber base reaches critical mass. Consequently, content revenue will dominate in the early years.

Time Warner IPTV Flunks Out

Time Warner has called a halt to its IPTV experiment that it offered to 9,000 subscribers in San Diego. Time Warner provided the abiity to these subscribers to view all 75 cannels that it offers over a PC. Less than 90 people per day used the service.

The PC did not become a replacement for the TV in. Instead, the channels accessed from PCs were used almost as a second thought. Viewers typically would be working on their computer and trying to keep on top of a live sports event or the news.

Time Warner found that the technical approach in this trial was not scalable and is working on a better approach.

While this shows that IPTV on a PC is not a slam dunk, it would be a mistake to count it out. The important usage cases have yet to be defined. In any case, Time Warner has not given up on it and is continuing to develop the technology.

100 Mbps Coming to Videotron

Videotron is planning to introduce 100 Mbps cable modem service. Its 1.6 million subscribers make it the third largest cable company in Canada. This service will be based on new DOCSIS 3.0 technology. Videotron has not announced when this service will be available.

100 Mbps DOCSIS 3.0 puts cable modem services in fiber territory. The wide deployment of this technology will leave FTTN VDSL deployments at 25 Mbps in the dust. 100 Mbps DOCSIS 3.0 is a killer technology that only Verizon in the U.S. is prepared to counter. ATT will be in big trouble when this technology is widely deployed in its territory.

Alcatel-Lucent to Develop MyView

Alcatel-Lucent stated that it plans to continue development of the MyView middleware package that Lucent acquired from Telefonica of Spain last year. This is in addition to its continued support of the Microsoft IPTV Edition software.

MyView is a good backup software strategy for Alcatel-Lucnet. It would be difficult for Alcatel-Lucent to revive the OMP middleware product that it backed off from when it announced its partnership with Microsoft two years ago. MyView supports 300,000 IPTV subscribers with Telefonica's South American subsidiaries as they introduce IPTV services. Who know, if the Microsoft package does not sort itself out soon, MyView is waiting in the wings.