A quick Google of AT&T’s U-verse IPTV system this week reveals two contradictory stories doing the rounds. Firstly that AT&T is planning to speed up its roll-outs during 2007, to catch up the ground it lost at the tail end of 2006, and secondly that AT&T executives are starting to openly criticize Microsoft software, naming it as responsible for the delays.
CEO Ed Whitacre talked about the expansion of IPTV activity when addressing investors at the year end results, and said that High Definition versions of U-Verse would reach 8 million homes by year end and 19 million by the end of the following year.
Throughout last year AT&T kept promising it would reach over 20 markets by the end of the year, and despite a number of rushed launches in November and December, it still only managed 11 markets. The reason for the rush at the time appeared to be that late arrival of the second batch of set top chips that could finally cope with HD programming, which only went to volume in December.
But Whitacre was clear about what caused the delays, not the late chips which had already once been recast to add layers of security, but the software layers that were still bug ridden and not performing to spec, as well as billing systems, of all things. Up until now he and his executives have steered clear of openly blaming the software., but he was keen to make it abundantly obvious that the AT&T network was in good shape and so diverted attention away to Microsoft.
AT&T CFO Rick Linder re-iterated the software claims when answering questions, and said that AT&T hadn’t yet ramped up its advertising for the services because it doesn’t want increased demand until the software is working properly.
Microsoft has continually kept quiet about the reasons for the delays at AT&T and at first said that there were no such delays, but has privately steered analyst at delayed chipsets and increased security demands placed on the system by content owners.
Despite all of this AT&T continues to characterize the delays as the normal problems that network operators have with all new services.
Microsoft first publicly stated that it had been awarded a $400 million contract for its IPTV middleware system by AT&T in November 2004, and at that time it expected systems to begin being field tested in mid 2005 and commercially available in late 2005 passing 18 million homes with higher speed internet access by mid 2007.
It is those promises on day one that haunt the pair and while the early markets are a full year late, they can be considered on track because much of the network build would not be finished until this Summer. But after the Summer, further delays would mean that the network is complete, but it has no extra service revenue, an outcome that is bound to show itself in the financial results of AT&T, although it may still be able to hide much of that in the integration costs of Bellsouth.
In June 2004 SBC announced what it called Project Lightspeed, building out 38,800 miles of fiber, at a cost of between $4 billion and $6 billion, with the payback expected to come in providing integrated IP-based television, ultra-high-speed broadband, IP voice and wireless bundles of products and services.
The same kind of spend at Bellsouth on network upgrades would mean that AT&T could find itself with a $10 billion hole it in accounts, with no payback insight, at a time when it is still leaking well over 1 million fixed telephone lines to a combination of cable, VoIP providers and mobile only homes.
The back end of this project, the billing and service provision, is one of the reasons that Microsoft got the project in the first place. It may have offered an untried IPTV service, but it has, in the past, developed many business systems to make back end billing integration comparatively simple.
But in the end Whitacre gave no clues that he was about to change strategy or lose patience with Microsoft and said that the company was on track to reach 19 million homes by the end of 2008, and that it would work out in the end, financially speaking. Let’s hope that AT&T still have 19 million customers by the time it is rolled out that widely.
On the subject of the Bellsouth merger Whitacre pointed to better than expected savings from merging the two companies, almost enough on their own, at $4 billion, to pay for much of the IPTV development.
Separately Microsoft reported a 28% drop in its net income compared to this time last year, down to $2.63 billion for its third fiscal quarter. This was blamed primarily on the delayed release of its new Windows Vista operating system, which Microsoft calculated as $1.64 billion of revenue and $1.13 billion of net income. The Entertainment and Devices division lost $289 million in operating income, much the same as last year, on revenues of $2.9 billion, up 75% of this time last year.