SBC Communications Inc., as part of its effort to compete head-on with the cable industry for television subscribers, plans to announce today that it will pay $400 million to Microsoft Corp. for software used to deliver TV programming over high-speed data lines.
It would be a crucial move into unproven territory for SBC, which, like the other regional telephone giants, wants to grow by expanding beyond phone and Internet services and into entertainment.
To do that, SBC expects to spend more than $4 billion over the next three years on its fiber-optic network in order to offer faster Internet connections capable of carrying digital video programming.
The deal is also a milestone for Microsoft. The company has spent about $20 billion in the past decade trying to break into the television business but has little to show for that investment, industry analysts said. The 10-year agreement with SBC is Microsoft's first commercial contract to help deliver programming to millions of homes.
SBC plans to deploy Microsoft's software to encode television programming before it is sent to subscribers and then decode the programs on TV set-top boxes in customers' homes. Most important, the software compresses digital signals so that video programs can be sent over high-speed data lines.
Microsoft has been testing this technology, called IP-TV, with several telecommunications companies outside the United States, including Bell Canada International Inc. and Reliance Telecom Ltd., one of India's largest phone providers.
Some analysts are skeptical of how quickly and cheaply the regional Bell companies can enter the television market, but SBC plans to start selling programming through its fiber and copper network from EchoStar Communications Corp. by the fourth quarter of next year.
SBC has a separate agreement to market EchoStar's satellite service known as the Dish Network.
The Bell giants Verizon Communications Inc. and BellSouth Corp., and many smaller phone companies also plan to sell television in coming years to increase revenue and challenge the cable industry, which is fast moving into the phone business with Internet-based voice transmission.
Consumers could have hundreds of channels to choose from, although delivery of that programming would be different from cable's. All IP-TV programs would be delivered on a video-on-demand basis, with consumers requesting programs from a central server. In contrast, cable companies typically send hundreds of channels to customers' homes all at once, although newer, digital cable systems can also send programs one by one, video-on-demand-style.
Initially, SBC hopes that the Microsoft technology will allow it to simultaneously send two high-definition channels, two standard-definition channels for consumers with two televisions on at once, as well as a high-speed Internet connection to consumers. Subscribers would need only add a set-top box to receive the programming. SBC would also have to greatly increase data speeds on its network.
Microsoft's technology will make it easier for SBC to offer TV programming to its customers on a variety of devices, which might include cellular phones and personal digital assistants when wireless speeds become fast enough.
Instead of trying to win business by becoming an equity partner in cable companies, Microsoft is focused on improving the server computers and set-top boxes for IP-TV.
Other phone companies are looking at using Microsoft's technology.
Together, the regional Bells are expected to acquire 6.1 million television subscribers, or 6.2 percent of the national market, by 2010, according to Jeffrey Halpern, an analyst at Sanford C. Bernstein in New York.
A major hurdle for SBC is boosting the speed of its network in order to deliver the television and Internet services it promises. SBC will have to increase its current connection speeds sevenfold, which might make the company's goal of providing television programming within a year difficult to achieve.
Separately, SBC said yesterday that it would start offering Internet-based phone service over broadband lines early next year. The company is testing the service in Chicago, Dallas, Los Angeles and San Antonio. Verizon and Qwest Communications International Inc. plan to offer similar services.