IPTV Q&A With Microsoft TV’s Ed Graczyk

As we stand on the threshold of the new year, vendors and carriers tell us that mass market IPTV is just steps away. So, for xchange’s first special On the Tube supplement, Editor in Chief Paula Bernier spoke with Ed Graczyk, director of marketing and communications for the Microsoft TV division at Microsoft Corp., about the status of IPTV today and what lies ahead.

Microsoft TV's Ed Graczyk

XC: Refresh my memory. Which telcos now are working with Microsoft TV’s platform?

EG:  Our TV platform consists of really two different product lines.

Our IPTV product line has been sold to [AT&T Inc.] and BT and Swisscom in terms of commercial agreements. We also have agreements for trials with Bell Canada, T-Online France, Reliance Infocomm in India and Telecom Italia and BellSouth [Corp.]. So there’s eight total on the IPTV front.

And then Verizon is a little bit different because the solution they’re deploying is a combination of both our IPTV product line and our cable product, which is called Microsoft TV Foundation Edition.

Then, on the cable front, Comcast [Corp.] is our biggest customer and we have a 5-million unit commercial agreement with them. And then we also have agreements with some of the leading cable operators in Latin America. In fact, about 40 percent of the Latin American digital cable market is running on Foundation Edition today. And those are all commercial agreements.

XC: Where is each of these telco customers with its TV rollout?

EG:  Verizon a few weeks ago began their deployment of the FiOS TV service in Texas. They’re now in commercial deployment mode in their first market.

AT&T will begin their commercial deployment very soon. The timeline they’re stating publicly is the end of ’05 or early ’06 – they will start with what they’re calling their controlled market launch, and then scaling up in the 2006 time frame.

And Swisscom will begin phase 1 of their commercial deployment by the end of [2005], and then scaling those and adding new functionality in 2006.

And BT, which is also a hybrid solution – though not cable and IP, in their case it’s digital terrestrial and IP hybrid – they’re on path for a market trial in spring of 2006 and commercial deployment around late summer.

XC: How many commercial customers are now receiving telco TV services running over the Microsoft TV platform?

EG:  In terms of telco, the only one commercially deployed so far is Verizon [Communications Inc.]. And AT&T and Swisscom will both start between now and early ’06. I don’t believe [Verizon] has announced any numbers yet. You can assume they’re relatively small numbers.

XC: How many customers should be receiving telco TV services running over the Microsoft TV platform at about this time in 2006?

EG:  Of course it’s totally dependent on our customer deployment timelines, but by then we’ll have all the customers we talked about and probably at least a couple of our trial customers in commercial deployment mode as well. So we’ll be in the, I would expect, tens of thousands of deployed consumers and then scaling from there.

This kind of technology will roll out very much in a similar fashion to the way DSL rolled out or cable modem or digital cable rolled out. It’s not like there’s one magic day where the service provider flips the switch and suddenly 2 million people get the service. They’ll roll out kind of city by city, region by region. It’ll start small and then volumes will scale up. So we really see 2005 as the year that the commercial deployments start for some; 2006 is the year commercial deployments start for other of our customers; and the second half of 2006 is where we expect that the volume deployments start – you’ll see the volume deployments start taking off.

XC: To what extent is the Microsoft TV platform able to scale if a telco were ready to go mass market today?

EG:  It is ready to scale today. We released version 1 of the software just a couple weeks ago. And that’s the version that will go out in these initial deployments. We’re hard at work and have been for a while on the next couple upgrades to that, which will happen in the course of the next 12 months. And so we have every confidence that we will scale to the volumes that these customers will get to on their timeline. When you look at AT&T’s stated goals, by 2008 they expect to have this service available to 18 million households in their footprint, which isn’t to say, of course, that all 18 million are going to subscribe. So we are talking to scaling to multiple millions of consumers at a number of our customer sites over the course of the next couple of years.

XC: I’m told the Tier 2 independent telcos have held back on launching IPTV in expectations that Microsoft/Alcatel would come to them with a solution, but now are considering going another direction because of a sense they won't have an off-the-shelf, fully integrated IPTV/DSL package from these guys for quite awhile to come. When can the indies expect a solution from Microsoft TV?

EG:  You might want to talk to Alcatel about that because they’re, of course, our sales channel for that second and third tier of operator. That’s part of the agreement with Alcatel that we will co-market to Tier 1 operators, and then Alcatel is a reseller of our software to Tier 2 and Tier 3 operators. So they’re the folks out there and those engagements are ongoing, they’ve been ongoing for a while.

That’s very much in the plan. Of course if the product meets the needs of a company like AT&T with their expectations, then it’s a fair bet that we’ll be able to scale to the much smaller volumes that a much smaller operator needs to get to.

XC: How will telcos differentiate their TV services from those of DBS and cablecos?

EG:  You can’t answer that with just one answer to represent all telcos. But one area of differentiation is around more niche-type programming. The nature of IPTV is that the programming is not delivered in a broadcast way, unlike cable or satellite where basically every subscriber gets all channels and you can only fit so many channels in the pipe. In a market like the U.S. where you’ve got more and more high-def programming available that takes two to three times the bandwidth the standard-definition channel takes up, it becomes a zero-sum game, essentially, to add a new channel of programming. You’ve got to take away what’s there because the pipes are full.

So in IPTV, everything on a technical level is essentially an on-demand environment. So we don’t send a video stream down to that device in the home until you select the channel or the baud stream or what have you. So that means you don’t have this bandwidth bottleneck. And whether you’ve got 100 channels available or 1,000 channels available, that doesn’t affect how much bandwidth you need into the home. As long as you have enough bandwidth to support the number of devices in the home, whether it’s 100 or 1,000 [video streams] doesn’t matter. So certainly some of our customers are looking at a broader range of content, more narrowly targeted, focused niche-type content.

XC: Right. I’ve heard a lot of mentions of foreign-language programming.

EG:  You look at a market like Seattle – and this is just a generality – so Seattle is a big high-tech market and we’ve got a big population of Indians, but not enough that it would make sense in a broadcast environment for the local cable operator to necessarily have an Indian channel taking up a channel’s worth of bandwidth. But in an IPTV world, because we don’t have this bandwidth constraint, you could have the Baliwood movie package available to that population, or – and I’m Polish so I can this – the polka channel in Chicago where you’ve got a lot of people with a Polish background.

Have you heard the term ‘the long tail’ when it comes to content? That’s something you hear a lot about in IPTV and that’s certainly where we think the market is going, not just for the huge wealth of programming that’s available from the studios but also more local content, over time, being able to tune in to the local high school football game perhaps being broadcast by the local provider, and even, over time, personal content.

XC: What do you mean by personal content?

EG:  Well you could do things like home movies and make that available. The whole idea of video blogs and things like that are certainly possible. But I don’t want to get too futuristic and kind of out there because the focus for these first deployments is very much going to be on a better TV experience. So there’s a lot you could do with this technology even today where it just wouldn’t make sense to roll that into the first version of these services because the consumer reaction likely wouldn’t be positive if it’s too different [from] what they’re used to today.

You don’t want this Swiss Army knife – and I’ve seen this with a cable operator in Europe where they rolled out this service that just sounded amazing on paper and when you saw the demo it was incredible. You had 40 interactive channels. You could do everything from home banking to e-mail through your TV set, but at the end of the day it came with a 40-some-page user guide, and it was just too much too soon for the consumer who was moving from just analog cable. So you have to, when you talk to the consumer marketers, you have to just ease in the new features over time.

XC: At the same time, however, telcos getting into TV need to at least offer the highly sought-after features available through cable TV and DBS providers – and high-definition platforms are not yet available for MPEG-4 deployments. It seems to me the high-end consumers that own HDTVs and are willing to pay a premium for HD programming are the most likely – and attractive – customers for the telcos to target. But how can telcos expect to compete with cablecos without offering HD?

EG:  It’s very nearly there. What’s missing today is really just the set-top boxes. We’ve demonstrated high-def for over two years and we’ve done it with our own homegrown hardware. The missing link has been the availability of these IPTV systems on a chip, and Sigma Designs just announced the availability of the first version of their system on a chip and ST Microelectronics is coming out with one very shortly as well. And one of the key things this system on a chip does is hardware-based decoding – not only MPEG-4 but also VC-1 and even MPEG-2 on the chip itself. So they’ve just begun. I personally saw the first chip in a live demonstration just on Friday in a Motorola set-top box at a partner summit we had in the Bay Area. So these chips are just becoming available and the set-top boxes will start coming available in the first half of 2006.

High-def is really just a requirement here in the states; it’s not really yet a requirement in Europe, at least in terms of commercial launching. The conventional wisdom is that in 2006 is when high-def starts taking off in Europe because they’re broadcasting the World Cup Soccer in high-def for the first time, and you’re certainly starting to hear a lot of buzz about high-def in Europe. But there’s really very, very low penetration TVs in Europe and very little high-def programming available.

XC: So in the United States, do you believe that the fact that MPEG-4 HD will be available in the first half of 2006 syncs up fine with the telco TV launches here?

EG:  When you look at it from the bigger picture, no [it will not be an issue]. You’ve got roughly 13 percent of U.S. households [that] have a high-def TV set today. And considering that the second half of 2006 is really when the volume deployments for these operators start taking off, we feel pretty comfortable that we’re in a good position there and our customers are in a good position.

For the very first deployments for the first couple months, you’ll have to limit your target market a bit away from that 13 percent, but that functionality is coming pretty quickly. Like I said, we’ve been demonstrating it on homegrown hardware for quite a long time.

XC: There’s been a lot of discussion lately on ‘the long tail’ of the Internet and ‘walled gardens.’ How can the telcos offering TV services leverage the expansive amount of content available via the Internet while still keeping a hold on their customers? I mean, if niche programming will be a key to telcos’ IPTV initiatives, wouldn’t it make sense for telcos to somehow figure out a way to use or repurpose some of the content already available on the Internet?

EG:  Well, potentially, sure. There’s a big difference between video on the Internet and the video experience you’ll have in an IPTV environment.

One of the things we talk about when I present on IPTV, one of my first slides is usually what IPTV is not, because I think there’s a lot of confusion out there. The way we look at it, IPTV is not streaming video on the Web delivered to a PC like people see it today. We certainly see the PC as a potential secondary device for receiving video in an IPTV environment, along with smartphones, gaming consoles and these other devices in the home.

But IPTV is very much about a great TV experience delivered on the TV set you have in your home today, which can range from a 20-year-old analog TV set to the 62-inch, brand new, high-def TV. And in order to deliver that kind of experience with the kind of capability – high-quality video, instant channel changing, all the kind of features and functions that people expect in a technology environment that we have today – then you need to be able to guarantee the quality of that network into the home. So you get into these quality-of-service technologies that the operators are deploying so that while you’re watching the high-def Super Bowl on the big screen TV in one room and your kid is in the other room downloading some home movie that a friend of his sent, it doesn’t affect the quality of the video on the TV sets.

But one of the nice things with IPTV is it’s not based on these closed, proprietary technologies like cable and satellite. Your TV is not this island of technology in the home that doesn’t connect up to anything else. So it does enable stuff like pulling in Web-based services. Now those could be video-based services, in fact that’s part of what we’ve been demonstrating for over a year.

We have this service called Online Spotlight that’s available to anyone who owns a Media Center PC today. You can choose from the menu Online Spotlight and then you’re routed to a kind of a walled garden of Web-based services from a whole slew of content providers that range from online music stations like NPR and AOL music to video-based service like Reuters news headlines and MSNBC to other Web-based services like Kodak for photo sharing and editing and ordering. So it’s relatively easy to integrate those types of offerings into the package of services that the network operator will deliver. But that’s, of course, up to the network operator and the provider of that third-party content.

XC: One of the telcos’ big challenges in offering TV services is to find ways to exploit third-party innovations through specific business arrangements that benefit the telcos’ retail outlets. How is Microsoft helping telcos forge those third-party arrangements?

EG:  When it comes to content providers, we play a little bit of this role of facilitator, matchmaker if you will. The business relationship is very much only between the service provider and content provider. But we do things like we’ve hosted a number of different content summits around the world. These are invitation-only events where the service providers come in, the content providers come in and we educate them on IPTV. We help the content providers understand the business opportunities available. We make them comfortable with the technology, with the DRM, the encryption. And we can facilitate the introductions, if needed, between those two types of companies. It’s more educational evangelism and a bit of matchmaking.

XC: Does the content community now have the confidence that telco TV security and DRM works?

EG:  Yeah, I think they do – especially when you look at services like Movielink and CinemaNow where you’ve got virtually all the major studios that have been making their content available in actually a less secure environment, because you’re talking about the open Internet, for a couple of years now using things like the Windows Media technologies and the digital rights management that’s incorporated there.

By and large, the content providers see a lot of interesting opportunity in IPTV. Not only is it a new distribution channel for them, not only does it break the shackles that they have with the incumbent video providers, but because it’s based on this more modern technology – DRM instead of conditional access – it gives them more flexibility in the ways and business models they use to distribute their content.

So, they’re not limited to the three basic methods you have today in TV, which is either the content is free to the consumer, the consumer pays a monthly fee or the consumer pays per view. You can do all that kind of stuff with IPTV, but you can also do models like download this movie to the DVR for $3.99, or for $4.99 you can download it to the DVR and copy it to a portable device like a laptop or a portable Media Center so you can watch it on a plane and watch it for as many times as you want in the next week until it expires. Or watch this exercise video 25 times over the course of the next year until it expires. So you have a lot of those new interesting ways of distributing content not just to the TV but to these other devices that people are increasingly using to watch video on.

XC: You mentioned that IPTV systems are open, yet competitors like Widevine Technologies Inc. says that Microsoft’s is a closed system, where the DRM is coupled tightly to the IPTV middleware and Windows CE operating system and, as a result, cuts off service providers’ access to other OS and middleware environments, leaving them overly dependent on Microsoft in the event of security breaches or in instances where other suppliers come up with innovations that Microsoft is unwilling to implement. Care to comment?

EG:  We’re one of the most open platforms when you look at the standards that we’re based on from the core technology networking standards like IP, all the Web-based services are XML- and SOAP-based.

What we’re not, which is by design and frankly a competitive advantage for us and one of the big reasons you see us have success with these big operators, is we’re not a solution that’s made up of these disparate third-party pieces that were never meant to work together. The competitors we face are these loose confederations of third-party companies that each provider has a little piece of the IPTV puzzle and the onus then becomes that of the operator to try to get all the pieces to work together, No. 1; and if they work together, get them to scale to the volumes that a BT, AT&T, Verizon or whoever expects to scale to.

So, it’s very typical competitive counter positioning. If you provide just middleware, or just DRM, or just video-on-demand servers, or just the IPG, then of course you try to argue that it’s a closed platform.

It’s really a very open platform, but it’s not modular. You can’t rip out our VoD service and put in a third-party service, because frankly that’s an inferior solution. That’s the solution you have in cable today, in fact. One of the big advantages with our platform is VoD is built in as this core system-level service and it’s not treated as a second-class citizen as it is in cable. And it reacts to the user the way the user expects it should react.

I’ll give you an example. Today on a cable service at home I’ve got, I think they say, 3,500 hours of VoD programming, and if I’m a big fan of Julia Roberts and I’m in the mood for a Julia Roberts movie, the only way I can find that Julia Roberts movie in VoD is hunting and pecking through these 3,500 titles that are organized by content provider. So if I’m looking for “Pretty Woman,” maybe it’s an HBO movie so you’ll navigate several screens through HBO to get to the movie section to try to find it, and oops it isn’t there, so you back up to the main VoD menu and you navigate now through Showtime or Cinemax or whatever. You don’t have this ability to search – something as basic as search you can’t do on cable today for VoD. Whereas in our IPTV platform, you search for Julia Roberts and it pulls up search results regardless of what type of video content it is, whether it’s linear, scheduled programming you see in the guide or whether it’s “Pretty Woman” in any of the VoD libraries that the service provider happens to deliver, or even if it’s “Pretty Woman” that happens to be sitting on the hard drive in the set-top box because you had previously recorded it and forgot that you’d done it.

The reason you have that sub-optimal experience in cable today is because VoD was this third-party add-on, was added years after digital cable, and in most cases it’s proprietary hardware and software that is used to enable that.

Things like DRM, again, that’s built in as this core system-level service, we feel that’s a big advantage technically from a scalability perspective and it’s based on the Windows DRM technologies which extend well beyond the TV set. That’s a huge advantage. You talk to people like Andrew Burke at BT, I’ve heard him say this time and time again, that one of the big advantages for them was the fact that they could deliver content securely end-to-end, not just to the TV set but to the PC or the game console or the smartphone or to any of these other devices that support Windows DRM.

If you’ve got a cable system, that info is very secure to the set-top box where it’s decrypted and then you have what they call the analog hole. As soon as it’s decrypted, it’s on your TiVo box, then you can take it off the TiVo box, you can break the DRM there very easily. That’s how these TV shows and movies show up on these peer-to-peer file sharing sites, because the protection essentially stops as soon as it’s decrypted at the set-top box. So it’s a benefit for the service provider and a big benefit to the content provider that now not only can you make your content available on that smartphone and presumably have some business/financial benefit for doing that, but you can do it in a way where that content remains secure.

XC: How does Microsoft’s Xbox tie into the Microsoft TV strategy?

EG:  Like I said, we see the TV as the primary receiving device, but we do see these secondary devices evolving over time. And Xbox or any other gaming device for that matter could be a secondary device in the home. We have this new Xbox coming out this week, Xbox 360. The initial iteration of that is focused on gaming, and some of the home media management, it won’t have IPTV functionality built into it, but it’s a fair bet at some point in the future you’ll have an Xbox console that could be also an IPTV receiver – that will have the IPTV functionality built into it.

And, in fact, the system-on-chip-technology I was talking about from Sigma and STMicroelectronics, one of the cool things that enables is for that chip to be embedded in a variety of different consumer electronics form factors. So think of a DVD player, think of a TV itself on top of things like set-top boxes. Any of those devices with the system on chip inside then becomes effectively an IPTV-ready receiver. So you could, at some point in the future, walk into a Best Buy or a Circuit City and you could buy a DVD player/burner with this chip embedded in it and it’s IPTV ready. You come home and plug it into your TV set and you plug it into whatever your broadband outlet is, you call your service provider and they provision down to that device and now you’ve got IPTV down to that device without the need for a separate set-top box.

The benefit to the set-top box vendors of the system on a chip is it helps reduce costs of those set-top boxes pretty dramatically.

That’s not to say the set-top box will go away, but new devices will morph to be this kind of machine.

XC: Linksys-KiSS, Motorola, Scientific-Atlanta, Tatung Co. and The Thomson Corp. recently confirmed support for the Microsoft TV platform with a range of new set-top boxes supporting Microsoft TV IPTV Edition. What’s meaningful about this?

EG:  It shows on the one hand just the readiness of what we call the ecosystem – not only set-top boxes but chip manufacturers, these set-top boxes, the encoding system vendors, the content provider community. What we’re seeing is this whole ecosystem for IPTV that’s come together in order and in time to support these first commercial deployments from customers like AT&T and the others.

And the second part, when you look at set-top boxes in particular, it gets back to my point earlier that people try to claim we’re a closed environment, but the reality is you’ve got all these set-top box vendors – and you can add Phillips to the list – you’ve got a very healthy, a very dynamic, a very competitive market for these other pieces of the ecosystem, that again drives a lot of the cost in the equation. To allow the customer to be able to choose between five, six, seven, eight set-top vendors or multiple chipset vendors and we’ve got three encoding system partners we’ve announced. That’s a big part of our strategy, to have this platform that openly integrates with these other third-party pieces of the ecosystem to enable our customers to have choice and that choice, of course, drive[s] innovation, drives competitive, drives better economics.

XC: Speaking of Scientific-Atlanta, what are your thoughts on the Cisco/Scientific-Atlanta deal?

EG:  I think it’s an endorsement on where a company like Cisco sees the opportunity for these emerging video platforms. We’ve got a long history with both S-A and Cisco at Microsoft. S-A is supporting our IP platform not just with their set-top boxes but also with their encoding systems. So we think it’s all a good thing. Cisco owns one of our other set-top partners, which is KiSS; they were not long ago an independent company, I believe in Denmark, and then the Linksys part of Cisco acquired them just within the last six months or so. So we actually have two different pieces of the Cisco organization we’ve been working with specifically around IPTV. Of course, across Microsoft there’s a lot of work we’ve been doing with Cisco for a long time.

XC : 2006 is xchange magazine's 10th anniversary and also the 10-year anniversary of the Telecom Act. In what key ways has the industry changed in the past 10 years, in your opinion, and how did that affect the evolution and direction of Microsoft and the creation of Microsoft TV?

EG:  2006 is such a transformative year for the telcos. Video is the obvious, the big new service that every major telco will either be deploying or be trialing by then. But even, you just look at the evolution of the IP networks, the introduction of things like voice-over-IP services. And then one thing that we haven’t talked about and is a little further out in terms of when I expect these kinds to come out in volume for the mainstream, it’s what we call connected entertainment services.

The real interesting stuff is in the single play. A lot of the people in this industry are focused on this concept of the triple play or the quadruple play, and it’s all about the bundle. But the real nirvana is to break down the silos between those three or four services and enable new types of services that are a culmination of basically the integration of the capabilities of voice, video, data and/or mobile. And that’s why I call it the single play.

You think of something like being able to sit on your living room couch and have a video teleconference with your grandmother in another state through your television set. Those are the kinds of services that this technology enables. Don’t expect that in the Verizon/Keller, Texas, deployment today or the first deployments from AT&T that’s a great example of a brand new type of service that’s not a voice service, that’s not a video service, that’s not a data service – it’s kind of all of the above. It’s a new thing that’s been enabled because we’ve been able to break down the barriers between those services.

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