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With over 100 million spent to influence national and state legislation to dismantle local video franchises (and PEG), it seems AT&T still doesn't have a sound delivery system. AT&T, now the biggest telephone company, is relying on Microsoft, the largest software manufacturer, for the software of their delivery system. "Your World...error... delivered".

from: Wall Street Journal

Internet Technology Tests AT&T’s Bid for TV Subscribers

From Wall Street Journal, February 7, 2007
By Peter Grant

AT&T’s big bet on using Internet technology to vault ahead of rival cable operators in the television-distribution business is beginning to look more like a long shot.

The telecom giant says it has rolled out its so-called U-verse service in 11 cities. But that’s four fewer than promised, and the technology seems to remain mostly in the trial phase. AT&T executives acknowledge they aren’t fully marketing U-verse because the service can’t yet handle a surge of customers. AT&T counted just 3,000 customers at the end of the fourth quarter, unchanged from three months earlier.

Meanwhile, AT&T executives last month admitted for the first time that there were problems with the software for U-verse provided by Microsoft, its primary vendor on the project. That’s a concern not just for AT&T, but for telecom companies world-wide that bought Microsoft technology to run TV services using Internet protocol, or IP, to transmit signals.

It isn’t clear how serious the problems are because AT&T and Microsoft executives won’t discuss them. An AT&T spokesman attempted to play down the situation, calling it “a little fine tuning.” A Microsoft spokesman said the technology was “on track.”

But the delays plaguing U-verse have fed criticism that AT&T and Microsoft overreached, trying to get more out of Internet technology than it’s capable of delivering at this time. The skeptics include vendors, former employees and competitors. Surprisingly, one of the challenges they believe has tripped up AT&T is something the earliest TV sets could do easily: switch channels instantaneously.

If AT&T did overreach, it was out of necessity. The company faces pressure to get into the TV business from cable companies that are luring away tens of thousands of customers with their “triple play” offers of phone, TV and high-speed Internet services. AT&T wants to sell similar packages without investing billions of dollars in fiber-optic cables to customers’ homes, like Verizon Communications is doing.

Internet technology is an intriguing alternative. It doesn’t require as much bandwidth as cable because it doesn’t deliver all broadcast channels to the TV set at once. Rather, it sends them one at a time, similar to the way Web pages are sent to computers. That means the signals technically could be sent along existing copper wires to customers’ homes.

Moreover, some smaller telephone companies in Europe and Asia already have rolled out IPTV systems. Hong Kong’s PCCW, for example, now has more than 700,000 subscribers.

But AT&T has recognized that, to compete with cable, its IPTV service would have to be more advanced. As a result, U-verse includes features such as high-definition TV, video on demand and digital video recorders. AT&T also has added stand-out functions like recorders that can tape four channels at once and be programmed from remote Web sites.

The challenge is to get all these features that succeeded in trial markets working for tens of thousands, then hundreds of thousands, of subscribers. AT&T doesn’t have much time to do this. The company wants to offer U-verse to 20.5 million homes by the end of next year.

The scaling causes problems. For starters, the Microsoft software has to work seamlessly with new set-top boxes, and with the new equipment AT&T is adding to its network to deliver at least the 20 megabits a second of capacity needed for U-verse to work. Microsoft has been installing numerous patches to improve all these network elements, according to a report by John Hodulik, a UBS Securities analyst.

Also problematic is the advanced compression technology AT&T uses to fit the high bandwidth-consuming features like HDTV through its wires. AT&T is one of the first telecom companies to use this technology on a large scale and glitches were inevitable, tech experts say.

Fast channel-changing is important because AT&T wants to distinguish itself from cable by eliminating the lag time in most cable systems. But this has required adding servers to the network — adding to operating costs. It also puts high demands on the network when there is lots of channel changing, like at the end of the Super Bowl. An executive working at one AT&T vendor says the stress on the network has led to picture degradation, or pixilation, problems. A Microsoft executive disagrees that the stress caused picture problems; an AT&T executive says pixilation issues were solved months ago.

AT&T and Microsoft likely will solve their problems. Cable companies, after all, faced similar growing pains when they launched digital service in the 1990s. But telephone companies don’t have the luxury of time.

AT&T’s slow rollout of IPTV has analysts speculating that the company may have to shift its TV strategy. One suggestion is that AT&T focus more on its Homezone service, which combines satellite TV with on-demand movies and other programs from the Internet. AT&T may decide to take a shortcut and simply buy its own satellite-TV operator.