AT&T announced last week that its Internet-based television service, which has been in the test phase for over 5 months, is now commercially available to 5,000 homes in San Antonio.

The company says the service, dubbed U-Verse, utilizes Internet Protocol (IP) to bring a more interactive television experience to customers.

Our new television service was built around the needs of the individual customer, Brooks McCorcle, AT&T vice president and South Texas regional general manager said. We're confident that once customers experience AT&T U-verse TV, they'll never look at home entertainment the same way again.

Companies are looking for new ways that consumers can watch and interact with their televisions. It comes at a time when cable television, the standard in many homes today, is starting to show signs of age.

Consumers have shown an increasing demand for downloadable music, movies and instant messaging. With patience levels decreasing, traditional broadcasters may no longer be filling the needs of consumers looking for on-demand programming with higher visual and audio quality.

IPTV is one of the newest offerings leading the shift. With U-Verse, AT&T says that in addition to television, customers should see advanced features such as picture-in-picture windows as well as interaction with other IP services, such as voice calling and web surfing all through the same service.

AT&T spokesman Fletcher Cook says that initial customers have been pleased with the offering. He adds that the company plans to expand the service to nearly 19 million homes by 2008. But with experts citing a number of problems and limitations, will the new service be embraced?

Pipe Dreams

Since January, U-Verse has been in trial runs across select homes in Texas, however it has been struggling to overcome technical issues and experts question whether the technology can be widely adopted.

The issue is that [the technology] doesn’t work, Todd Mitchell, a research analyst with Kaufman Bros. told IBTimes. The architecture has several fundamental problems.

The most notable of these issues is the inherent lack of bandwidth the service can provide. U-Verse is the consumer package delivered through AT&T's Project Lightspeed technology, a service designed to bring television signals to regions across high speed fiber-optic backbones. The signals are then disperse to individual homes over digital subscriber lines (DSL).

DSL lines can run at a maximum speed of 20 megabits per second (mbps), a speed 10 to 20 times faster than what most broadband users currently receive. Most implementations of high definition media utilize the MPEG-2 compression format to encode data - a scheme that can require over 20 mbps for detailed scenes, essentially pushing the technology to its limits.

Cook responds, saying that AT&T’s content is compressed down to about six to eight mbps for an HD channel stream, leaving plenty of room for more channels. Given that, and also noting that customers close to the central office (CO) would see upwards of 25mbps of service, users would conceivably have enough bandwidth left for Voice Over IP (VOIP) service on top of HD content.

Some analysts feel that while having such a capability would make U-Verse a very attractive service, AT&T’s offering is more marketing than reality.

It is too ambitions to assume that most of their customers will get 20mpbs says Albert Lin, Co-Head Director of Research at American Technology Research firm. Different regions across the U.S. vary in terms of infrastructure and even weather. These variables, Lin contends, are not favorable conditions for DSL.

Not all Light Speed customers will get the same service, he says.

Even if each customer was to get speeds as advertised, they still wouldn’t have enough bandwidth, experts say. At the advertised rate, the service would only be sufficient to deliver only one HD channel. Problems would arise if more than one television was in use, or if a combination of television and intense Internet were in play.

The reality is even within your own usage, you're looking at an infrastructure to do the bare minimum, Kaufman's Mitchell says.

This could explain why U-Verse’s initial lineup did not include HD content in its package of over 200 channels, including all three major broadcast networks. AT&T’s Cook states that because the product just launched, those channels are not yet available. However he adds that they are on their way.

Mitchell says the problem is not with timing but rather with a limit in the technology itself.

The pipes aren't fat enough, he asserts, adding that this is a problem especially in an HD world.

Shift to High Definition

High definition televisions are currently in 18 percent of homes across the United States. Many industry experts feel that the upcoming Christmas season is when there will be a shift to HD, noting that service and content providers have finally intersected to usher in that change.

Networks have increasingly made more of their content available in HD. Some channels, such as HBO, Discovery, and ESPN offer HD-only counterparts in addition to their normal programming. With cable and satellite providers planning to host more of this content by this winter, Mitchell feels this is the Christmas when we hit critical mass.

In addition, the price of HD-capable units has seen a substantial decline. A report released on July 4 by research firm DisplayBank predicts that full HD TVs (that is, those supporting 1920x1080 resolution) will account for 58 percent of overall 40-inch and larger TVs in 2010.

That is one of the things AT&T totally mis-analyzed, Lin says. With the prices for large screen TVs falling, he expects more people buying screens larger than 40 inches.

Once you get to a 40 inch or larger screen, standard definition will start to look fuzzy. Consumers will demand HD.

AT&T official literature states that it plans on supporting HD later this year, however, given the limitations of the service, analysts say it is unlikely U-Verse will be able to cater to the growing HD demand.

Don’t Blame IPTV

Despite the HD deficiency in AT&T’s current service, Internet-based television itself does have much to offer, especially compared to traditional cable broadcasts.

Viewers can essentially dial-in to the shows that they want with the benefit of instant channel changes and multiple picture-in-picture options. These are on top of video-on-demand and digital-recording cable users are accustomed to.

Companies such as Verizon have spotted this trend and are feverishly building their own networks to meet demand. The company has invested billions of dollars to establish its own IPTV infrastructure dubbed FiOS. Not only will Verizon establish a fiber-optic backbone, but it will also bring fiber-channel lines directly into the home. It’s a costly measure, but one that allows for highest home bandwidth of any solution available.

AT&T may have recognized the limitation of their Lightspeed project as it is simultaneously working on a hybrid product that takes advantage of the downstream bandwidth of satellite technology, and which allows interactivity through existing broadband.

From a consumer’s perspective this makes sense, says one analyst.

Not only does it offer you everything cable can offer you, Mitchell mentions, it offers you much more than they can offer in the Lightspeed.

A Smaller U-Verse

AT&T expects to offer the service in a total of 15 to 20 markets by the end of the year, however the challenge will be capturing the first one.

AT&T's current successes have been gained in a favorable environment, analysts say. The services are being offered to new subdivisions and new housing developments, but in its current state, they are not taking customers away from cable television providers.

They are getting these successes, Mitchell points out, but nothing can be extrapolated out to the larger market.

Outside of this controlled environment, most people will find the quality too inconsistent to pay the premiums AT&T demands, he says. Current AT&T U-verse bundles range in price from $69 to $124 per month, depending on the selected programming and Internet package, which is nearly identical to packages offered by cable providers.

On top of this, however, AT&T touts the triple play advantage, a service offering data and voice in addition to television. Demand for this, however, is over-estimated, Lin says.

In order to expand, AT&T would have to compromise with it pricing, just as customers will need to compromise with them.

Given the emerging HD market, the service simply won’t offer enough bandwidth to bring the technology forward and justify the prices AT&T currently asks for, analysts say. Although some customers will get HD signals, they will be severely constrained. For example, those who want to watch one HD channel and record another will be dismayed that they will need to chose on or the other.

Most channels will be standard definition, or you will have to give off a lot of your [internet] data speed, Lin says. There will be many trade offs by the time you are done, adding Lightspeed will have to sell itself as a cut rate service.

In an interview, Cook said that One of the things we stood by is offering our customers with great offerings. If this doesn’t mean service, at least it can mean price.