The Internet may soon change the way people watch television. AT&T and Verizon have been spending billions of dollars, to build and reinforce their networks with the hope of turning the Internet into an on-demand, multi-media entertainment machine.

With the addition of broadcast quality video, these telecom providers aim to round out the internet's existing voice and data capabilities, brining a one stop triple play of high-speed Internet service, Internet telephone service and television to consumers.

Recent studies indicate that the market for Internet-Protocol TV (IPTV) is set to take off. IPTV subscribers are projected to grow to over 60 million subscribers by 2010, or 26 times the current amount, according to market researcher iSuppli. This will generate an overall market of related services of $30 billion.

In an effort to target this market, AT&T has developed a high-speed network infrastructure called Project Lightspeed with commercial deployment already active in San Antonio. It is also planning to spend $4.6 billion through 2008 to expand to almost 19 million homes through an aggressive marketing push.

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

Verizon however, is developing a network of its own, based on high-speed fiber optic lines transferring massive amounts of data. The company dubs it the “Fiber Optic Service, its FIOS network of the future. David R. Magnant, Verizon president for Virginia, Maryland and Washington, D.C. touts FIOS as technically superior to other communication platforms with faster data speeds, that Verizon hopes will beat competitors such as AT&T.

A Tale of Two Telecoms

IPTV enjoys the benefits of traditional cable television but with the added ability to let users watch what they want at any time. While it is similar to what traditional cable companies offer, the selection isn’t limited to movies or special titles. Everything on the screen, including television shows, is on-demand. Gartner research calls IPTV “Tivo on Steroids.”

The streaming Internet video seen on most Internet websites today is prone to dropped frames and low quality. With IPTV, viewers essentially dial-in to the show they want, tapping into a dedicated stream of high-quality video requiring tremendous amounts of bandwidth.

Both Verizon and AT&T are breaking ground and laying the foundation for tomorrow's high-speed networks. AT&T is building a high-speed fiber-optic backbone that brings data into the neighborhood, then to individual houses via traditional DSL lines. Verizon goes one step further, bringing the fiber networks straight into homes - a superior method according to many experts.

AT&T expects the DSL lines to run at a maximum speed of 20 megabits per second, which is a few times faster than most commercially available Internet today. It is adequate for watching standard television, but the problem arises as the world moves into a high definition standard - requiring upwards of 20mpbs for a single channel.

The price of HD capable displays are seeing a substantial drop in price, increasing the rate of adoption. Display research firm, DisplayBank predicts that full HD TVs (that is, those supporting 1920x1080 resolution) will account for 58 percent of all 40-inch and larger TVs in 2010, the same time IPTV should hit critical mass.

That is one of the things AT&T totally mis-analyzed, Albert Lin, Co-Head Director of Research at American Technology Research, says. Once you get to a 40 inch or larger screen, standard definition will start to look fuzzy. Consumers will demand HD, he continues, and this is the point where AT&T's network will be pushed to the limit. Add another TV-set or download music while watching HD, and the network immediately becomes inadequate.

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,

Verizon takes a different approach, sending fiber lines straight to the home, which offer virtually limitless bandwidth. This is costly, with the company estimating it will make an investment of around $20 billion over the next several years. If we have to invest a little more up front to make sure we're providing the best service, we think it's worth it, Mercedes Cutler, group manager of video broadband solutions said.

The strategy seems to be paying off. Verizon saw nearly 7 percent growth for the quarter, which compares with 6.5 percent for BellSouth and 4.6 percent for AT&T. Of their new subscriptions, a quarter of them are for FiOS, a pretty impressive figure according to Joseph Laszlo of Jupiter Research.

The Real Loser

While AT&T is off to a slower start, it isn’t completely out of the picture. It may have less bandwidth to play with, but a refined, efficient application can mean DSL speed is all it needs The company is experimenting with Mpeg4 compression to shrink HD signals to under half of traditional encodings.

The real loser in the future may not be AT&T, or Verizon, however. Experts contend that IPTV is coming to stay and that it will be at the expense of traditional media outlets.

Market power for traditional media companies is derived more from control of distribution than it is from control of content, Gartner analyst Jeremey Donovan explains. IPTV offers a world where the concept of a TV channel no longer exists, meaning branding channels will no longer have meaning.

With a dynamic audience that is changing from program to program, it is very difficult to sell advertising in traditional ways he states in research released in May.

In addition to media distribution companies, IPTV is a threat to traditional cable and satellite operators. Subscribers will have more content and more interesting interactive services on an IPTV network.

The expanding base of IPTV subscribers will put telecom operators on a collision course with existing pay-TV market competitors Mark Kirstein, vice president, multimedia content and services for iSupply, said.

If IPTV does become successful, then telecommunications operators get into a position of being able to control and monitor consumer navigation of content Donovan said, putting companies like Verizon and AT&T in the forefront media for the next generation.