In 1996 when Twin Valley Telephone purchased some cable systems from Galaxy Cable, Mike Foster, the telco's president and general manager, knew he wasn't getting much in the way of advanced technology. The acquisition was a purely defensive move; the Miltonvale, Kan.-based telco was hoping to prevent a competitor from buying the six Galaxy Cable franchises that coincided with Twin Valley's own serving area.

Seven years later, Twin Valley has completely relaunched the system — only it's using its existing copper instead of coax and DSL instead of RF. In June, the telco officially launched IP video over asymmetrical DSL using AFC's Telliant 5000 central office platform and AccessMAX remote equipment, along with a Minerva headend and Thompson set-top boxes. What's more, Twin Valley is beginning its first competitive venture, offering video service in Greenleaf, Kan., the only town where it serves as the local telco but not the cable operator.

“We're going to take all their customers,” Foster confidently predicted. “We've got a much better product.”

In Greenleaf, Charter Communications offers some of the same services it puts forward in larger cities, but with a population of less than 500, Greenleaf is not likely to top the priority list at the corporate office. In contrast, Twin Valley will roll into town with a service that includes a package of 60 expanded basic channels (including 10 off-the-air stations from Topeka and Wichita), three pay-per-view options and all the premium movie channels. In the towns where Twin Valley has already rolled out service, the telco is getting nearly 80% take rates. (The national average for cable is closer to 68%, with direct broadcast satellite picking up an additional 17%.)

Perhaps it helps that Twin Valley is offering voice, high-speed data and video in a single package, dubbed Ilink. But offering more channels — as well as a digital format — is key to capturing a good portion of the video market in a competitive environment. The strategy, though small in scale, is indicative of a movement taking hold among telcos jumping into video.

In the rush to get into the video market, telcos often are faced with the question of what will differentiate their service from cable — especially given that telcos are generally second, third or even fourth to market with video services.

In some areas, the answer is bundling. And for most telcos, that “triple play” of voice, high-speed data and video will be enough for an initial push into the market, particularly in rural areas.

“One of the ways that this whole triple play is being used by these companies is to reduce churn,” said Mark Carpenter, vice president of marketing for VideoTele.com, a video components vendor owned by Tut Systems. “Some of the RBOCs are using this ‘cross elasticity’ kind of math to prove these business models. They're trying to figure out the new services that won't just bring them new revenue, but also will keep their customers.”

At the same time, attracting the attention of customers deluged with marketing from cable and satellite providers will require something unique. While cable operators generally have a less-than-stellar reputation as service providers, it isn't bad enough to jeopardize their dominance over the mass market, where inertia plays a significant role in determining market share. However, telco video providers have some inherent technical advantages even when entering the market as a second provider.

For starters, the basic design of a telco network lends itself to interactivity. In the IP-centric design that most vendors are pushing, a set-top box does a lot more than just tune to a specific channel. For virtually all IP-based set-tops, non-video information such as channel guides and menus are displayed using Web browser software. In addition, by using IP to communicate between the set-top and the headend, any IP-based content can be accessed, including Web pages, e-mail, video-conferencing and chat.

One carrier on that path is SureWest, which will begin offering DSL-based video over its copper plant in Sacramento by the end of the year. The telco is using Occam Network's DSL access multiplexers (DSLAMs) and Minerva headend equipment to develop a road map for data services delivered over TV, said Terry Perkinson, general manager of SureWest's Broadband business unit.

“Early on, we're looking at providing access to e-mail from the television,” he said. “We're also looking at displaying caller ID on screen. It seems silly, but it tests very well.”

Many vendors believe telcos can differentiate their networks even more effectively by offering interactivity combined with localized ad insertion. Though cable operators generate significant revenue from local ad insertion, telcos can do it on a much more granular basis because of their ability to send content only to certain set-tops. The result is the ability to offer advertisers a target market of specific neighborhoods (or even blocks).

The next step would be to allow users to connect directly with advertisers' order systems. A local pizza place, for instance, could allow a viewer to order a pie with anchovies from his set-top.

“Think of home shopping where you can buy directly from the TV without having to dial an 800 number,” said Dan Doczy, vice president of marketing and business development for ECI Telecom's broadband access solutions unit. “With local advertising, you can generate revenues in real time and an advertiser will pay for that type of focus.”

The inherent interactivity in telco networks also means they will likely be the only carriers able to offer true video-on-demand (VOD). Similar to hotel-oriented providers such as OnCommand, true VOD providers store digitized films on video servers in a centralized location and let users watch pay-per-view fare at any time. Some newer systems also will allow the additional option of VCR control (pause, fast forward, rewind) over the stream.

In contrast, the bus architecture that cable operators use limits their ability to offer true VOD, said Bethany Meyer, vice president of product marketing for SkyStream Networks, which develops networking gear for advanced video and IP services. “VOD is a pretty strong argument for the telcos,” she said. “Frankly, the cable guys' infrastructure challenges are pretty hefty. In order to make it interactive, you're moving from a broadcast mode to a unicast mode.”

Telcos are coming to market with a switched multicast mode, which gives them the ability to stream and control two or three IP video channels between the DSLAM and the end user. Instead of sending every channel to the user's home like traditional cable, telco-style VOD takes up only one channel for the user that ordered it. It's a potentially potent business model: SkyStream already has created a business case that shows DSL-based telco video systems with VOD would become cash flow-positive within four years.

In a fiber-to-the-user network, VOD channels are streamed from the optical network unit, which creates an even more attractive business model for telcos, said Mark Klimek, senior director of marketing for Alcatel's fiber group.

“Not only can you match the [multiple systems operators] on bandwidth, but you can exceed them,” he said. “Also, on day one you have a state-of-the-art cable TV system. Being able to offer a full spectrum of channels instantly justifies your business model.”

For those telcos pushing video over copper, a number of other available applications also justifies a move into the market. For example, some vendors and telcos have started exploring network-based personal video recorder (PVR) services. Premises-based PVRs such as TiVo and ReplayTV act as digital VCRs, allowing user to record shows for playback at a later time using a hard drive instead of tape. They also let viewers pause live TV and skip commercials on playback material.

Some cable operators have been deploying set-top boxes with integrated PVRs. Comcast has started testing such a service in some of its California markets, and last year, EchoStar Dish Network added a PVR to its receiver box, offering it essentially for free in order to entice subscribers.

Telcos could offer the same service using PVRs in a centralized location in the network. Catena Networks, for instance, already is employing real-time stream protocol into its access gear in anticipation of such services, said Mike Drew, product manager for the Ottawa-based vendor. “Instead of being straight from the multicast channel, we set up a path to the video server [where recorded data is stored],” he said. “The customer is connected directly back to the video server.”

While saving the carrier the cost of putting expensive equipment in the home, network-based PVR (N-PVR) services are still not fully developed. One big issue: digital rights management, or who has control over the video content. Hollywood studios and television networks traditionally have hesitated to convert their content into IP format, fearing it will lend itself to piracy and illegal copying. In addition, broadcast advertisers are concerned that viewers will simply use N-PVR to skip commercials.

There also is a network capacity issue if N-PVR service begins to scale up. In one business case for Telmex, DSLAM vendor Corecess determined that the telco would need somewhere around 1000 Gigabits of initial storage for N-PVR. RBOCs in the U.S., notably BellSouth, have been exploring the idea but face similar scale issues.

“To have [video] stored in the network for any volume would mean enormous servers,” said Steve Klein, vice president of sales and marketing for Corecess, which is advocating integrating PVRs into IP set-tops.

While N-PVR services may be some time off, it's becoming increasingly clear that telcos won't be entering the video market with a me-too cable offering. Initially, the difference may only be in the packaging, with “triple play” being the key word for the next several quarters. However, a slew of new services enabled by telcos' network advantages are on the horizon. And like any new service, economics will continue to be the key determinant.

“In terms of the actual cost of deploying a network for video vs. data, the difference is relatively minimal,” said ECI's Doczy. “The difference is adding the middleware software and set-top box, which is far outstripped by the outside plant and the cost of the content. Given that you're paying so much for content, though, why not present it in a much more appealing way?”