A new Forrester Research report gives cable companies the edge in "The Battle for the Digital Home," but offers telcos some hope, if they continue to innovate.

Based on extensive interviews with 32 major players in nine different industries affected by the way digital technology is dramatically reshaping the modern home environment, Forrester Research Vice President Ted Schadler concludes that cable companies, game developers, PC makers and software companies are the current leaders. Content owners, Web portals and telephone companies are in a position to challenge, while consumer electronics makers, retailers and satellite service providers are long-shots, the report concludes.

"Any one of these industries is at risk," Schadler said in a telephone interview. "The cable industry is in a leadership position now because they have the large installed base, they have the infrastructure--the last mile is wired. They have the ability to innovate, they just haven’t done it."

By contrast, the telephone companies are scrambling to push fiber closer to their customers and position themselves to offer high-bandwidth video services, but are showing signs of innovation.

"The telcos are in a very unique position--they have nothing to lose," Schadler commented. "They are so unlike the cable providers, who have everything to lose. You don’t normally think of the telcos as being at the forefront of device innovation. But they are taking considerably more risks."

Schadler points to Verizon’s iobi Home service, which combines voice mail, e-mail and service management onto a Web-based portal, as an innovative offering.

SBC’s Home Entertainment Service, announced today, is another example of innovation, he added. It’s important for the telcos to develop new services ahead of their fiber deployments, because it will take many years to get fiber out to all neighborhoods, and they need to build loyalty in the meantime.

"Using satellite services as part of their bundle to do that makes sense in the near term and even long-term in areas where it won’t make sense to run fiber," Schadler commented.

The next challenge for the telcos will be developing standard middleware that can enable Internet Protocol-based TV to be delivered over fiber and fiber/DSL networks, Schadler said. He fully expects to see the major telcos team up with Microsoft Networks to accomplish this over the next two to three years.

"The Microsoft-SBC deal was the first salvo," he said. "What they need here is a very large slice of standard software. All the communications, the channel switching, the VOD delivery, the video recommendation engines, program guides, etc. all need to be driven by a standard middleware. The predication we are making is that will be Microsoft’s job. Microsoft has been trying to get into the living room for a decade now, by investing in the cable industry but that hasn’t paid off."

Other highlights of the report, "The Battle for the Digital Home:"

• There will be one pipe but two networks going into the digital home. Cable companies, telcos and wireless providers will battle to provide the pipe. The two networks will include a secure, closed wired network entertainment network to handle the bandwidth of HDTV and meet content providers’ need for protection; and an open, wireless data network that will carry everything else, including voice.

• In-home devices will largely be portable and use different wireless standards including Bluetooth, SIP and UpnP.

• Partnerships, mergers and collaborations will be the order of the day for all segments of the industry.

• Cable companies need to open up their networks, embrace IPTV and make it more interesting for other innovators in the software and PC industries to work with them.