Video compression specialist, Tandberg Television, earlier this year acquired N2 Broadband, a specialist in open-platform solutions for VOD, for $118 million in shares and cash. (Note: the best-known N2 Broadband product is OpenStream, an open standards-based, end-to- end VOD backoffice solution that stretches from the content provider through the cable headend to the set-top box, and that allows operators to use a variety of VOD streaming servers and applications interchangeably.) The deal saw N2 Broadband forming the core of 
Tandberg Television Americas, and its president and CEO, Reggie Bradford, becoming the president of that division. [itvt]'s Tracy Swedlow recently spoke to Bradford and to Tandberg Television's president and CEO, Eric Cooney, about the rationale for the acquisition, about emerging opportunities in the VOD market, about the issues surrounding VOD advertising, about the move to next-generation compression technologies, and more. (Note: for an earlier interview with Reggie Bradford, prior to N2 Broadband's merger with Tandberg, see [itvt] Issue 5.79 Part 1.)
[itvt]: Why did Tandberg Television and N2 Broadband decide to merge?
Cooney: Tandberg Television, as you know, is a leading supplier of video compression headend equipment in Europe and the Asia-Pacific region. We realized that once our international cable operator customers had deployed digital cable, they would then want to deploy video-on-demand, and that it would be natural for them to come to us, their compression headend supplier and system integrator, when they were ready to do so. So, in order to be prepared to meet what we anticipated would be our customers' needs, we engaged with N2 Broadband, and, about a year ago, Reggie Bradford and I got together and arranged a reseller agreement.
The reseller agreement was really how the two companies started to get to know each other. Through the course of that arrangement, it became apparent that there was a good rationale for a much closer arrangement than just a reseller agreement. The rationale for the merger from Tandberg's side of the table was the following: first of all, it made sense from a technology standpoint. We offer hardware headend compression equipment, and VOD is a natural extension of that. Secondly, when we looked at our company's footprint, we had a strong presence in Europe and the Asia-Pacific region, but really no presence at all in North America, particularly in the North American cable market. That market had historically been dominated by our competitors, Scientific-Atlanta, Motorola, and Harmonic. N2 Broadband, conversely, was very strong in the North American cable market: in a very short period of time-- four to five years, essentially--they had developed solid technology and established great relationships and a great reputation.
The rationale for the merger on N2's side was the mirror image of ours: they were strong in North America, but realized that international markets were where their future growth would have to come from. As we both started to contemplate a merger, we also considered what you might call "softer issues." It became clear that we had a similar philosophy: a belief in open, non-proprietary solutions that allow operators to assemble systems out of best-in-class technology. So, all in all, the deal felt very good to both sides. And, when we put the deal together, Tandberg Television shareholders had a very positive reaction as well: our share price actually rose after the announcement, and has stayed higher ever since. We closed the deal in February, and since then we've been building momentum: we have already secured our first major European VOD sale for N2's technologies, and we've secured our first sales of compression hardware equipment into the North American cable market.
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[itvt]: Are you interested in expanding your N2 business beyond your traditional cable customer base and selling VOD solutions to telcos?
Bradford: We do have some new business opportunities outside of cable for our backoffice infrastructure. However, the overwhelming majority of our revenues are currently generated by sales to cable operators, and there's still a huge opportunity for us in the North American cable market. The early stages of the evolution of the VOD space were dominated by proprietary, bundled solutions, consisting of backoffice, server and applications. We're now seeing a complete break-apart of that bundle: most of the top 10 cable operators will have adopted an open architecture--and will have completely divorced the backoffice from the server--within the next 12 months. Which, of course, is very positive for us, because we're obviously the dominant player in the open backoffice--our OpenStream platform runs probably over 90% of open backoffice deployments today. So our intention is to continue to build our foothold in the cable market.
However, we do feel that the IPTV market could be a good opportunity for us: We have several customers who've requested that we become more active in the IPTV space. And certainly our merger with Tandberg puts us in a stronger position to go after that market, not only because the combined companies have a more comprehensive product offering, but also because telcos historically tend to go with larger, well-capitalized players.
So, while we're still expecting significant further growth in the North American cable market, our traditional core market, we're absolutely pursuing telcos around the world with our VOD solutions, as well as European cable operators. It's easy to see where the opportunities to sell to telcos are: the reality for the telcos is that their whole business plan is based upon at least getting to market with a "me-too" solution relative to what the cable operators are offering in their local region. So if the cable operator in any particular region has VOD today, you can expect that the telco in that region is going to come to market--or will at least try to come to market--with an IPTV service that offers VOD.
[itvt]: Could you elaborate on where you see business opportunities in the North American cable market?
Bradford: The majority of our North American cable business is with the top five operators, and we believe there is still a tremendous amount of opportunity for our software products with those top five players. The opportunities aren't just for our OpenStream backoffice product; we've got AdPoint, which is our advertising play for on-demand content, and which is getting a ton of traction.
We've also got our OpenCable initiative, which is still a little bit under wraps, but basically we are working with several major operators--and actually have deals in place--to help them create, if you will, the headend of the future: to help them separate out conditional access from command-and-control in the headend, so they can easily support new OpenCable devices in the network, and thus move away from the proprietary way things have been done with the set-top box and the control systems to date.
[itvt]: Could you tell us a little more about the capabilities of your AdPoint system and what specifically you mean when you say it's getting a lot of traction?
Bradford: AdPoint is a recently launched family of software products that enable intelligent on-demand advertising such as VOD ads, ad- supported content production, sophisticated campaign management, and targeted VOD ad placement. We built AdPoint in close collaboration with the cable industry and the product is unique in its compatibility with every existing VOD deployment today--meaning it doesn't require any new functionality or expensive upgrades from the VOD vendors to work across the entire installed base of an operator's digital subscribers. This is extremely important to our customers because they want to launch VOD advertising to all their customers today, enabling the reach advertisers want from day one. We are getting great traction with AdPoint and are launching multiple major markets this year with major US operators.
[itvt]: I take it you have no doubts that cable operators are fully committed to an open approach?
Bradford: Absolutely. We have built a business on open interfaces that allow our customers to use plug-and-play, best-of-breed components, and we think that the trend towards open solutions is going to accelerate. We feel that the proprietary approach is largely dead now. The cable operators all see what happened with DOCSIS, and they're now seeing that an open approach has had a similar impact on VOD-- removing dependence on an incumbent vendor, and thus reducing prices, providing them with more flexibility and speed in terms of the applications they can roll out on their systems as interactive TV starts to really ramp, and so on. Cable operators' belief in open solutions is only going to get stronger, as they migrate towards an all-digital infrastructure, and implement a set-top environment where customers can plug and play multiple kinds of devices.
Cooney: Regardless of whether you're talking conditional access, DRM, VOD or whatever, the clear and universal message from the cable operators is that open standards-based technologies are the basis upon which they intend to build their next-generation networks.
[itvt]: Are cable operators asking you to prepare for a switch to an all- IP network infrastructure?
Bradford: My personal opinion is that cable operators are watching IPTV closely, but that they still feel that their current network is going to remain superior for the next several years. As you know, our products already work in an IP environment. There's already plenty of IP in the transport layer in cable, so it's just a matter of how far it gets pushed up into the network. I think that ultimately, yes, cable networks will be fully IPTV networks, but the question is: in what sort of timeframe--is that a five-year timeframe or a 20-year timeframe?
Cooney: I think that the cable operators today are happy with--and intend to keep building upon--the infrastructure they have in place. Their priority right now is to roll out propositions that will appeal to the consumer, such as VOD, HD, VoIP, etc. They don't necessarily need to move to an all-IP infrastructure in order to deploy those services.
[itvt]: Do you think that we're going to see an acceleration in the deployment of interactive TV services by North American cable operators in the near future?
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Bradford: We definitely think that ITV is an important new horizon for cable, and that you're going to see a lot more of it. It's going to be driven by competition from satellite and telcos, which gives cable operators an incentive to continue to add differentiated features and offerings. I think the key to deploying and scaling interactive TV quickly is going to be open interfaces that will allow new companies to get deployed across a cable operator's entire network, as opposed to having to be integrated on a headend-by-headend basis. Because of this, we're quite involved in OCAP, as are all our major customers: we believe it will enable new entrants into the marketplace and thus increase innovation.
Cooney: I think that the next several years are going to be a great time for consumers in the North American market, given the competitive dynamic across cable, satellite and telco. If you think about it, the competitive pressure there is immense, and each of the players is looking to maximize the opportunities they can bring to the consumer through the different technologies currently available. So if you're a satellite company facing competition from cable VOD, your goal is to get DVR systems deployed as quickly as possible. If you're a cable operator facing competition from satellite, you're thinking about how quickly you can roll out VOD. If you're a telco and you're trying to penetrate a market where cable dominates, you're going to be thinking about how you can offer a service that isn't just a "me-too"--that differentiates itself from the local cable service by offering interactive TV applications, multiplayer gaming, and so on. So it's clear that the consumer is going to be the beneficiary of this three-way competitive dynamic.
[itvt]: How do you think your cable customers view the immediate future of VOD?
Bradford: The cable operators are asking us to prepare for a world where they've got, at any given headend, 20-30,000 hours or more of content available on-demand. That's going to require a tremendous expansion of streaming and storage capabilities, and they're going to want to buy the lowest priced products they can, so they're going to need an open-platform approach. I think another thing they're very conscious of is that, as more and more non-linear content becomes available, you're going to see more and more changes in the advertising model. Cable operators want to be able to capture upside in terms of new advertising models around local advertising insertion, long-form advertising, direct response, and more. They're also very aware of the need to create a dramatically better user experience of VOD: if you've got tens of thousands of hours of content on offer, you're going to have to make it easier for your customers to find the content they want: consumers are going to demand more sophisticated search facilities, recommendation engines, and so forth.
[itvt]: Are your cable customers interested in implementing "telescoping" as an advertising solution?
Cooney: Yes, they are. And, in fact, telescoping is part of the roadmap for our AdPoint technology. All the operators are interested in telescoping, and believe it will be a goldmine, in terms of additional revenue.
[itvt]: Why haven't they moved more quickly to offer it?
Bradford: It's not because the technology is lacking. I think it's more a question of how to settle the business model for on-demand advertising. Traditionally, as you know, the programmers have bundled national ads inside their content and the operators have had some local avails with which to monetize that content. But with the new technologies now available, there's no reason why a cable operator couldn't take content from a programmer and put ads anywhere they wanted inside of that content. Then the programmer just becomes the provider of content as opposed to an aggregator. So one of the big questions in the on-demand world is: who bundles the ads inside of the VOD content?
Cooney: You can also view it from the perspective of an advertiser like GM. They have an annual US TV ad spend budget of over $3 billion-- how are they spending those dollars and what sort of return on investment are they getting? Listen to the people who are in charge of the budget and one of their recent conclusions was that they're not getting the best return on generic, nationally broadcast TV ads that just go to everyone. Think about the process that you or I go through if we're considering buying a new car: one of the first places we'll typically go is to the Internet to do research. Well, suppose that GM could change that, so that, instead of going to the Internet, you could go to your television and download a targeted, long-form advertisement that GM had produced expressly to sell you the next Trailblazer or whatever it is. The ROI that GM would get from that long-form Trailblazer advertisement would likely be much greater than from a generic 30-second national advertisement. So what is happening today is that the combination of new technologies and shifting business models is creating an opportunity for cable operators, who until now have gotten a much smaller share of the total TV ad-spend market than has generally gone to the broadcast networks. New technologies are creating an opportunity for the Brian Roberts's of the world to offer a new value proposition to companies like GM--to say, "Hey, we can provide you with a system that uses VOD and two-way interactive technologies to deploy targeted ads to our 20 million-plus subscribers around the US." It's a compelling story.
Bradford: You see, with the new technologies that are now available, the cable operators, who are starting to deploy those technologies, who have their own distribution network, and who--in many cases--have their own programming, can now become aggregators with the ability to insert ads themselves: they have multiple "avails" and can approach national advertisers directly. Long-term, this is going to create an incremental revenue stream for cable operators and better equip them for the competitive threat posed by satellite. It's all the more important as a revenue stream for cable, because it's questionable whether consumers are going to continue to put up with annual increases in their cable bill that are above the rate of inflation.
So, as I said, the business model for on-demand advertising is unsettled. There's a lot of experimentation, where broadcasters and cable operators are collaborating. But, at the same time, cable is growing the amount of commitments it receives from advertisers.
[itvt]: So broadcasters are effectively under siege, you could say, in two ways: not only are cable operators requiring them to offer their content for free on their VOD systems, but they're potentially going to cut into the broadcasters' advertising revenues?
Bradford: That's the whole controversy, right? I think that, as a result of this shifting business model, it's been a struggle for the cable operators to get primetime programming from the big broadcasters for their VOD services. However, I think that once the business model evolves more fully, and cable operators increasingly leverage new VOD advertising technologies and develop their own relationships with advertisers, they are going to have to start paying broadcasters for VOD content. I should stress that we don't have a dog in this fight--we have key customers both among the cable operators and the broadcasters. Both Comcast and News Corp., for example, are Tandberg customers.
[itvt]: Turning to compression: what directions do you see that space heading in the near future?
Cooney: It's not difficult to see where it's going. Yesterday's compression technology was MPEG-2; tomorrow's compression technology is one of two options: MPEG-4 or Microsoft's VC-1. Both of those technologies, by about a factor of two, outperform MPEG-2. So, half the bit rate, double the channels--however you like to look at it.
[itvt]: Is the cable industry eager to switch to the more advanced codecs?
Cooney: The biggest barrier to entry for those next-generation technologies is the installed base of MPEG-2 set-top boxes in the cable space: none of those boxes can receive and decode an MPEG-4 or VC- 1 signal. So you need to replace the set-top boxes in your networks, in order to move to those next-generation technologies. If you're a telco that's getting into the IPTV space and that has no installed base of set- top boxes, and you're asking yourself, "How do we implement the next generation of compression," the answer is easy: if you're making technology decisions today, you might as well pay for the best technology available, which in the case of compression is MPEG-4 and VC-1. Actually, as it happens, if you're a telco, you're going to need to use those codecs anyway, as MPEG-2 isn't good enough to get video through your relatively small pipes. So for telcos, there's really no decision to make: they have to use next-generation compression. But for the other operators, both cable and satellite, there are definitely decisions to make, and commercial implications are the drivers of those decisions. DirecTV, for example, has already purchased an MPEG-4 high-definition system from us, and has said publicly that it plans to begin using MPEG-4 this fall.
[itvt]: Presumably the technology will be useful for any DVR-based VOD service they roll out--allowing them to download more encrypted content to the hard drive?
Cooney: Absolutely, that is true--you could store about twice as many movies compressed with MPEG-4, than you could with MPEG-2. However, I believe the initial impetus for the consumers to upgrade to a new set-top box is the desire to switch to HD services, not to get more hours of content on the DVR. For DirecTV, replacing the MPEG-2 set- top boxes for over 14 million subscribers will be a fairly long process that will be driven by customers' decisions to upgrade to HD. The ability to store more hours of content on the DVR is an "added bonus" relative to MPEG-2 DVR.
[itvt]: Which codec do you think will emerge the winner between MPEG-4 and VC-1? Are there interoperability issues involved in this switch to the new codecs?
Cooney: Any issues with interoperability would presumably be in the set-top box, right? The question would be: if you're receiving one channel encoded in Microsoft's VC-1 and another channel encoded in MPEG-4, could the set-top box deal with it? And the answer is "Yes," because the chipset manufacturers are now developing their chipsets to support all three codecs: MPEG-2, MPEG-4 and VC-1. So there's really no interoperability issue. As for the question of market share between MPEG-4 and Microsoft: from our perspective, the customers that are interested in us supporting the Microsoft VC-1 codec are the telcos. The more traditional players--the broadcasters, the satellite TV providers, and the cable operators who are interested in next-generation compression--seem to be more comfortable with MPEG-4.
[itvt]: Going back to the question of the cable operators and next- generation compression technologies: is there some kind of catalyst in the offing that might push them to adopt those technologies more quickly?
Cooney: I think that, here in North America, DirecTV will be that catalyst, because of the consumer value proposition that they're working on: they're planning on launching more than 1,500 channels of high-definition service. As an individual consumer, you may not see all of those on a regular basis, but you will certainly become used to having well over a hundred high-definition channels. Compared to what cable is offering today, that's a huge gap--an order of magnitude in terms of what you can get as a subscriber today. So if the cable operators start losing large numbers of subscribers to DirecTV because of this HD service, they'll need to respond. And, of course, one of the ways to respond is the "me-too" method, whereby they will offer hundreds of HD channels themselves. Practically, the only way they could do that from a bandwidth standpoint is to go to next-generation compression. In terms of timing, I don't see any cable operators deploying MPEG-4 or HD before the end of this year, but we will see the MSO's deploying MPEG-4 in 2006.
So I think DirecTV will be a huge catalyst for the industry as a whole, because even if the cable operators don't choose to respond with HD, they'll need to respond to the competitive threat that DirecTV presents. Maybe they'll respond with a combination of HD and more VOD, or by adding more interactive services. We see ourselves as being in the sweet spot, if you will, as a technology provider with insight into all of these operators.
By the way, one thing I do think we're going to see in the near future is a lot of consolidation among technology suppliers: over the next several years, a lot of smaller players are going to merge or combine in some other way in order to achieve a certain scale and scope that will enable them to be a trusted supplier to a Comcast or a DirecTV.
[itvt]: One area where there's a lot of activity right now is the home network--how to deliver VOD assets to different devices on the home network. Is that an area that Tandberg is looking at closely?
Cooney: Well, that's really a question of DRM: how do you track, monetize, and control the distribution and use of VOD assets? Today, in that context, we would be involved in terms of a platform provider but not specifically in terms of the DRM technology. That being said, DRM is certainly on our radar as an area of interest: much as VOD was an extension of our core compression headend business, DRM is a natural extension of what we're doing today in VOD and compression.
[itvt]: So might Tandberg acquire a DRM company?
Cooney: The short answer is "No." However, as a trusted supplier (and I don't think I'm overstating our position with our operator customers-- we're very well-positioned around the world), it's not unreasonable to expect us to form closer partnerships, so that--as the video subsystem integrator for a telco, for example--we might provide beyond or take responsibility beyond our existing scope of supply.
Bradford: Our OpenStream platform already supports whole-house viewing, so you can start watching a video in one room, and then go finish watching it in another room. I think you're going to continue to see OpenStream evolve to support whatever additional home networking functionality our operator customers want. That's a key part of our business model: to integrate any application that the customer believes is going to benefit their networks.
URL: http://www.tandbergtv.com/
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