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VOD, the First Skirmish in the Battle

Television's long-unfulfilled promise as the central server for the home network moved a bit closer to fulfillment with all the snazzy demos of interactive TV at the recent Consumer Electronics Show.

As digital content, including video-on-demand (VOD) and video messaging, swirls into an expanding universe of devices, the set-top box (STB) perched atop a television appears poised to become the hub managing the inflow and outflow of data and content to networked devices.

Or is it?

Much of the argument about the TV as home-networking hearth centers on whether the pipe to the Internet is running through a TV set-top box, or through a computer -- the traditional conduit spreading broadband adoption across the United States. The set-top box makers -- and the cable players distributing them -- would like to make the path to high-speed Internet connections flow through their networks.

By incorporating advanced features such as PVR (personal video recorder), VOD (video on demand) and thin client functionality (video networking capabilities), set-top boxes are becoming more complex brain centers for the living room, according to research by tech assessment firm Allied Business Intelligence.

Video-on-demand is also seen as the catalyst helping to prompt more battles among media and technology companies over who controls the gateway-enabled set-top box (STB), ABI adds, as cable operators and broadcasters get a taste of the revenue possibilities with VOD, as well as PVR, built into their cable networks.

This increased functionality is not without its cost, however, as MSOs (multi system operators) will pay from $600 to $1,000 for a highly integrated set-top box versus $250 for a plain old box, ABI's research said.

"MSOs are demonstrating the willingness to spend more on increasing the functionality of set-top boxes," said Adam Becker, a senior analyst with ABI. "With anemic growth of basic subscribers, reducing churn and increasing revenues per subscriber are the major tenets of service provider strategies. They can see the ROI (return on investment) potential and can justify the investment."

The cable industry's next version of IP-over-set-top-boxes is the Data over Cable Service Interface Specification (DOCSIS) 2.0 protocol. Recently approved by the the International Telecommunications Union, the DOCSIS 2.0 networking standard for data transit is expected to allow greater networking, as well as phone services -- a development which increasingly threatens telecommunications players.

Telco players, meanwhile, argue that cable operators' DOCSIS 2.0 standard is just a feeble attempt to carve up a broadcast signal for packet, or interactive, delivery of files -- and that a broadcast signal was never intended for return paths on content.

The ITU calls DOCSIS 2.0 a "major milestone" in the development of broadband infrastructure across worldwide cable systems, specifically because it helps enable true two-way interactivity, in some cases at a data transmission rate of about 30 Mbps.

So while the cable industry scrambles for IP networking over the set-top box by carving new IP channels out of its broadcast signal, services such as TelcoTV, which uses telco company NextLevel's backbone for providing video-on-demand to a set-top box, are also rolling out.

Amid the scramble, "you have to ask yourself, is the set-top box a cable box or the vision of a home networking center that companies like Microsoft and Sony have," says Douglas McIntyre, president and CEO of video compression company On2 Technologies .

"Sony thinks that vision is going to be a television that has everything built into it, multiple codecs, cable, DSL, or wireless, with the ability to power other devices in the home," says McIntyre, whose company On2 supplies advanced video compression software and technology to set-top box makers in Asian markets such as Japan and South Korea.

Along with its gaming console xBox, Microsoft, adds McIntyre, sees the personal computer acting as a home network central server that can pipe video on demand to a bedroom television, weather data to a living room TV, and perhaps feed video instant messages to a wireless device.

"I think there's a war already underway that involves these big companies who want a place in the home network," says McIntyre, a trend that adds pressure to the cable and broadcasting industry's home networking ambitions.

"The battle is not just for the pipe into the home -- and where that pipe leads, it's also for the real estate at the end of the pipe."

In Asian markets in which his company has contracts to provide video compression software as much as 40 percent of the population has broadband, compared to about 12 percent of the population of the U.S. McIntyre says in many Asian countries, set-top boxes are already acting as home networking servers.

ABI's research shows that set-top box shipments in North America alone totaled 17.2 million units for 2002, which represents an aggregate value of $7.6 billion. By 2008, ABI estimates that total units shipped will be about 22.9 million, with an aggregate value of $9.3 billion (which includes all cable, DBS, and terrestrial units -- which will be increasingly home-networking enabled).

Major suppliers of cable set-top boxes in North America are Motorola and Scientific Atlanta, and Pace, Pioneer Micro, Philips, Thomson and Panasonic in Europe/Asia markets.

In the North American satellite arena, set-top box leaders include Hughes, which makes satellite STBs for DirecTV; and EchoStar, itself a satellite provider, which also makes it own version of a set-top box.

In Europe, BSkyB, a satellite operator in Europe uses Philips; and Austar Communications is the STB manufacturer in Australia, providing boxes for TelstraSaturn, the satellite operator in Australia.

"The set-top box will be the device that takes the broadband connection and hooks it up to the television, but that's just one part of it," adds McIntyre. "The battle is also about who has the device at the end of that pipe that allows the most flexibility with the content."

ABI's research into gateways on set-top boxes says STB manufacturers will need to be aggressive in creating new features for subscribers and to help cable operators in their quest to generate new revenue streams.

"This competition will be healthy for consumers and will foster new and interesting improvements in home entertainment," ABI says.