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Homechoice wakes up and smells the coffee

IP TV operator's big plans

Tucked away in London, Homechoice can be considered the grandfather of television over a telco’s telephone line. Back in the early 1990s it created ideas like time shifted viewing, which it called “replay TV” long before anyone had ever heard the word TiVo. Even though after 8 years of offering VoD and IP TV services the company has managed to attract only just over 3,000 customers, by next year it believes it will blossom into a full triple play and begin the long journey out of its London roots to the rest of the UK, and probably a public quotation.

The Homechoice service comes from the company Video Networks, funded personally by Chris Larson, said to be one of the Microsoft founders. It started off technology development back in 1992 and began trials in Hull in 1996.

When it was launched it sported a CEO that had been the head of J Rothschild’s technology investment arm, and a chairman that had been chairman of Reed International and Capital Radio. It also tried to get a public flotation off the ground back in 1998 after it first began operations, looking to raise £100 million ($180 million) and its ambition has never left it, not even after the broadband revolution swept past it during the past three or four years.

People often get it confused with efforts that British Telecom had at the same time (we certainly did) which were also trialing back in the early 1990s, but it turns out that the only thing they had in common were the phone lines and the same brand of customer premises equipment (CPE) and BT’s DSLAMs, both supplied by Alcatel. Alcatel has long since left the CPE business and Homechoice no longer uses the British Telecom supplied DSLAMs, but its own DSLAMs now come from Alcatel.

An innocuous order with Alcatel, announced exactly one year ago for $16.6m for DSLAMS, first alerted us to the fact that the sleepy Homechoice network was waking up, and talking to new CEO Roger Lynch this week we got the inside track Two years ago the company had a rethink and began preparing a relaunch. Larson put another round of funding into the company, brought Lynch on board.

The unbundling decision has proved inspired, with an agreement between telco incumbent British Telecom and its Ofcom regulator that BT will slash prices for connection and rental of unbundled lines by up to 70 per cent over two years, putting a huge amount of margin into the Homechoice existing business. It will also stimulate investment into the unbundling sector and days after the new pricing was announced Bulldog Communications, an unbundler offering high speed internet lines, was sold on the back of the improved margin to Cable and Wireless.

“Our network now can reach 1.25 million people in London through 73 telephone exchanges in the London area,” says Lynch. “We have plans to go further afield, and a second phase taking us to 140 exchanges is going ahead.”

Advertising blitz

Anyone based in the target areas of London cannot have missed the massive advertising campaign that has been conducted through poster, TV and transport advertising costing millions. “It might look like we’ve spent a lot on advertising,” says Lynch, “but that’s just because you’ve been in the targeted area which we are trying to saturate.”

In answer to the $64,000 question, so are they signing up? Lynch says, “We wouldn’t be putting in another 70 exchanges if we weren’t seeing the kind of uptake that we needed to turn a profit.” Homechoice is understood to be aiming for 25,000 sign ups by the end of 2004 with a future break even point of around 100,000 customers. Lynch is delighted this week at the news that arch-rival NTL is now adopting ADSL instead of expanding its own cable network further.

“They say they are trying to reach another 2 million homes and that ADSL is the cheapest way to go,” he says laughing. “I know what cable costs,” he adds, “I spent years working on the continent with Chello Broadband,” (now owned by UGC International part of Liberty Media).

“At Homechoice we use our own servers and we make our own CPE,” boasts Lynch, but this is a bit disingenuous. The original media servers for Homechoice were always on Digital Equipment Alpha risc servers, and are probably on some other similar Hewlett-Packard server (they bought Compaq who bought Digital Equipment), perhaps even still the Alpha (the architecture is still supported, just).

The new CPE that Homechoice has come up with is based on the Texas Instruments AR7 chip, a DSP based chip that can be software downloaded to switch between a ADSL, ADSL2 and ADSL2+ and other ADSL variants.

“We are using basic ADSL right now,” confesses Lynch, and will move to ADSL2+ some time next year. We haven’t decided exactly when yet because there are some migration issues and a critical choice of line cards to be made.”

That line card choice certainly is critical, because Video Networks will rely on it to take the Homechoice service into a fully functioning triple play.

Cards on the table

Lynch wants to offer phone services and will begin later this year using simple “carrier pre-select” technology, which is the basis for discount telephony in the UK, opting to jump to the nearest entry point for a particular wholesale carrier.

“We’re doing that because we want to be offering primary telephone lines, not secondary. Voice over IP can be used as a primary line, and it will be, but we need to select a line card that can support both ADSL2+ and offer VoIP, while still powering the line from the DSLAM.”

Most VoIP services go dead once power is off in a household, something that has stopped them being used for primary phone services, with regulators worried about emergency calls. The PSTN has its own power supply and VoIP suppliers try to get around the problem with local miniature UPS, but Lynch is waiting for a line card that powers up on its own.

“We’ll have that next year and that’s when we can jump to ADSL2+,” explains Lynch. At the moment Homechoice offers around 4.5 megabits per second which restricts its customers to being within 2 kilometers of the public switch.

That 4.5 Mbps is taken up with either 1 Mbps or 2 Mbps broadband line for high speed internet access, and the rest is used for TV services, offering a single channel at a time from a choice of 60 channels, 1,000 films on pay as you go VoD, and most TV series free on VoD, all for around £27 ($48) a month.

It has recently signed the BSkyB sport and film channels which have to be bought extra. Prior to the BSkyB deal customers were prone to taking the Homechoice service alongside BSkyB or NTL, but with the new BSkyB deal it can be a home’s only TV service, saving the entire cost of NTL and putting pressure on cable TV suppliers.

Extended reach

Homechoice is also almost ready to step up its codec to H.264 MPEG 4, from MPEG 2. “When we first started in this business it took about 6.5 Mbps to give a picture of a particular picture quality. Currently we are getting that same quality with under 2 Mbps, because the codecs have improved.

“We expect the same thing to happen with H.264. Initially it won’t give us too much improvement, but it will gradually get better and cut the bandwidth required for the service,” he says. Both the use of ADSL2+ and H.264 will mean that Homechoice can extend its reach. ADSL2+ uses a 2.2 megahertz signal which attenuates faster than the 1.1 megahertz ADSL signal, but carries far more data.

The net result is that Homechoice will be able to service people up to 4 kilometers from a public switch at its current speeds, and if it can use less bandwidth it can go even further afield, or more likely offer two tuner services (one to view and one to record) over the same capacity and offer DVR services in its CPE.

It could also enter the TV film downloading market, and when asked if he’s considered this Lynch mere says, “Yes, that’s a possibility.” Film downloads can be sent over far greater distances than streamed content, potentially form the other side of the world, and because Homechoice has full UK rights to most of its content, it could offer a download service off the same servers at no extra cost, with a retail piece of CPE, extending its business model.

If it adds voice at the same time as it jumps to ADSL2+ and H.264, Homechoice should comfortably be able to double its revenue for the same amount of installed infrastructure, except for the addition of more servers.

At the moment Homechoice uses just three big mega servers and fast lines connecting them to the respective DSLAMs. It will have to invest in a bigger server network to support the 70 new DSLAMs anyway. Lynch analogizes his service to the well documented Fastweb service from e-Biscom in Italy and to Iliad in France, and says as such Video Networks should be able to have access to public funding in an IPO, if it so chooses.

But already Video Networks is on the lookout for further funding, and is said to have appointed the same bank that managed the sale of Bulldog, to raise between £70m and £80m in new equity by the end of this year.

Copyright © 2004, Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of events that have happened each week in the world of digital media. Faultline is where media meets technology. Subscription details here.

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