Deutsche Telekom <DTEGn.DE> will use Microsoft's <MSFT.O> software to deliver television and video-on-demand over its upgraded Internet Protocol network starting this summer, the two companies said on Tuesday.
The move marks the biggest European contract Microsoft TV has signed, and the second largest after one with AT&T <T.N> in the United States, the world's largest software maker said.
"It is a very large deal for us and brings the overall number of contracts to 13," said Microsoft TV's marketing manager Christine Heckart.
Both firms declined to give financial details, but the "T-Home" television service offering is at the heart of a 3 billion euro ($3.7 billion) network upgrade which Deutsche Telekom hopes to bring to 50 German cities by the end of next year.
"We forecast 1 million customers by the end of 2007. The main feature (of the new network) will be television and video services," said Deutsche Telekom spokesman Mark Nierwetberg.
In a 500-million-euro launch starting this summer, Deutsche Telekom plans to upgrade subscribers in 10 large German cities to VDSL — very fast digital subscriber line.
It plans to link a further 40 cities by the end of 2007, bringing the total investment to 3 billion euros.
VDSL is the supercharged sibling of normal ADSL broadband and offers data speeds of up to 50 Megabits per second. With those speeds Deutsche Telekom said it can deliver several high definition television programs simultaneously to the home.
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Three other companies will upgrade Deutsche Telekom's network.
France's Alcatel <CGEP.PA>, which has a partnership with Microsoft TV, will implement the Internet Protocol TV infrastructure. Germany's Siemens <SIEGn.DE> and Israel's ECI Telecom <ECIL.O> will also help to make sure the entire network can deliver the video images without interruption.
Microsoft began offering Microsoft TV in the 1990s to deliver TV and video programs to set top boxes in the home, but had trouble winning over major cable TV companies.
Its breakthrough came a few years ago when broadband speeds had risen enough for telecoms operators to start offering television and video services over Internet Protocol (IP) networks, resulting in a service called IP TV.
Most Microsoft TV customers are now telecoms carriers.
Telecoms operators such as Deutsche Telekom are looking for additional sources of income to offset declining voice revenues which are falling due to increased competition.
Microsoft said it expects most of its customer operators to end trials and move to commercial IP TV offerings in the second half of 2006, triggered by an upgrade of the Microsoft TV software as well as cheap IP TV set top boxes based on one chip.
Prudential analyst Inder Singh said he expects that by 2010 the global IP TV infrastructure business will have grown to $5.9 billion, with Asia having the largest number of subscribers, followed by Europe and the United States.
Pyramid Research said IP TV is a vehicle for carriers to offer a range of new IP-based services to their traditional voice telephony subscribers, but it warned that carriers will face substantial competition from existing pay-TV companies.