By KRYSTLE CHOW
Published in the Ottawa Business Journal newspaper and website.
June 25, 2007 (June 27 on OttawaBusinessJournal.com)

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Today’s consumer faces a dizzying array of telephone, television and Internet options – known as the “triple play” – with cable companies falling over each other to offer the cheapest bundles with the most features.

But telecommunications companies have been falling behind in the race to win customers ever since cable firms discovered a way to offer voice as well as their more traditional television and Internet services.

Although some telcos have ventured into the satellite market to try and take back some of the market from their cable competitors, analysts say the technology is often not as versatile and interactive as what is being offered by the cable companies.

Enter Internet protocol television (IPTV) and with it Espial Group Inc., an Ottawa company which makes software that offers telcos a way to provide cost-effective, interactive television through existing DSL lines.

“Remember the old days when we only had five television channels with maybe a few more if you had bunny ears? Well, we’re now in an environment with hundreds of channels (with cable and satellite television), and then you have our technology which enables a YouTube-like environment with millions of channels,” says Espial’s vice-president of marketing Brian Mahony. “The technology could also make it possible for you to chat on your instant messenger while watching Canadian Idol.”

Espial makes IPTV middleware, which is the layer of technology that presents the interactive interface to customers but also allows television set-top boxes to communicate with the telecommunications companies’ servers and deliver content to subscribers at home.

The company’s main products are the Evo Client which is the customer-facing software platform that offers features such as video on demand, electronic TV guides and Internet browsers for television, and the Evo Server, which provides service providers with the architecture to deliver, manage and sell those services. Espial also makes the IPTV applications which sit on the Evo Client platform.

The company currently splits its revenues fairly evenly between Europe, Asia and North America, although its European revenues are slightly larger, Mr. Mahony says.

Espial made its debut on the Toronto Stock Exchange two weeks ago, raising net proceeds of $26.9 million through the sale of roughly 4.1 million shares. The company’s share price soared by as much as 13.7 per cent above its $7 opening price on its first day of trading, before closing at $7.85.

Analysts say the company’s strong performance is evidence of its potential to go it alone in a gold-mine of a market: the client middleware market in 2006 was worth $38.4 million and is expected to grow to $75.1 million by 2011, says Stan Schatt of ABI Research, which ranked Espial at the top of its IPTV Client Middleware Vendor Matrix.

“Espial gets high marks particularly for innovation,” says Mr. Schatt, who notes that the company’s opportunities are particularly strong in Asia Pacific where service providers are very cost-conscious and Espial’s low-power, customizable solution is a great option.

“As more and more video services are demanded, client software (such as Espial’s) becomes more valuable,” he adds.

Mr. Mahony says the value of the company’s product is its ability to simplify the IPTV experience, since service providers must now deal with applying Internet rules to the television viewing experience and manage thousands of channels, games, instant messengers and so on, while catering to subscribers who want more variety but not more complexity.

“Subscribers want more choices but less clicks to get there; they don’t want to have to go through complex mechanisms (to find the right channel or movie). We make it so that Grandma can use IPTV as easily as Gen-Y,” he says.

“As for operators, they now have to manage more than 10,000 assets – that is, things like pay per view, games, movies – which is a lot to work with, and it’s a lot more than the days with just 10 channels. They have to ensure that there’s the same experience for the viewer, with no lag and no info jumble.”

Espial’s product also has the potential to provide a much more customizable television experience for both operators and subscribers, including the ability to track customer preferences and supply targeted advertising or personalized movie suggestions.

Having a technology which enables some very interesting features isn’t the only reason why investors might be attracted to Espial, says analyst Jon Arnold of J Arnold & Associates.

Mr. Arnold says most of Espial’s competitors are either gigantic vendors such as Microsoft or Siemens, or smaller companies which have been bought by these larger firms, making the Ottawa company one of the few remaining independent middleware vendors left.

“Espial is now a very attractive acquisition target because larger vendors may want to get the missing pieces of IPTV technology in-house. But because it is independent, its technology can also be used in various IPTV platforms which need middleware, making its customer base much broader,” he explains. “Espial’s IPO is a statement that it believes it can make it as an independent company… It’s a lot easier to be acquired so they wouldn’t go through with the process unless they were confident they had a sustainable business.”

Mr. Arnold says he is personally a fan of Espial, adding that the company has very good technology and is one of the few who might be able to go up against Microsoft and do fairly well. As well, the fact that there are so few listings for such companies in Canada might lead to a stronger appetite for Espial’s stock, since there aren’t many other firms to choose from.

However, he cautions that it’s hard to say if Canada is a hot enough market for Espial’s product, especially since it’s a small company with a technology which not too much is known about, and because IPTV has “barely registered on the radar” for the North American market.

Meanwhile, Dittberner Associates research director of broadband James Heath says another challenge for the company’s growth would be if customers simply aren’t looking for or willing to pay for the amount of interactivity Espial’s product can offer.

“If they don’t need it, it won’t be as high-growth of a market,” says Mr. Heath. “But think of YouTube – it never would have taken off on dial-up, but now it makes it necessary to have broadband to use YouTube … similarly, people need to develop features to force people to take advantage of IPTV. It’s a chicken-and-egg thing.”

Mr. Heath observes that Espial seems to be in “pretty good shape” as it has a very good product which is easily customizable by service providers, highly efficient in terms of processing power, and cost effective, which means it can produce a cheaper set-top box.

Espial’s set-top boxes are also much more affordable and efficient than the satellite option, he says, since satellite television allows lots of downloads but not uploads, which limits features such as digital video recording. Satellite-based service providers are forced to put hard drives in their set-top boxes in order to provide that interactivity, which ups the price of the box.

All this is good news for the company, which Mr. Mahony says wants to invest in research and development as well as sales and marketing.

In fact, sales is perking up because cable companies are getting more interested in Espial’s technology as well, Mr. Mahony notes, which is the “best validation” for its products.

He declined to provide specifics about hiring activity, but said that the company is definitely planning to grow in a managed way.

“Our best days are ahead of us,” he says.