In the nearly four years since AT&T Inc. launched its U-verse service in Dallas, the way I watch television—on the sofa, with popcorn—hasn’t really changed. What did change is the way TV is delivered to our living rooms. And for months now, AT&T has been exploiting that delivery system in a way that points the way to the future of video entertainment.

“This is really a story about cultural change,” says Jeff Weber, AT&T’s vice president of U-verse and video products.

Indeed, the changes to AT&T’s corporate culture, and the varied ways consumers enjoy entertainment programming, would seem to make U-verse a very interesting chapter in the history of television.

For more than a decade before the world’s largest telecom company moved its headquarters to Dallas in late 2008, the company—and its predecessor, San Antonio-based SBC Communications Inc.—had designs on delivering TV-like  services over a standard telephone network.

In 1995, SBC and two other phone companies launched a partnership with Disney to deliver “services such as video on-demand, home shopping, and networked video games” to consumers via its broadband network. SBC noted at the time that it had reached up to 47,000 Dallas area households.

In 2000, Enron Broadband Services (yes, that Enron) and Blockbuster Inc. partnered to create a video store consumers could access via their TVs. Consumers could “enjoy VHS-quality or better with VCR-like control,” the companies promised. SBC, again, touted its high-speed DSL network as one of the partnership’s delivery vehicles.

In those instances, the technology never caught up to the the company’s ambitions. But around 2005, after Verizon had already entered the pay TV market with its FiOS service, Weber says AT&T made some aggressive technology bets.

To deliver a new kind of TV service, the company ran fiber-optic lines—not to consumers’ homes, but to the neighborhood nodes, where those lines would feed the copper phone lines already in consumers’ homes. Thanks to some advances in video compression, AT&T could use Internet Protocol, or IP, as the language that its network equipment would “speak” to provide the service.

You can deliver an IPTV service via “a more or less conventional telephone network with some modifications,” says Kermit Ross, principal of Millennium Marketing, a Frisco-based telecom consultancy. “That makes the cost of providing U-verse lower than both an all-fiber optic network and lower than tuning a mostly analog cable plant to deliver IP-based services.”

What’s more, the TV channels were delivered using a switched video architecture; that means the number and variety of channels were no longer constrained by the bandwidth coming into the home. Although switched video is more commonplace now, even in cable networks, AT&T was pushing the envelope hard in 2005 and shredding its hands with paper cuts.

“We chose state-of-the-art technology, and it allowed us to [deliver U-verse] at 20 percent to 25 percent of the cost of building out fiber all the way to the home,” says Weber. “We also made a significant investment in our back-office systems to make sure that the customer experience was just going to be better.”

FROM MA BELL TO MA BROADBAND

AT&T has effectively changed from a phone company to a broadband company. It still has some work to do, but it’s important to note that nearly every new service the company offers to businesses or consumers either uses, encourages, or is delivered via a mobile or wired broadband connection.

Of course, AT&T really had no choice but to innovate. Telecom market analyst Pyramid Research estimates that traditional phone companies like AT&T and Verizon are losing somewhere around a million fixed-voice lines a month. Indeed, AT&T’s revenue for local and long-distance phone calls—its lifeblood for decades—fell by more than $2 billion during the first six months of 2010.

Sure, a percentage of those consumers are disconnecting their home phones after buying iPhones and other mobile devices from AT&T. But even with its mobile phone business booming, AT&T didn’t want to discard its phone network and needed to put itself at the center of the consumer broadband experience.

While AT&T was going through its own metamorphosis, consumer entertainment culture was changing, too. Consumers now watch TV programs and movies on YouTube. They use their mobile phones for almost everything—except making phone calls, in some cases. They don’t buy and unwrap movies and music; they download and consume them.

For AT&T to live in this new culture and to survive in the competitive world of pay-TV, already dominated by cable and satellite companies, it had to deliver a service that could at once be a “regular” TV experience, while still having the characteristics of the Internet.

U-verse’s delivery makes it different. It’s not a radio-frequency signal delivered over a coaxial cable, like a traditional cable TV service. Instead, U-verse is delivered via streams of data packets using IP, the common language of the Internet.

Millennium Marketing’s Ross says U-verse’s Internet-like delivery method is what makes TV interactive and unlocks the value of AT&T’s investment. “When you’ve got the Internet in the form of data packets, TV in the form of packets, and voice in the form of packets, you can start to blend the packets to create entirely new services,” he says.

One example: “If someone wants their TV show delivered to their wireless device, wherever they might be in the world, that can be made to happen,” Ross says.

Other examples include phone-like services that have made their way to U-verse TVs. You can review voicemails and get caller ID notices while watching television shows, for instance. Essentially, the functions previously dedicated to one device can be blended and accessible via the TV, phone, and personal computers.

For AT&T, the economics of adding new services could be compelling. “You can sell those new services to your subscribers, so you can increase your revenue,” Ross adds. “All of a sudden you’ve got the possibility of adding to revenue streams without significantly adding to your cost.”

U-VERSE’S BIG UPGRADE

After acquiring AT&T (and taking its name) in November 2005, SBC began controlled market trials of U-verse the following month. AT&T then bought BellSouth Corp. in December 2006, which helped make AT&T the nation’s largest wireless service provider. Three months later it launched U-verse in Dallas for the first time.

By 2008, AT&T still had fewer than 250,000 U-verse subscribers nationwide. But it had already started the underpinnings of what Weber calls “a truly integrated consumer experience” by giving consumers the ability to program their DVRs via a Web interface and a mobile phone application.

For many the U-verse “Eureka” moment came in late 2008, when AT&T launched a feature called Total Home DVR. It allowed consumers to watch programs recorded on their living-room DVR on any other TV in the house. The TV set became a central computer in the consumer’s home network, allowing for the exact same program to be played on more than one TV simultaneously.

Suddenly, the IP in IPTV mattered. AT&T turned on the feature in consumers’ homes overnight, with nothing more than a software upgrade at the company’s video-serving offices. Consumers simply woke up one day and their DVRs had more features.

More instant-upgrades have followed, and consumers are catching on. AT&T announced that its U-verse services earned it $1 billion in revenue during the second quarter of 2010. It had 2.5 million subscribers as of June 30, an increase of more than 900,000 in 12 months. The company says it will have its fiber-rich network available to more than 30 million “living units” in the U.S. by the end of 2011.

AT&T execs say more cross-platform services are coming soon. Already, the company offers customers the ability to program their DVRs from a PC, their TV, or a mobile device. Bandwidth upgrades can be handled instantly via the PC. TV package upgrades can be previewed and purchased instantly via the television.

AT&T has shown me a feature where a consumer can record programs to a U-verse DVR, then “sideload” that content to an iPhone or iPad via a home WiFi connection—a coup in mobile video entertainment. (The company gave no official release date for that feature.) AT&T execs have also discussed giving consumers the ability to use their iPhones as remote controls.

According to Ross of Millennium Marketing, there’s the possibility that AT&T could do for TV what Apple has done for mobile devices. “With U-verse, you have the potential to open up the interface—the application-programming interface—and let others write applications and sell those apps via your own app store,” he says.

Any of the above scenarios would hammer home AT&T’s cultural changes of late. AT&T works with partners, gives consumers more choices, and the company that once stood for American Telephone & Telegraph is selling iPhones and talking up its Internet-like TV service.

“I think AT&T will increasingly use the IP nature of this thing to market products, target, and shape what’s advertised and offered to a neighborhood, town, or city,” says Ross. “They’ve just scratched the surface of what they can do here.”

Phil Harvey is the editor-in-chief of Light Reading, a TechWeb publication that covers the telecom industry.