A CSMG ADVENTIS White Paper
April 2007
Introduction
IPTV[1] is finally coming of age in 2007. All of Europe’s major incumbent operators have brought consumer IPTV propositions to market. Competition between alternative Pay TV providers will intensify, with consumers in most markets now able to choose from a broad range of satellite, cable, IPTV and digital terrestrial propositions.
The potential of IPTV has not gone unnoticed by other players: in all of the major European markets there are multiple IPTV offers and in some cases three or four competitive offers challenging the incumbent operator for IPTV supremacy. Equipment manufacturers, games console manufacturers, content companies and online players have all been active in the digital TV, IPTV and online video spaces with a host of innovations designed to win share of mind and, more importantly, share of wallet from consumers. Consumers, for their part, are being presented with a plethora of new technology, devices and services and more and more of them are becoming early adopters.
The big question, of course, is who will win and who will lose in this battle for domination of the living room. Can online video offers be successfully migrated to the TV? Can the IPTV players really be any more than an irritation to the established cable and satellite giants? Can as-yet unseen disruptive IPTV plays steal a march on the predominantly me-too IPTV offers of the incumbents? Can content owners develop sustainable and profitable business models for on-demand content irrespective of the means of distribution? Finally, and crucially, will IPTV services ever be profitable for telcos or is IPTV in reality a Catch-22: can’t survive without it, can’t make money from it?
This paper addresses these questions, examines emerging models and identifies the key challenges that video players must overcome if they are to succeed in this increasingly complex and competitive environment.
[1] For the purposes of this paper, IPTV is defined as broadcast and/or on-demand streaming video delivered over broadband to a set top box connected to a television.
IPTV: Why Bother?
As BT begins to provision BT Vision customers in early 2007, the European IPTV jigsaw is at last complete. But why have the Telcos around the world invested so much in delivering a service that many analysts consider unprofitable and unsustainable?
It is well documented that Telcos worldwide are seeing a decline in their traditional voice and data revenue streams as a result of deregulation and increased competition. Increased competition is not just driving down prices and causing customers to switch their services to alternative providers, but new advertising-funded business models from online players are also reducing revenue streams from existing subscribers who remain loyal to the incumbents. The combined effect of these factors means that the Telcos have little choice if they want to avoid going the way of the dinosaurs: they must reinvent themselves and reposition in the market.
Figure 1: Incumbent and Competing IPTV Offers in Top 5 European Economies
To defend profits and gain and retain customers, the Telcos have realised that they must offer services over their pipes. They have tried doing this in the online world through a variety of models, but new entrants such as Google have undermined the ability of Service Providers to generate additional revenues this way. IPTV represents a unique opportunity: to deliver DVD-quality video over existing broadband pipes and to avoid becoming a commodity dumb pipe provider.
However the competitive landscape is very different from that envisaged by the major Telcos when they began looking at IPTV opportunities three, four or even five years ago. Since then many cable operators, such as Virgin Media in the UK and Ono in Spain have launched comprehensive streaming on-demand content offers, removing the key anticipated differentiator of IPTV services.
Nevertheless, the major Telcos have moved ahead rapidly to deliver IPTV to their customers. Italy, with an absence of cable competition, was the first major European market to embrace IPTV with the launch of services over DSL and fibre by FastWeb in 2001. France Telecom and Telefonica were the first major European incumbents to launch mass market offers in 2003. Although the UK has been relatively slow to bring IPTV offers to market to date – with the exception of niche offers from Homechoice (now owned by Tiscali) and Kingston Interactive Television (which ceased operations in 2006) – new IPTV solutions are expected this year from Sky, Orange and Tiscali, amongst others.
Driven by differences in national TV markets, a variety of IPTV offers are available, ranging from comprehensive Pay TV offers such as Telefonica’s Imagenio service to the on-demand only BT Vision. BT’s offer leverages the success of digital terrestrial TV (Freeview) in the UK to offer a hybrid DTT/IPTV box with broadcast services delivered over the air and unicast and interactive services delivered over DSL with the services being integrated into a single EPG.
Alternative business models notwithstanding, IPTV is here to stay, providing Service Providers with the ability to offer triple- and/or quad-play services over a next generation platform with formidable capabilities. The next question is how to overcome the significant challenges faced by IPTV providers as they move into (what is for them) the uncharted territory of content delivery.
Challenges for IPTV Operators
IPTV operators face five major challenges:
- Getting the basics right
- Securing appropriate and adequate content
- Developing advertising funded capabilities/models
- Moving from commercial convergence to functional convergence
- Delivering personalisation
1. Getting the Basics Right
Most new technology launches have teething problems, so given the complexity of IPTV platforms it is not surprising that launches across Europe and the US have been plagued by early problems.
While most of these problems have been quickly addressed, the challenge, in the face of robust competition from experienced cable and satellite operators, is to deliver a service that is not in any way inferior to those competitive services. The risk of spiralling costs in customer care makes this an EBITDA and customer-retention imperative.
2. Securing Appropriate and Adequate Content
One of the most significant challenges to operators in the IPTV space is the scarcity of good content deals. For the incumbents in particular it has been difficult to come to terms with the reality that they offer insignificant scale to major content providers with customers (actual or forecast) in the hundreds of thousands at best compared to their cable and satellite competitors who count their customers in the millions. BT’s non-subscription offer may help the company to overcome this challenge but it is a high-risk strategy. Collaboration between IPTV operators to improve their collective voice with the major Hollywood studios and other key content providers may help to improve the range of content available to all. Exclusive sports rights, particularly football in Europe, have been a cornerstone of the strategies of Fastweb in Italy and Belgacom in Belgium, but again it is a high-risk strategy and the investment case is far from guaranteed.
3. Developing Advertising Funded Capabilities/Models
To deliver profitability, IPTV operators need to extend revenue generation capabilities beyond Pay TV and Pay Per View (On Demand) services. The obvious opportunity is to develop advertising funded models based on the success of Internet players. Advertising potential extends from basic banner advertising in the EPG to advertising sponsored On-Demand content, but significant technical hurdles remain. Even without the technical challenges, Telcos lack the necessary relationships and also the scale to generate significant revenues from advertising at this stage in their evolution.
4. Moving from Commercial Convergence to Functional Convergence
Bundling IPTV with voice and data into triple play offers is a tried and tested approach to promoting services, but may serve to undermine profitability as discounting is almost invariably used to make bundles attractive. Bundling is also easily replicable, and the only likely effect of replication by competitors is to apply further pressure to prices – as has been seen in the UK broadband market.
The challenge for IPTV providers, therefore, is to move from commercial convergence to functional convergence and to start delivering on the technical promise of IPTV. Functional convergence may take many forms, such as offering integrated Mobile TV offers, delivering IPTV content to PCs, enabling PVRs to be programmed remotely, enabling IM and chat services to/from the TV, or developing interactive UGC-based services such as video dating using the IPTV platform. Using functional convergence to enhance and differentiate the customer experience will help to move away from me-too offers and alleviate long-term price pressures.
5. Delivering Personalisation
In the longer term, and building on advertising capabilities and functional convergence, IPTV will need to take leverage the customer profiling capabilities of IPTV platforms to deliver targeted advertising that will both enhance revenue generating capabilities and act as a differentiator compared to other Pay TV platforms. Telcos are well positioned to capitalise on personalisation, given their greater experience with CRM systems than most other IPTV competitors.
Who Else is IPTV Competing Against?
As we have seen fixed operators are launching their IPTV offers into an increasingly competitive Pay TV space. So far we have focused on competition from conventional Pay TV providers, but many other players are seeking to gain share in this lucrative market. In this section we explore some of the emerging models and new technologies that are adding another layer of competitive complexity to the space that IPTV is seeking to call its own.
Whilst IPTV operators attempt to gain market share from cable and satellite operators, other players in the home entertainment value chain are not sitting idle. The Digital Marketspace Map in Figure 2 illustrates the territories of the other major players and reveals sources of competitive tension.
Figure 2: The Digital Marketspace Map
While the operators have been expanding horizontally to maximise the value of customers connected to their networks, other players have expanded vertically to capture more of the value chain for themselves. Media and content companies, for example, have begun to offer their content direct to consumers over the Internet. Movies, TV shows and music videos are now available from sites such as MTV Overdrive, AOL In2TV and Movielink (a joint venture between 5 major studios). The sites are employing a mix of revenue models including advertising-funded, download sale and rental. While much of this content is only available exclusively in the US at present, it is only a matter of time before these models proliferate in Europe.
Customer equipment vendors have also been expanding their business models across the value chain, most notably Apple with its iTunes media store. With the launch of the Apple TV device, Apple now has a solution for delivering iTunes video content to the TV. As expected, synchronisation of the closed system content is seamless and hassle-free and the device is bound to extend the video opportunities of the iPod and iTunes.
For those seeking an open platform, vendors such as Netgear and KiSS (a Cisco company) offer products that enable a wide variety of media file formats to be viewed on the TV. Using wired or wireless connections, these products connect to the home network to access content online or stored on the user’s PC. In the US, PVR manufacturer TiVo is also moving into this space, having recently announced a partnership with Amazon that will allow TiVo owners to download content from Amazon Unbox, for rental or purchase, direct to their TiVo.
Meanwhile, Sony plans to leverage its position in both consumer electronics and content production with the launch of the Bravia Internet Video Link. Using the same menu-driven interface as the PSP and PS3, the device enables consumers to view selected online media for free on Bravia HDTV sets. The initial content line-up includes a range from Sony BMG, Sony Pictures, AOL, Yahoo and Grouper, although open access to the Internet will not be enabled.
The Sony development is particularly interesting as it overcomes two limitations of the other device plays: firstly it provides a TV-centric interface, avoiding the need to use a PC browser to select content from an online catalogue; and secondly, it provides streamed online content direct to the TV, rather than the download-then-view model adopted by most online movie rental sites.
In the online space, Internet TV players are now starting to emerge with advertising-funded business models bringing free content to users for PC viewing. Joost (set-up by Skype founders, Niklas Zennström and Janus Friis) has announced content deals with Viacom and Warner Music, whilst Babelgum (backed by Fastweb Chairman, Silvio Scaglia) plans to focus more on niche content. Both services are keen to avoid the copyright issues of the leading UGC sites, and will restrict content uploading to rights-holders only. These early entrants have adopted a segmented approach to market entry, with a focus on young adult males. The risk to Pay TV providers is that this may set a wider expectation that on-demand content should always be available for free.
In the last two years, major Internet portals such as Google, MSN and Yahoo! have expanded into social networking and user-generated content to drive eyeballs to their sites and increase their advertising-revenue potential. The astonishing success of User-Generated Content represents a significant threat to IPTV. Websites such as YouTube, MySpace and Flickr have opened a massive outlet for creative talent that would otherwise have gone unseen or unheard. The ability to connect creators of niche content with globally distributed audiences challenges the traditional model of professionally produced content for mass consumption. Whether these major portals will move into TV-centric delivery remains to be seen; however emerging services point to the potential for personalised, advertising-funded channels.
For Telcos, these alternatives to IPTV both increase competition in the market of content provision and threaten to relegate their role in the value chain to that of bit-shifting utilities. It is a cruel irony that the Telcos’ broadband networks are enabling services that could undermine their own fledgling IPTV businesses. Indeed, looking to the future there is a risk that as IPTV and other streaming video services proliferate, contention at bottlenecks on the Internet may undermine the service quality delivered to end users, and in the extreme case cause serious deterioration in overall Internet service quality. Under these circumstances a conventional view of IPTV differentiators is insufficient, and alternative approaches to managing loads and securing investment for underlying infrastructure will be vital.
The inability to assure service quality on a best effort network presents a real opportunity for network owners to differentiate. With ownership and control of the access network, infrastructure players can use capabilities such as QoS and CDN to assure the quality of experience for their end-users. They may also choose to make these capabilities available to their competitors – at a price – although it is unclear to what extent the regulators would force them to do so. The regulatory issues surrounding access to such advanced features are complex and a case for intervention would need to consider the definition of the market in which services were being offered, whether the incumbent had significant market power in that market, and whether the new capabilities represented bottleneck assets.
Strategic Priorities for IPTV Operators
So where should IPTV operators focus in light of the numerous challenges and competitive threats that we have discussed in the preceding sections?
The growing range of video services available over the Internet is already subject to congestion and contention issues, and the Telcos already protect the quality of their IPTV services by using QoS enabled streams. However, it remains to be seen if further deterioration in the user experience of ‘free’ online video services will drive Internet-savvy customers towards operator-controlled IPTV services. In the meantime the Telcos must make the best of a challenging situation, faced as they are with both abundant Internet-based competition and mature satellite and cable competition. They must face up to the need to invest in services that will struggle to make a decent return in the short term and use this time and investment to build up expertise in the differentiating capabilities of IPTV.
Operators must focus on delivering a clearly differentiated consumer proposition. The temptation to over-invest in premium content should be resisted as a good return on investment is unlikely to be achieved. Instead, operators should look to differentiate themselves through the IPTV platform itself.
Figure 6: IPTV Operators must develop their propositions to survive in the digital marketplace
At the heart of the user experience for IPTV is the EPG, which has the potential to become IPTV’s ‘killer application’. Through the EPG, operators have a vehicle for defining a unique user experience on their platform, differentiated from that of the competition. By combining search, browse and recommendation features, the EPG can be developed to simplify navigation of both live and library content, enabling users to find personally relevant content with minimum effort.
Operators can also extend the capabilities of the EPG and weave IPTV deeper into the fabric of consumer’s digital lives. As a first example, operators could integrate IPTV with existing communications services, enabling functionality such as IM, social networking and UGC within the IPTV user interface. A second example would be to extend the reach of the EPG to index and access consumers’ personal content, for example photo albums and digital music collections.
Another opportunity for differentiation can be found in the installation and configuration process. By simplifying IPTV to the point where self-installation becomes practical for the mass market, operators can avoid engineer-assisted installation as required by cable and satellite services. The need for user intervention can be reduced through plug-and-play technology, self-configuring and/or remotely controlled customer equipment. New home-wiring can also be avoided through the re-use of existing wiring or the use of wireless technologies, as demonstrated by France Telecom (Homeplug) and Belgacom (WiFi with smart antennae).
In parallel with the development of a compelling IPTV proposition, there is a clear need for operators to invest in customer education around the overall value proposition: with so much choice in online and digital media, too few customers understand what IPTV has to offer and why they would want it.
The emergence of online advertising-funded competitors presents both a threat and opportunity. In preparing a defence against these competitors, operators should assess and understand what opportunities advertising-funded business models could offer to their own IPTV business. Many possibilities exist including traditional pre- and post-roll ad insertion, static and dynamic banners, and interactive ads allowing consumers to ‘click-through’ for more information or to register interest. As with online advertising, IPTV can enable ads to be targeted to consumers with far greater accuracy than broadcast media has been able to achieve. In fact, if used appropriately, the demographic information held by operators about their IPTV subscribers will become one of their most valuable assets.
Underpinning both the customer proposition and the advertising model, operators need to develop powerful personalisation capabilities, building on the foundations of their existing CRM systems. From both a technology and cultural perspective, operators have a potential lead in this area which they should seek to exploit aggressively.
Longer term, there is a real opportunity for the IPTV platform to be leveraged to support a wide range of mass market and niche vertical applications such as home security and management services, e-commerce applications and training and education services. The IPTV set-top box could become the hub of the digital home, delivering a wide range of enhanced broadband services. This is a strategy that BT is already beginning to deploy successfully.
Catch-22?
So what is the prognosis for IPTV in 2007? Too little too late, or yet to prove its full potential?
In the near term, IPTV is a Catch-22, and it will only be by accepting this that operators can move to adopting a long term view and develop services along a strategic roadmap. Indeed, paradoxically, in the long term it is possible that the success of IPTV may be borne of the inability of its underlying infrastructure – the Internet – to support the delivery of competing streaming video services to the mass market.
IPTV operators must focus in the short term on delivering a service that is in no way inferior to cable, satellite or DTT services, and this is no mean feat: these competing services have had fifteen years or more to iron out any technical glitches and they are a mature and able competitor.
Even if IPTV operators achieve this parity, it will be no guarantee of success: positive differentiation must be achieved if subscriber targets are to be reached, and customers attracted from competing services, and perhaps more importantly additional revenue streams must be derived from a highly subsidised platform if sustainable profitability is to be achieved.
IPTV does have the potential to become a major player in the Pay TV landscape and deliver a wide range of revenue generating services into the homes of millions of consumers, but it will be a long hard slog to achieve this potential. In the long run the time-honoured capabilities of the Telcos in running robust networks to deliver high quality services will play a critical role in delivering market leading IPTV services. In the meantime, operators must build capabilities in less familiar areas to create the platform, propositions and user experience necessary to survive in this increasingly competitive market.
For further information please contact:
Bob House, Vice President bob.house@csmg-global.com
Jonathan Rowan, Principal jonathan.rowan@csmg-global.com
Michael Dargue, Manager michael.dargue@csmg-global.com
Susannah Hawkins, Manager susannah.hawkins@csmg-global.com