Pressures to drive revenue growth, emerging content delivery technologies and promising subscriber uptake in various markets has generated interest in IPTV (News - Alert). Service providers with extensive broadband access networks have an opportunity to increase value from these investments and derive competitive strength. This paper provides a perspective on positioning IPTV within an overall market strategy and business model to increase the likelihood of commercial success.

Evaluating the attractiveness of launching an IPTV business requires consideration of specific market dynamics and business models.

New technologies and business models present significant opportunities and competitive threats for established service providers. Some of the key questions which need to be addressed when evaluating the attractiveness of an IPTV investment include:

• Are there attractive customer segments where the preferred viewing device is not the TV?

• Can customers find attractive alternatives to acquire the same content?

• Can a viable revenue steam for targeted advertising be secured?

• Does revenue sharing represent an opportunity to accelerate adoption and create value?

• Can a value constellation (a network of value chains) be constructed from existing businesses with new partners to improve the attractiveness of the investment?

IPTV can be considered as a suite of services, and may be an important part of an overall voice-data-video (and mobility) strategy that addresses telecom market challenges and opportunities.

 

Many service providers evaluate the business potential of IPTV platforms on the basis of more efficient content distribution. However the primary value chain driver is consumer content. Deployment of new content distribution technologies as a substitute for established distribution (e.g., cable, satellite) may not produce an attractive return. Consumers value content, and pay for it with their time (free-to-air) or a subscription (pay-TV). Given this is the primary source of value, then without a clear differentiator, service providers will only be able to command a low margin because value-add is low.

Although telecom networks have traditionally delivered externally created content — user voice, service providers do not generally have the market expertise and appetite to manage the investment associated with a content development business. There an many examples of service providers forming partnerships with content developers — France Telecom has specific campaigns with Canal+ and TP to sell premium content offers; for example, based on the French soccer league.

Attempts to differentiate through a wide array of functions and features may only detract from mass-market profitability, due to the large investment in sales & marketing of the benefits, and ongoing customer support.

Aligning with the proven free-to-air TV business models, competitors to traditional telecommunication service providers have developed similar business models for communication and content services subsidized by advertising revenues. These competitors are also forming alliances with traditional media players. For example, Yahoo! and Channel 7 have formed a joint venture in Australia and New Zealand. Traditional telecom service providers have the potential to learn from these developments and structure media and communication packages subsidized by targeted advertising too.

Service providers generally need to acquire the capability to source, package and manage content – big media players have large established sales and distribution channels. This lack of experience can increase business risks. Recent cases where service providers have failed to adequately monitor and protect content distribution, and failed to meet royalty payment obligations to content providers, have resulted in highly visible and protracted disputes.

The dilemma service providers’ face in controlling and protecting the content value chain is being played out in a number of different ways that are specific to the unique market and business needs of each service provider.

Some have developed content partnerships that enable them to co-market the attributes of their networks and content. AT&T uses a portion of Comcast’s (News - Alert) television programming to enhance their content offerings for their Uverse IPTV service. Tele2-Versatel aims to use KPN’s Digitenne network to market a television product under its own brand name to Tele2 customers and Fastweb is planning to offer its customers the entire SKY portfolio of television channels through broadband while SKY will offer its current and new subscribers both telephony and HSI via Fastweb.

Others, however, are investing in their own content generation. Belgacom is investing in film productions and its own football content, while PCCW is building it own interactive news channel.

Service providers have opportunities to leverage competitive strengths. Established providers have significant assets in established relationships with customers for broadband services, and large scale investment in customer service, billing and mass technology management. Synergistic commercial arrangements such as revenue sharing may also enable a service provider to structure incentives for silo businesses units or affiliates to up-sell IPTV services on an existing customer base e.g., service providers with different entities for delivery of satellite TV, cable TV, ADSL broadband, and cable broadband.

With ownership of the last 1000-100-10 metres to the customer premises, service providers do not have the downside exposure to net-neutrality risks that independent content aggregators need to accept. In fact, this provides access to an ideal source of competitive business intelligence, due to the opportunity to monitor traffic flows and types carried over the network.

Based on Alcatel-Lucent’s (News - Alert) participation in a European consortium and market trials, there is significant potential opportunity from integrating the access network with other communications infrastructure, including active outdoor furniture. Combining this with content delivery has the potential to establish new content distribution opportunities and capture advertising revenues. With increasing penetration of the digital interactive world into the home and office, there is a general market readiness to expand to a global digital interactive world, which includes the public space.

Service providers also have the ability to significantly deliver solutions to improve targeting, evaluation, and return on the advertising spend. Simple feedback mechanisms can be integrated into fixed-mobile convergence solutions, shrinking the gap between consumer, advertiser and retailer.

Advertising is also a significant component of service provider expenses. In January 2007, Nielsen reported the telecommunications industry was the 5th largest industry source of advertising impressions, and represented 8% of total advertising impressions excluding house advertisements. Advertising and promotion represented 3% of Telstra’s (News - Alert) total expenses in 2006. The investment in integrated content delivery solutions also can be offset with cost savings from a reduction of the service providers own advertising costs, and further value may be realized by the service provider though increased effectiveness and efficiency in positioning new value-added services.

Although acquisition of new content is a challenge for many service providers, significant revenues may be realized from older content, as cost to source decreases over time. Service providers have the potential to build content libraries and extract revenue through content on-demand libraries more effectively. Integrating these with hosted collaboration services (e.g., blogs, chats, newsgroups) may provide further niche opportunities.

IPTV consumer premise equipment (CPE) such as set-top boxes can represent ~50% of IPTV infrastructure capital costs over the long-term, taking into account a refresh every 3 years. Service providers may adopt different strategies to offset these costs — including customer contribution, and requiring customers to provide CPE independently. Integration of functionality in consumer devices which are attractive to consumers for direct purchase can significantly impacts the service provider’s business case. For some segments, service providers may have opportunities to integrate CPE with home networking gateways and derive subsidies from other services including home security. In other segments, customers may prefer to procure set-top boxes integrated with personal video recorders, and other functions including the screen itself.

The opportunities outlined above will not last forever. In many markets, including the US, Netherlands, Singapore and Australia, there are significant political and regulatory pressures to open existing broadband access networks, and facilitate deployment of new privately funded wholesale fiber networks. This has the potential to marginalize competitive advantages unexploited by established service providers.

Seamless delivery and mitigation of substitution risks is important to viability. Although revenue sharing opportunities may provide the motivation to up-sell IPTV services to an existing customer base, this should also be considered as an opportunity to migrate away from a silo delivery model. Bundling — without the capability to flawlessly manage the services as an integrated offer, may result in customer dissatisfaction, drive churn on the whole bundle, and result in revenue erosion. As a simple test, a service provider may ask: can a subscriber move house and have all services reconnected as they are able to do with other utility services?

Service providers need to ensure that content revenues are protected. Exploiting the trend to more quickly uplink broadband, new technologies (e.g., Slingbox, ORB.com) are providing consumers with the potential to redistribute content purchased anywhere to any device. Service providers may need to carefully consider the extent to which this represents a threat to proposed content-based business models. These threats may include sourcing and redistribution of content in cheaper markets, and rebroadcast of service provider content undermining the revenue base.

As noted earlier, CPE is a significant capital expense in the IPTV business case. Game platform providers, such as Microsoft (News - Alert) with its IPTV-enabled Xbox, may introduce further threats, and present opportunities for alliances.

Although, there are technical challenges to be carefully managed during an IPTV deployment, service providers establishing an IPTV business risk commercial failure — because of their inability to fully understand market dynamics, not addressing unique buying characteristics of target customers, and not orchestrating appropriate value constellations.

For service providers that carefully consider the business models, risk sensitivities, and overall strategy to maximize competitive strengths, there is an opportunity to compete effectively and grow shareholder value.