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Telcos entering the fray
with IPTV services
Poland’s largest alternative fixed line operator, Netia, announced that it
plans pilot trials of IPTV services in Warsaw and Wrocaw with n, the digital
DTH HDTV platform of one of the leading media groups in Poland. Netia will
be competing against the TP Group who have been in the IPTV services market
since late 2006. Relative to Cable TV, IPTV is still a young pay TV platform
in Poland. However, the potential for growth is significant particularly
given the increasing household broadband penetration.. According to the
telecommunications regulator UKE, only 42% of households are DTH homes, and
38% are cable homes. Chart 1 illustrates the degree of household penetration
for various TV access methods and offers a comparison against broadband
household penetration.
Netia’s and TP Group’s bid to offer IPTV services will not only add to pay
TV market development, but also generate business innovation in Triple- and
Quad-Play dynamics amongst the telecom service providers. The following
paragraphs provide examples from Western European operators that are likely
to influence the development of IPTV in Poland.
Western European telecom operators’ TV rollout is but a part of their
transformation strategy
To make inroads into the pay TV market, fixed telecom operators had already
attempted to enhance their TV offering by laying out new pipes and acquiring
or creating new media and content. The desired outcome is to boost
additional revenues above the bundled package tariffs they charge customers.
In addition to enhancing their triple play offerings to retain wavering
fixed telephony customers, such a strategy has also helped fixed telecom
operators to gain a foothold in the pay TV market and more importantly to
generate sufficient end-user interest on such add-on services like
Video-on-Demand (VoD) for additional TV value added revenues.
For example, BT Vision has high expectations that such variable revenue will
boost its overall revenues. It particularly hopes to do so through alliances
e.g. Microsoft’s Xbox to capture the gaming community within the residential
segment. While we believe that the impact of leveraging on Xbox’s fans was
minimal at best last year, we estimate that around 5-10% of its IPTV
installed base were VoD customers. Thus, despite having only 340,000 IPTV
customers in September 2008, or capturing only 7% of its existing retail
broadband subscribers, its estimated ARPS reached almost €45/month. Chart 2
illustrates UK Pay TV ARPS since 2005. Currently, BT Vision’s ARPS is
estimated to be around €45/month in 2008, still 30% short of, Virgin Media’s
average ARPS. To play catch up, BT Vision’s aspirations extend beyond home
hardware issues (such as convergent set top boxes) and sustained efforts to
fulfill end users’ demand for new popular content. To effectively meet the
residential end user’s needs for media, entertainment and communications, BT
will rely on its next generation IP network to enhance its ability to carve
out alternative revenue streams from media content delivery. This includes
potentially revenue sharing with third parties such as advertisers.
Looking at the UK market
leader in pay TV ARPS, Virgin Media’s strategy took on a different route to
BT. It initially tapped into the trend of service convergence and hyped its
“QuadPlay” offering in UK, then leveraged changing end user habits of media
consumption and the emergence of Over-the-Top (OTT) media players such as
BBC’s iPlayer. Previously, the lack of success in IPTV take-up can be
attributed to the binary of lean back vs lean forward experience. The former
is typically favored by new media consumption via the PC/laptop screens.
However, the general public still very much favours the lean back experience
in enjoying traditional television, despite the play and time shift
functionalities that IPTV offers. According to Virgin Media, its TV offering
now includes the popular iPlayer and has recorded a 30% increase in iPlayer
views. Interestingly, it also observed a boost to the number of VoD usage
per month throughout last year. While the two trends may not be correlated,
we believe that Virgin Media’s iPlayer strategy highlights the potential of
incorporating a “substitute product (eg OTT content) in order to maximise
revenue from the end-user.
These two examples highlight telecom operators’ expansion of their service
portfolio to cover as much as the end user’s entertainment, media and
communication needs. Catalysed by the dismal IPTV take up and increasing
competition, telecom operators are expected to accelerate their service
portfolio expansion, and/or transformation to capture current end users’
media consumption habits. Furthermore, the ability to inject a degree of
interactivity with the end user enables telcos to uncover alternative
revenue sources such as advertising. Already, there have been trials that
are in progress on tapping into the advertising models such as opt-in and
click-through advertisements.
IPTV services in Poland to augment broadband service offerings
Netia’s announcement to provide IPTV services together with n is another
strategy to capture a larger share of new broadband subscribers from the
dominant player TP Group. It is also another move to achieve its overall aim
to provide both communications and media services to its customers. We
believe that the “bundling” strategy will boost overall broadband subscriber
numbers as well as accelerate the development of media consumption in
Poland. After all, the dominant access method for broadband internet is ADSL
followed by cable. There is therefore a pool of existing customers to whom
telcos can push its triple or even quad play services. Chart 3 illustrates
the breakdown of broadband access in 2007, where xDSL contributed almost 70%
of broadband subscriptions. We believe that there is significant potential
for further broadband growth in Poland, which in turn will also give the
necessary boost to IPTV subscription for TP Group and Netia. Currently, IPTV
subscriber numbers are insignificant relative to DTH numbers. TP Group
reported less than 100,000 IPTV subscribers in 2008, which is less than 5%
of its broadband subscriber group. While TP Group will benefit from its
parent group’s, Orange, TV strategy, we believe one of the ways to encourage
IPTV uptake is to offer services that leverage the change in media
consumption patterns.
The future is video
Looking ahead, we believe that the change in media consumption patterns
marks a turning point in the telecommunications and media industries. Frost
& Sullivan estimates that revenues from TV services could add between 15-22%
of telecom operators’ retail revenue in the top 5 Western European markets.
In the UK alone, as illustrated in Chart 4, it is expected that revenues
from TV would enjoy an 8% 5-year CAGR, a more robust rate than that in both
fixed and mobile communications sector. However, the current momentum is not
sufficient to rejuvenate overall revenue growth in telecommunication
services yet. Operators will need to continue to improve QoS, extend
coverage and distribution, form more alliances and create more innovative
services.
At the end of the day, the revenue potential hinges partly on the consumer’s
expectations as well as propensity to spend and partly on the provider’s
ability to deliver, customise and thus monetise video content. Broadcasters
and other high definition content aggregators (such as OTT players) have a
critical operational need to demand high quality, reliable and secure
networks for content delivery. Telecom operators stand to generate revenues
as a transport network especially if those with flexibility in offering
various QoS levels at corresponding price points.. This is an important
change in order to compensate for the decline in bundled service margins. To
those telecom operators with their own networks, there is also wholesale
revenue potential to target broadcasters and other high definition content
providers.
This should in turn translate to a new growth area for telecommunications
equipment vendors where telecom operators and even CDNs upgrade their
networks to meet the demands from video delivery. Importantly, we believe
that the major vendors with a wide product and service portfolio such as NSN
and Ericsson must have the ability to address their target customers’ IP
media challenges. Other equipment vendors such as IBM and Cisco are
similarly ready to provide the services and kit necessary for enterprises to
manage their digital media assets. This growing demand can only provide the
glimmer of light for revenue potential in the next few years. Frost &
Sullivan is currently conducting a study on “Beyond QuadPlay” that attempts
to quantify the revenue potential to the industry as operators address the
consumer’s entertainment and communications needs in a digitalised
environment.
A trend brightens the industry’s outlook for the year
In conclusion, a disappointing IPTV performance is not the end of the
road for Telecom incumbents but instead, has spurred new service creation
and more innovative business models across the value chain. As end user
media consumption patterns change, both telcos and broadcasters face a
window of opportunity to invest and/or collaborate to meet the evolving user
demand.
Details:
Yiru Zhong
Industry Analyst
ICT Group
Frost & Sullivan International
E-mail:
yiru.zhong@frost.com
URL:
www.frost.com