From Defense Mechanism to Revenue Generator: Can IPTV be Profitable?

Learnings and Experiences from Global IPTV Operators

1. Introduction

In an increasingly crowded provider market that translates into decreasing revenues, telcos and service providers are more and more pressured not only to protect existing revenues but also to find new revenue streams. Cost cutting and providing value-added services solely to reduce customer churn are right at the top of the list of remedies telcos are employing to fight back. But in an environment where cost cutting is only going so far in staying ahead of declining revenues, adding new services with actual revenue potential seems to be the name of the game.

So what types of new services should telcos go for? What would make sense from an economic, technology and consumer acceptance perspective?

Apart from VoIP, which finally seems to be taking off, the hottest of the new buzzwords seem to be Triple Play and Convergence. And there are already a number of success stories to report from selected operators in Asia, the US and Europe.

It is not surprising that these types of success stories spur interest among operators around the world who ask themselves: How did they do it? Would I be able to replicate their success in my home market?

At a recent panel discussion I moderated at PTC in Hawaii, I invited some key players from Asia, Europe and North America to share their first hand view of some of the important considerations required when launching an IPTV service. 

Their unanimous view was that top priorities of telcos today remain reducing churn and increasing ARPU and it appears that these goals are best achieved through providing new services like IP TV. However, these operators also view IPTV as a new revenue stream.

Coincidentally, TDG research just released survey results which predict that IPTV will explode into a US$17 Billion market by 2010 with 20 million subscribers globally.

These are certainly rosy figures and 2005 is already shaping up to see more IPTV service launches, particularly in the Asia-Pacific region. In China for instance, the local regulator is expected to issue IPTV licenses in 2005 that will enable all 4 mainland telco operators to launch IPTV services.

2. Facing the Challenges of Rolling Out an IPTV Service

Let’s look at the commercial realities of launching an IPTV service though. As mentioned, IPTV is already experiencing full scale commercialization in markets such as Hong Kong, Italy and France.

However, a question is whether profit has yet entered the equation for IPTV, or if branching out into this area is still mainly a defense mechanism to hold competitors at bay.

Current research reports and studies certainly point to a profitable future for IPTV services, but whether IPTV remains a sustainable service may hinge on customer education and consolidation in the cable market space that will allow more profitability for operations.

This is particularly evident in countries with low ARPU, as evidenced by incumbent carrier KT in Korea who will launch a service in 2005 or 06. KT’s Dr. Minzheong Song who was one of our panelists at PTC pointed out the difficulties of a new service holding out against low prices of cable tv. If cable operators can offer, say, 70 channels at a reasonably low price and an IPTV service, due to budget restrictions, can only offer half the number to start with, it will take either high value-add niche content, new interactive features or a clearly differentiated business model (e.g. a la carte payment) to entice existing subscribers to try the new service.

But for all the defense tactics IPTV is touted to deliver, such as churn reduction and ARPU increase, operators believe that a business case for IPTV has to ride on all factors, not only churn and ARPU, but also on profit generation. For operators, branching out into IPTV is increasingly not a matter of ‘if’, but ‘when’ - and how to get the network and service ready in order to get value from it.

Here, telcos seem to have a clear advantage against cable operators due to the latters’ common operational weaknesses such as slow roll out of digital services due to the limited ability to free investment capital, which in turn is due to cable’s low ARPU and thus profitability.

It is a fact though that IPTV is now vastly more affordable also due to the continued decrease of equipment and transmission costs.

2.1 The Biggest Challenge: Content

While customer service is the most important factor to differentiate a service, we find that in our discussions with Asian telcos Content seems to be the biggest challenge in terms of operation. How do we get content, negotiate exclusive deals, talk the talk and walk the walk?

Telcos need to compete with cable and satellite TV operators to get the desired content, however this is usually virgin territory for them due to the difference in dynamics of both industries. Pay tv operators have a natural head start in the content business, not least because deals are largely already in place between studios and distribution channels, making it hard to break into the established relationships.

A successful content operation requires smart people with the right skills sets who are constantly planning and are able to act quickly based on audience responses and competitors’ moves. However, establishing internal content expertise is certainly no easy task. Here, a good consultant can help with critical issues such as the recruitment process, organizing the content department and designing workflows on content strategy and management logistics.

However, when it comes to content negotiations, bigger may not always be better as evidenced by small Canadian operator SaskTel. SaskTel’s Jason Durant said at the panel that the company’s status as relatively small operator actually worked to their advantage when it came to dealing with content owners. He said that in his experience content owners are quite happy to use a small-sized operators as a testing ground to find out what’s working and what is not in a particular market to give them experience and insights when dealing with bigger players.

2.2 Security is of Paramount Importance

A topic closely associated with IPTV content is security. The unanimous view from our panelists was that investing in a solid content security system is crucial to deploying a new service. However, with advancements in technology, IPTV operators no longer need to rely on traditional conditional access systems that cable and satellite TV employed but can take advantage of more secure and cost effective solutions available today.

There is still the perception out there that content owners simply don’t want to deal with IPTV operators for fear of security breaches, leaving operators struggling for content. This may have been true several years ago when confusion about the emerging technologies reigned high. But all the Hollywood studios we speak to today are not only anxious to license content to the broadband TV platform, but have already done so in many countries and even in countries where piracy is rampant.

The importance of investing in a solid content protection system to get Hollywood’s nod of approval was also highlighted by SaskTel’s Jason Durant.  He also suggested that telcos should open up and show content owners how each element of the network works, even if it’s a proprietary development, to give content owners confidence in its security.

2.3 Regulatory Issues: Dealing in a Gray Area

In many markets, IPTV remains a grey zone when it comes to regulatory issues and more often than not operators have to overcome numerous hurdles on their way to rolling out a service.

Many countries have two separate watchdogs to regulate the telecom and broadcasting industries and discussions around the convergence of telco and broadcasting regulators are ongoing. At the moment, telcos usually either apply for a Cable TV type license and abide by the respective broadcast rules for IPTV services or, in rare cases like HK, be allowed to hold a Pay TV license as a telco.

3. Key Lessons Learned from Successful Deployments

3.1 Bundling for Success

Learnings from already deployed services indicate that a sound bundling and content strategy is the most important ingredient for long-term success. Experiences with IPTV services in all regions have shown that customers in general best respond to smart bundling options that combine at least IPTV and broadband internet access.  

For PCCW’s Now Broadband service for example, the key success factors were an a la carte channel offering with no basic monthly service fee plus exclusive programming and aggressive investing in content. NOW provides its service over ADSL and bundles broadband and pay TV together. With a pay TV penetration of only 30% in Hong Kong, this is a sound strategy for growth.

The paramount importance of an attractive bundling strategy that taps into the consumers’ wants and needs is also highlighted by France Telecom’s Wanadoo, which is a broadband access service that functions as one hub for broadband home entertainment, including TV, gaming, voice, music and internet. Wanadoo’s success lies firmly in its extensive bundling of services, which also gives customers the convenience of dealing with just one company for all of their entertainment needs without having to sort through multiple invoices at the end of each month.

3.2 Excelling in Customer Service

New competitors push into markets around the world constantly and offer services over unbundled local loop that are designed to undermine the existing operators on price. What they are lacking though is the customer service and sophisticated content necessary to differentiate themselves and attract customers for long term success.

In this environment, excelling in customer service emerges as a key differentiator and driver for long term success. Apart from the usual CRM initiatives this can include using one’s own installation team and call center to retain control over the quality of performance, rather than outsourcing these key operations.

However, one interesting conclusion from the panel was that across all regions price does not seem to be a decisive factor for customer uptake and long term success.

4. Conclusion

I think it is clear that for telcos around the world launching IPTV and Triple Play is not a matter of IF, but WHEN. But big challenges remain and operators have to ensure they build a watertight business case for IPTV that includes all factors - churn reduction, ARPU increase and revenue generation.

2005 will no doubt be an exciting year that will see many IPTV services launched around the world. It will be interesting to see how the operators design their services to achieve the success they want and need.