In the mid-1990s, UK telecoms giant, British Telecom (BT), launched an advertising campaign with the famous catchphrase: 'It's Good to Talk'. At the time, for BT and most other former state-owned telecoms networks, this was certainly true. Little direct competition delivered giant profits, and, for the time being, talking seemed to be the name of the game. But, just a decade later, telecoms companies face a drastically altered landscape.
Liberalisation of the industry has created fierce competition and plummeting prices. In the three years following the deregulation of the telecoms industry in Europe in 1998, the average telecoms incumbent lost 22% of its share of national calls and 35% of international. The bursting of the telecoms bubble in 2000 wiped more than $1 trillion off the industry's value in just 12 months. In March 2003, Deutsche Telekom reported a net loss for the previous year of $27 billion - then the biggest loss in European corporate history.
Recovering from this near meltdown, telecoms have been forced to reinvent themselves. And voice traffic alone is no longer enough to sustain them. As Peter Cochrane, former chief of technology at BT and founder of telecoms consultancy ConceptLabs, says: "The old profit margins of 16% or 22% have gone. The percentages are now single figures and they're going down. The big issue for telcos now is that all the commercial and economic forces are pushing them towards being commodity providers. As you get down towards 3% margins, there's less and less scope for survival."
An avenue for survival is to find a new use for the networks, and for many telecoms the logical solution is television. With wire already plugged into billions of homes and existing billing relationships that allow them to cross-sell additional services, expanding into TV is, in many ways, a no-brainer. Indeed, if technology had been up to it, many would have done it a decade ago. But now, as super-fast broadband makes streaming and downloading TV a reality, the rush is on. As a result, many of them have switched from 'it's good to talk' to a revised vision of the future: 'it's better to watch'.
Recent activities of the biggest telecoms in Europe, North America and Asia reveal a vast swathe of investment and activity in building television services. The delivery of television and entertainment services over broadband internet networks (also known as Internet Protocol Television, or IPTV) is set to become a major growth area, challenging cable, digital terrestrial and satellite as an alternative broadcast delivery platform. IPTV is already well established in some parts of Europe, particularly France, which had 470,000 IPTV users at the end of 2005. Italy is also a leader: FastWeb has been offering IPTV since 2003 and was joined by Telecom Italia in 2005. By the end of 2005, Italy had about 324,000 IPTV subscribers.
According to research firm Gartner, the number of IPTV subscribers around the world is expected to double from 6.4 million in 2006 to 13.3 million in 2007. By 2010, Gartner estimates that 49 million households will subscribe to IPTV services. According to research by Informa Telecoms & Media, worldwide revenue generated from subscriptions and video on demand via IPTV was under $1 billion in 2005, but is expected to grow to $12.2 billion by 2011.
Dan Marks, chief executive of TV services at BT Entertain-ment, which is launching an IPTV service in the UK called BT Vision, says that every major telecoms company is going after a slice of this business: "There is not a mature market in the world where the telcos are not taking this extremely seriously and investing a significant amount of money. They must rise to the challenge of broadband or face a very uncertain future. They can't carry on doing what they've been doing."
An example of the scale of investment involved can be seen in the US, where AT&T is investing $4.6 billion building a fibre-optic network capable of delivering television across 13 states, reaching up to 19 million homes by the end of 2008. The television service U-Verse is the company's biggest investment in nearly a decade. The network is not entirely fibre optic, as AT&T plans to use its existing copper-based network to cover the last 1,000 metres to the home. Fellow US telecoms company Verizon is going even further, building an entirely fibre-to-home network to support its FiOS TV service in 10 US states.
Meanwhile, in Europe, Deutsche Telekom is ploughing EUR3 billion into offering super-fast VDSL broadband in 50 cities, capable of delivering speeds of 50 megabytes (MB) a second. This next-generation broadband, still using traditional copper networks, will support its new IPTV service, T-Home. And, in the UK, BT is spending EUR14.8 billion over 10 years to replace the UK's old phone network with a new IP-based system. By early 2008, the company expects that 50% of households will have broadband lines capable of carrying 24MB a second. Again, this will be achieved by upgrading exchanges and 'sweating' the copper network to obtain more performance.
Ben Geller, director of industry marketing for Motive, a US-based company that specialises in management software for broadband and IPTV services, says: "These are billion-dollar bets being placed by the telecoms industry, that IPTV will help them grow their revenue. But I'd say the jury is still out on whether this notion of convergence genuinely helps them grow revenues, or is simply just a matter of retaining customers."
This costly rush into television is not being done in the expectation of early returns. On the contrary, IPTV is expected to be a slow-burn business and will meet stiff competition from cable, satellite and digital terrestrial pay-TV businesses. According to Informa, only 3.4% of the world's TV households are forecast to subscribe to IPTV platforms by 2011. The proportion is higher in Europe: Screen Digest forecasts that IPTV will capture 10% of pay-TV revenues by 2009, compared with 57% for cable and 30% for satellite.
Gartner echoes this conservative outlook. Elroy Jopling, research director for Gartner's Consumer Communications Services Group, says: "The global picture for IPTV revenue is much less impressive than for subscriber numbers. IPTV will not be a panacea to replace diminishing voice revenues, but in the medium term it can be a powerful tool in helping retain customers on their existing voice and broadband services."
Why are telecoms investing if the returns will not be huge? Is this, ultimately, a defensive strategy to keep customers loyal with the lure of TV bundled together with voice and broadband, or is it a genuine push into an entirely new business? "It's probably a bit of both," admits Ken Tysell, director of AT&T's U-Verse. "It's a growth strategy as we move into the video business, and also because it ties together our services in a way that hasn't been possible before, we hope it will make customers less likely to disconnect."
Annelise Berendt, a senior analyst with telecoms consultancy Ovum, says telecoms are trying to catch up with the cable companies that for a long time have been offering 'triple-play' packages of TV, telephone and broadband. "The telcos need to get up to speed with the cable companies to offer triple play, so in many respects this is a game of catch up. In the short term, it gives them a way of reselling broadband to people, which will help them increase their average revenue per customer. Ultimately, though, IPTV is a very long-term business commitment and telcos can't expect profits overnight."
Perhaps the most challenging aspect of this shift in business strategy is the cultural change it involves. In essence, it involves telecoms moving from being a utility to entertainment companies. Berendt points out that to be competitive, they will have to secure the entertainment content deals to attract customers. "It's an alien culture for them," she says. "The only way they can do it is to import staff from the entertainment industry and hope that they can change from the inside out."
The fact that many telecoms companies are trying to secure big ticket content deals before their IPTV services go live is an added complication. "Negotiating for content without an audience isn't easy," says Berendt.
Not surprisingly, many have been on a hiring spree, plucking executives from the television, music and film industries. BT's Dan Marks is a good example: a former president of Universal Studios Networks in the UK, he has assembled a team that includes experienced executives from Sky and Disney. So far, BT has signed high-profile content partners, including Paramount, Warner Music and National Geographic. Meanwhile, AT&T, which hired Dan York from broadcaster HBO to lead its content strategy, has struck deals with Hallmark, Discovery and MTV, among others.
U-Verse's Tysell says: "Content acquisition is a huge focus and a significant investment for us. We've got a team on the ground in Los Angeles that is tasked with acquiring rights and, yes, you do need to have experienced people to do that."
The transition is not a question of BT becoming a fully-fledged entertainment company, but rather a repositioning, says Marks. "This is a way for BT to hold on to the values that it has always had and to build on that by bringing in new skills, values and products based around entertainment. I think I am welcomed as an agent of change - people know that BT needs to move with the market."
He adds: "All telcos are grappling with this change. They have all been built as large engineering companies, but they now need to make the transition to become consumer companies. Yes, it's a challenge, but it's also true for the entertainment companies with which we are competing. The crux of this is that we are all in the broadband game now and that is harder for entertainment companies, which have never been in that market, than it is for us.
"The fact is that the telecoms industry doesn't want to be in competition with the big beasts of the entertainment world and those big beasts don't want to be in competition with the telecoms industry. But there's no choice about it. We are heading for a massive consolidation - it's about the battle for the total broadband industry and that's a big prize to play for."
DIGITAL PENETRATION OF TV HOUSEHOLDS in 2011 (%)
CABLE DTH IPTV DTT TOTAL
UK 14 36 5 40 95
Germany 34 12 7 8 61
France 15 25 15 25 80
Total 24 21 8 22 75
DTH = Direct to Home Satellite
DTT = Digital Terrestrial Television
SOURCE: Informa Telecoms & Media
TOP FIVE IPTV MARKETS IN 2011
BY SUBSCRIBER BY PENETRATION BY REVENUE
('000) (%) (dollars
China 11,182 Hong Kong 37.6 US 2.20
US 3,429 France 14.8 Japan 1.85
France 3,390 Singapore 11.9 France 1.59
Japan 3,075 Norway 9.2 Italy 1.10
Germany 2,626 Israel 9.2 UK 0.81
SOURCE: Informa Telecoms & Media
CASE STUDY: HONG KONG
PCCW is Hong Kong's biggest telecoms operator and the world's most successful IPTV provider. Now TV, a pay-TV service piped over PCCW's telephone network, was launched in 2003 and has 654,000 customers - more than any other IPTV network.
PCCW was founded by Hong Kong tycoon Richard Li, younger son of Li Ka-Shing, Asia's richest businessman and founder of the Hutchison Whampoa and Cheung Kong conglomerates. The young Li established the Asian satellite television network Star TV before selling out to Rupert Murdoch's News Corporation. The acquisition of Hong Kong Telecom, Hong Kong's leading phone company, in 2000 propelled him into the telecoms game, but his aim has always been to grow the business beyond fixed-line telephony.
Delivery of media services over the internet was a key goal and Hong Kong was a prime market for it to take off. It is one of the world's most advanced internet territories, with penetration in 70% of households (the ninth highest level in the world - Iceland has the most with 87%). Hong Kong also suits IPTV as it is a densely populated self-contained area, with many people living in high-rise apartments.
Daniel Schmidt, an analyst with consultancy Screen Digest, says: "As a city state, the local loops [the distance between telephone exchanges and homes] in Hong Kong are very short; also, the cable and satellite companies have been very complacent, and haven't taken the competition from telecoms companies seriously. They ended up losing a lot of their content deals, allowing PCCW to get exclusive content on to its channels."
PCCW's success has also been driven by the desire of Hollywood studios to combat piracy by offering exclusive content deals. These include exclusive live coverage of UEFA Champions League football, and PCCW is hoping to follow this by bidding for the right to broadcast English Premier League football. The attraction of content such as this is evident in PCCW's most recent results, showing a 38% increase in users in the first half of 2006 compared with the same period last year. However, the price of securing these deals has cost the company dearly, with the TV business reporting pre-tax losses of $24 million for the first half of 2006.
PCCW sees IPTV as a key way to achieve broadband growth against a typically sluggish performance from its fixed-line business. If the company can get more households to buy its premium content, then growth is there for the taking. The market is becoming more competitive, however, with another fixed-line company, City Telecom, launching an IPTV service through its Hong Kong Broadband Network subsidiary.
Earlier in 2006, Li tried to sell PCCW to foreign bidders, with News Corporation and private equity groups Macquarie (from Australia) and Newbridge Capital (from the US) all showing interest. But China Netcom, which controls 20% of PCCW and wants to use it as a platform for international expansion, blocked the bid. Instead, Li sold his stake to Hong Kong-based investor Francis Leung for $1.2 billion. Leung has strong links with China, with over 20 years' experience as an investment banker. Many are now looking to him to help PCCW expand into the booming Chinese market.
CASE STUDY: FRANCE
France has the most IPTV subscribers in Europe, with 470,000 by the end of 2005. According to Gartner, by the end of 2006, almost half of Western Europe's IPTV subscribers will be in France, generating EUR141 million in revenue. By 2010, subscribers are expected to reach 5 million, generating EUR682 million.
IPTV has taken off in France, unusually, because the two main satellite players - TPS and Canal Plus - have turned to broadband as a way of reaching areas in the country unserved by satellite dish; they resell their packages through the telcos. A relatively weak cable sector is another factor: cable reaches only about 40% of the country and the sector has also been undergoing consolidation.
France Telecom has aggressively pushed into IPTV through its MaLigne TV service, launched in 2004. By mid-2006 the service, now branded as Orange, had 229,000 subscribers, but it plans to rack up 1 million by 2008. But the telecom, which has formed a content division to prioritise new content acquisition, faces stiff competition.
Broadband provider Free, owned by the Iliad Group, is France's second biggest internet service provider and offers IPTV as part of a triple-play package. It has made video on demand a key part of its 'Freebox TV' service, offering CanalPlay, the VoD service provided by Canal Plus. It has pushed ahead rapidly with new technology, launching High Definition Television (HDTV) services in 2004 and beginning trials with next-generation speed broadband - ADSL2+ - in November 2005. France Telecom is also pushing HDTV with its latest generation of set-top boxes.
The other main IPTV player is Neuf Cegetel. In September, it showed its broadband ambitions by buying the French AOL business from Time Warner for EUR288 million. Inheriting AOL's 500,000 French broadband customers should allow Neuf Cegetel to reach its target of having 2 million ADSL subscribers before the end of 2006. Signing these up to its triple-play package, which includes Neuf TV, will be a priority.
Another key reason for IPTV's success in France is the low cost of entry - encouraged by the government. France's regulator has insisted on lower wholesale prices for access to broadband DSL networks and also for local loop unbundling (allowing competitors other than the incumbent telecom to control the line from the exchange to the home). This has driven down the cost of entry into broadband, which, in itself, has prompted service providers to seek new revenue opportunities, including TV. France is also well ahead in introducing ADSL2+, which gives more capacity for television services.
Operators also benefit from having a plentiful supply of home-grown content, and strong demand for it. According to Ovum, about 38% of films shown on French TV are French-made. Maintaining this situation is strongly supported by the government.
Competition for IPTV is increasing from digital terrestrial television (DTT), which was launched in mid-2006 and covers about 58% of the French population (rising to 85% next year). Most IPTV players in France, including France Telecom, are planning to include DTT as part of their offering. BT has also done this in the UK with its BT Vision product, a hybrid IPTV and DTT product.