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Triple-play battle will be ‘bloody,’ says iSuppli analyst

Technology value chain research firm iSuppli recently forecast that the number of IPTV subscribers worldwide will climb from about 4 million last year to 103 million in 2011.

That dramatic rate of growth has set the stage for equally dramatic battles between multichannel video programmers, including cable operators, direct-to-home satellite providers and newcomer IPTV services, as they compete for supremacy in a triple-play market.

IPTV Update spoke with Frank Dickson, iSuppli’s principal analyst, multimedia content services, about his view of the competitive landscape and moves by each camp to bolster their competitive positions.

IPTV Update: You forecast the number of global IPTV subscribers will grow from 3.9 million 2006 to 103 million in 2011. What do you forecast the IPTV subscriber number to be for the United States in 2011, and what are you basing your forecast on?

Frank Dickson: The U.S. was a little over 200,000 IPTV subscribers in 2006. That was mostly made up of FiOS customers with a sprinkling of U-verse sampling. We are looking at 13 million U.S. subscribers in 2011.

What am I basing my forecast on? Brute force. When entities the size of AT&T and Verizon enter the market with force, the question is not whether they will have an impact but to what degree they will have an impact.

Initially, it seems that the IPTV entry strategy is to target the weak areas in the cable world. Verizon, for example, seems to be targeting the former Aldelphia customer base that has been plagued by customer service issues. Verizon has literally had people on the street, going door to door signing up subscribers.

Over the longer term, there is some organic growth in U.S. TV households to be had. Additionally, the analog broadcast cut-off may nudge a few over-the-air broadcast TV households to pay TV services. However, in the end, the IPTV will take some subscribers from cable and satellite companies.

IPTVU: With Verizon’s FiOS TV and AT&T U-verse coming online, how do you envision the competitive landscape for multichannel video programmers in 2011 in the United States?

FD: The long-term impact is neutral to negative. My response may seem counter intuitive; however, there are a few factors that go into my opinion.

Eventually, there will be a number of households with three pay TV provider options. Each provider will have inherent advantages to its offering. The temptation will be too great to avoid price competition. However, since the U.S. is a saturated pay TV marketplace, the result is not a net gain in viewership for the multichannel network operators but a shifting of the viewers from one pay TV provider to another. With profit margins getting squeezed, the pay TV providers will have to start asking for concessions in the carriage fees.

Also, network-based or DVR-based VOD will become pervasive as a result of the pay TV arms race. Much of the syndicated content being multicast will be available on a VOD basis. If one is a creator of content, such as ESPN, this trend does not affect you. However, if you are a distributor of other’s syndicated content, your value proposition begins to be significantly diminished.

Finally, one of the key benefits of the arms race is that broadband bandwidth will improve dramatically. With the trend of IP connections increasing their penetration into consumer electronics, broadband delivery of content directly to consumers becomes an increasingly looming threat. The result is the ability of content owners to directly reach their audience, bypassing the multichannel networks.

IPTVU: How will the competitive battle between IPTV and cable shape up as the cable industry continues to push into IP telephony and high-speed Internet service (triple play) and IPTV operators obviously offer video along with voice and high-speed Internet (triple play)? When will the effects of this competition show up in subscription pricing?

FD: Remember, we are talking about markets that measure revenues with B’s, as in billions of U.S. dollars. Price competition is not something that is considered lightly. Initially, the battleground will focus on features and benefits. We may see some pricing pressure on a market-by-market basis in 2008, but I do not think that we will see price competition on a large scale until one of the market participants really feels pain. 2009 seems to be the year that price competition rears its head in a significant way.

IPTVU: How do satellite providers like EchoStar and DirecTV stay competitive in this environment?

FD: This seems to be a popular question. The lack of a broadband pipe to the home has encouraged those following the looming triple play arms race to quickly forecast the demise of the satellite industry. After all, how can the satellite companies compete with a range of services that can be offered with almost infinite bandwidth, right?

Well, the satellite companies are employing a strategy that resembles the strategy that Nintendo is employing against Microsoft and Sony in the game console wars, focusing less on horsepower and focusing more on content that people want to consume. Did we forget that content is king? The majority of the satellite industry emphasis has been on HD programming and unique content, such as out-of-market sports packages and specialty programming. The goal is to focus on the quality of the viewing experience. The results have been impressive subscriber gains of over 7 million for DIRECTV and EchoStar over the last three years.

Let’s also remember that the battleground is limited to an urban environment. Satellite providers have the advantage of ubiquitous delivery. There are many locations where satellite is the only delivery option. For those rural locations, it is game-set-match to the satellite providers.

IPTVU: Is there anything else you’d like to add?

FD: It is important to note that the other pay TV participants are not sitting still. Telecom companies may be rolling out fiber; however, the cable companies are responding with DOCSIS 3.0 and its channel bonding feature, creating a bandwidth competitive solution to the telcos fiber offering.

Channel bonding is a load-sharing technique for logically combining multiple DOCSIS channels. For downstream channel bonding, each downstream DOCSIS channel carries a payload of approximately 38Mb/s (50Mb/s with EuroDOCSIS). Load sharing traffic across multiple channels allows a maximum throughput of up to n x 38 Mb/s (or n x 50 Mb/s), with n representing the number of channels being bonded. A separate 6MHz or 8MHz frequency is used for each of the bonded channels. Upstream channel bonding is possible for a minimum of four channels, 10Mb/s to 30Mb/s each, for a total of 40Mb/s to 120Mb/s of shared throughput.

The satellite companies are responding with content, content, content! HD and sports content is unique and compelling. It is also compelling to the target customer for IPTV.

The battle is going to be bloody!

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