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IPTV: The telco catch-22?

IPTV is finally coming of age. Major telcos in the United States and overseas have launched their services and now compete with cable and satellite operators in the pay-TV market. In the broader market of content delivery, consumers have even more choice, as online players and consumer electronics giants enter the game.

The big question is: Who will triumph in this battle for domination of the living room? In an increasingly competitive market, will IPTV ever be profitable for telcos, or is it actually a catch-22 — can't survive without it, can't make money from it?

Looking back to when IPTV was first espoused, today's competitive landscape is different from that envisaged. Facing declining revenues in their core business, telcos saw IPTV as a unique opportunity to leverage investment in broadband and deliver a new generation of entertainment services. However, since then, cable operators have developed their own comprehensive on-demand services, removing a key anticipated differentiator. Telcos must now work harder than ever to make a success of their IPTV investments.

Challenges for IPTV operators

To become successful, IPTV operators face five major challenges:

  1. Getting the basics right. Given the complexity of IPTV platforms, it is perhaps unsurprising that it is difficult to successfully launch services. The challenge is to quickly address these issues to avoid customers perceiving IPTV as inferior to cable and satellite. The risk of spiraling costs in customer care makes earnings before interest, taxes, depreciation and amortization (EBITDA) and customer-retention imperative.
  2. Securing appropriate and adequate content. Securing good content deals continues to be a significant challenge for IPTV operators. Compared with satellite and cable providers, they lack the experience and have significantly less subscriber scale. Some telcos have acquired exclusive sports rights, particularly soccer in Europe, but this is a high-risk strategy, and the investment case is far from guaranteed. Collaboration between IPTV operators to improve their collective voice may help to improve the range of available content.
  3. Developing advertising-funded capabilities and models. To deliver profitability, IPTV operators need to extend revenue generation capabilities beyond subscription and pay-per-view services. Advertising potential extends from basic banner advertising in the electronic program guide (EPG) to sponsored on-demand content. However, technical hurdles remain, and telcos may lack the necessary relationships and scale to generate significant advertising revenues at this stage.
  4. Moving from commercial convergence to functional convergence. The triple-play bundle of IPTV, Internet and voice is a popular approach to promoting services, but bundle discounts may undermine profitability. Commercial bundling is also easily replicable, with replication by competitors likely to increase pressure on pricing. To avoid a price war of me-too offers, telcos should instead seek to enhance and differentiate their customer experience through functional convergence. Potential examples include cell phone control of PVRs and in-program electronic messaging, both of which could have customer loyalty upsides.
  5. Delivering personalization. In the longer term, telcos are well-positioned to capitalize on personalization, given their experience with centralized resource management (CRM) systems. Service providers must exploit the customer profiling capabilities of their IPTV platforms to deliver targeted advertising that will both enhance revenues and differentiate their offers.

A crowded digital marketspace

As IPTV operators attempt to gain market share from cable and satellite operators, other players are not sitting idle. Figure 1 on page 94 illustrates the territories of the other major players and reveals sources of competitive tension.

While telcos have pursued horizontal expansion, other players have expanded vertically to capture a greater share of the value chain. Media and content companies, for example, have started offering their content direct to consumers over the Internet. Sites such as MTV Overdrive, AOL In2TV and Movielink offer a broad range of content for download, with a variety of revenue models.

Customer electronics vendors have also been expanding across the value chain. Examples include Apple TV, which enables iTunes video content to be watched on the television, and TiVo's partnership with Amazon Unbox, which allows users to download paid content direct to their TiVo.

Meanwhile, Sony has launched the BRAVIA Internet Video Link, enabling consumers to browse and view selected online content for free on BRAVIA HDTV sets. This development is particularly interesting as online content is streamed direct to the TV rather than via the download-then-view model adopted by most online movie rental sites.

In the online space, Internet TV sites such as Joost and Babelgum are emerging with advertising-funded business models bringing free content to users for PC viewing. The risk to pay-TV providers is that this may set a wider expectation that on-demand content should always be available for free.

User-generated content also threatens the conventional IPTV business. Web sites such as YouTube, MySpace and Flickr have been highly successful in connecting creators of niche content with globally distributed audiences. Whether these major portals will move into TV-centric delivery remains to be seen; however, emerging services point to the potential for personalized, advertising-funded channels.

For telcos, online alternatives to IPTV both increase competition and threaten to relegate their role to that of bit-shifting utilities. It is a cruel irony that the telcos' broadband networks are enabling services that could undermine their own fledgling IPTV businesses.

However, the success of online video services may be their own undoing. Explosive demand is likely to cause a capacity crunch that will impair the quality of these online offers. In contrast, ownership and control of the access network enables telcos to assure the quality of experience of their IPTV service. They may also choose to make such capabilities available to their competitors — at a price — and the net neutrality debate continues to rumble on.

Strategic priorities for IPTV operators

Telcos must make the best of a challenging situation, as they are faced with both abundant Internet-based competition and mature satellite and cable competition. They must invest in services that will struggle to make a decent return in the short term. The temptation to over-invest in premium content should be resisted as a good return on investment is unlikely to be achieved. Instead, operators should look to differentiate themselves through the IPTV platform itself. (See Figure 2 on page 94.)

The EPG is at the heart of the user experience for IPTV. It has the potential to become IPTV's killer application. Through the EPG, operators have a vehicle for defining a unique user experience on their platform.

A well-designed EPG guides users to relevant content with minimum effort. Additionally, the EPG can weave deeper into the fabric of consumer's digital lives. For example, operators could integrate IPTV with existing communications services, enabling functionality such as electronic messaging and social networking within the IPTV user interface. A second example would be to extend the reach of the EPG to index and access consumers' personal content, for example photo albums and digital music collections.

In parallel with the development of a compelling IPTV proposition, there is a clear need for operators to invest in customer education regarding the overall value of IPTV. With so much choice in online and digital media, too few customers understand what IPTV has to offer and why they would want it.

Telcos should also assess and understand what opportunities advertising-funded business models could offer to their own IPTV business. The interactive nature of IPTV enables richer, more engaging advertising formats and also enables ads to be targeted to consumers with far greater accuracy than broadcast media has been able to achieve. From both a technology and cultural perspective, operators have a potential lead in this area that they should seek to exploit aggressively.

Longer term, there is a real opportunity for the IPTV set-top box to emerge as the hub of the digital home, enabling a wide range of mass market and niche vertical applications, such as home security and management services, e-commerce applications, and training and education services.

The telco catch-22?

So what is the prognosis for IPTV in 2007? In the near term, IPTV really is a catch-22. Only by accepting this will operators be able to adopt a long-term view and develop services along a strategic roadmap. IPTV does have the potential to become a major player in the pay-TV landscape, but it will be hard to achieve this potential.

The immediate priority is to ensure that IPTV is not perceived as inferior to cable and satellite services. Moving forward, positive differentiation is required if subscriber targets are to be reached. Perhaps more importantly, additional revenue streams must be derived in order to achieve sustainable profitability.

In the long run, telcos' ability to run robust networks will play a critical role in delivering market-leading IPTV services. In the meantime, operators must build capabilities in less familiar areas to create the platform, propositions and user experience necessary to survive in this increasingly competitive market.

Michael Dargue is manager and Bob House and Ed Naef are vice presidents for CSMG Adventis, a TMNG Global Company.