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Current Issue: November 2007
Conflicting IPTV visions
Operators pursue radically different strategies to attract IPTV customers
by Iain Morris
It is sometimes said to be the greatest challenge facing telcos today: how to shake off their decades-old reputation as uninspiring utilities and recast themselves as exciting new media companies for the Internet era.
The launch of IPTV, with its promise of on-demand content over a truly interactive platform, is the most visible sign operators are trying to make this change. For that reason, investors may judge the success or failure of an operator’s IPTV business as a critical determinant of its future prospects.
The stakes, then, are enormous. In some parts of the world operators have spent billions of dollars building high-speed networks to support their IPTV services. Others are spending just as much on the content that will form the bedrock of these services. For many operators IPTV could become a make-or-break strategy.
So it is perhaps strange there is no consensus on that strategy. Opinions on how to guarantee the success of IPTV differ hugely–even among operators introducing IPTV in the same geographical market. What might be regarded as the trump card by one provider is seen to be of little consequence by another.
With IPTV still in its infancy in most countries, investors will be watching intently for early indications of how the drama could unfold, and which operators could finish on top.
The me-too service
The United States is one of the most closely monitored IPTV markets in the world. AT&T and Verizon, the country’s two largest providers, do not overlap much geographically, but they compete in areas where cable companies have long had pay-TV customers all to themselves. Their strategies for luring those customers away contrast markedly.
Verizon, for a start, does not even like to describe its FiOS-branded service as IPTV. Partly this is just a technological truth–the operator uses digital broadcasting for its pay-TV channels and IPTV for on-demand content only–but it also reflects the way Verizon positions the service.
While some providers see the interactivity that comes with IP as their big advantage over other pay-TV operators, Verizon prefers to compete against its cable rivals on their own terms. Indeed, if it had a pay-TV motto it would probably be "anything the cablecos can do, Verizon can do better."
What does that mean in practical terms?
Verizon says 99 percent of its customers pay US$42.99 a month for its Premier offer, which gives them around 200 channels and access to a video-on-demand (VoD) library of more than 8,600 titles. Most of that content is not exclusive to Verizon, but Verizon claims to make it available more transparently and at lower cost to the customer than its competitors.
"With cable companies you buy higher levels of service and get more channels as you move up the chain," says Jerrlyn Iwata, who is responsible for content strategy and acquisition at Verizon. "With FiOS, all the channels are in the Premier offer."
A cable customer would typically pay US$15 to US$20 more each month than a Verizon customer to receive those same 200 channels, Iwata says. That means special-interest channels, such as college sports, are out of reach to all but the heaviest-spending cable customers who opt for top tier service.
But how much is Verizon spending to beat the cablecos at their own game? Its investment in a fiber-to-the-home (FTTH) network alone is projected to reach US$23bn by 2010. If content-acquisition costs are equally draining, is there not a big risk in giving FiOS away so cheaply?
Although tight-lipped on the budget for content and marketing, Iwata says Verizon has been able to assume an aggressive stance in its negotiations with program and content providers.
"We provide programmers with multiplatform partnerships and that changes their perspective of the business entirely," she says. "If you can reach consumers on television, on broadband and on mobile, you create more opportunities for advertising and customer transactions."
The FiOS service on mobile phones is already proving popular with mainstream IPTV customers, Iwata says. As for the mainstream pay-TV business, it appears to have performed well in recent months. Last quarter, net customer additions averaged 2,600 a day, giving Verizon a total of 515,000 FiOS customers at the last count, while fixed-line ARPU (excluding former MCI consumer markets) rose 10.9 percent over the same period in 2006 to hit US$57.47 a month.
Interactivity on tap
Verizon’s IPTV strategy is shifting. By 2010, when it hopes to have captured between 3 million and 4 million customers, the operator largely will have phased out its digital broadcast overlay. At that point, when most elements of the FiOS service are delivered using IPTV, interactivity could become a lot more important.
"At the moment there is no evidence interactivity is a customer acquisition tool," Iwata says. "But as customers get used to interactive services that will change."
Accordingly, Verizon is slowly ramping up its range of interactive features, which now includes news and traffic information accessible at "the touch of a button." As it does so, its main telco rival is taking a different view of the value of interactivity.
Unlike FiOS, AT&T’s U-verse service is IPTV through and through. Although AT&T is spending less on IP infrastructure than Verizon–investing some US$6bn in a fiber-to-the-curb (FTTC) network–it transmits all components of its service over that network, from VoD content to program channels. With service costs ranging from US$44 to a stinging US$129 per month, U-verse is clearly not trying to undercut the cablecos on price. So why would a consumer choose the service over a rival pay-TV offer?
"Ultimately it’s about delivering a better TV experience to customers," says an AT&T spokesperson. "The IP platform enables features that set U-verse apart from cable, and there’s more to come."
Like Verizon, AT&T does not charge extra for interactive services, but it does claim interactivity is a unique selling point that has proven to be the most popular aspect of U-verse. That could be interpreted as an attempt to justify the high package prices.
So what interactive features do customers get? At presstime, AT&T was promoting its U-bar, which, it says, brings Internet-like content to the TV screen in the form of customized weather, stock, traffic and sports information. It also offers a search facility called Yellowpages.com TV, a gaming service in conjunction with Yahoo!, and remote access to the digital video recorder (DVR) via the mobile phone. The range appears to be far greater than what is available to Verizon customers.
There is evidence AT&T’s marketing is beginning to resonate with consumers. In its investor briefing for the second quarter of 2007, AT&T said its U-verse subscriber base had risen from 13,000 to 51,000 in the three months leading to the end of July. On Sept. 5, just two months later, it was laying claim to 100,000 customers.
Both Verizon and AT&T, then, seem to be winning over customers with fundamentally different strategies. Sustaining that rate of growth in years to come may depend on each operator’s ability to do what the other is already doing. For Verizon, that could mean catching up with AT&T on the interactivity front. AT&T, meanwhile, might have to prove it can support as much content as Verizon using what some claim is inferior, albeit less costly, IP infrastructure.
New IPTV models
As Verizon and AT&T pursue their conflicting IPTV strategies in the U.S., operators in other parts of the world are investigating new business models for the service.
Telekom Austria is, arguably, at the forefront of this innovation. Although one of Europe’s smallest incumbents, serving a domestic market of just 8 million people, Telekom Austria has to confront one of the most competitive pay-TV environments in the world, with a raft of satellite and cable competitors vying for the TV customer’s wallet.
"If we offered just a standalone TV service in a TV market that is 50 years old then the whole IPTV investment would completely fail," says Helmut Leopold, head of platform and technology management for Telekom Austria. "We will have to position it as something new."
Leopold is also chairman of the Broadband Services Forum, an industry body comprised of representatives from IPTV operators, content providers and equipment manufacturers that is committed to exploring new IPTV opportunities. So while he seems to shirk the me-too approach followed by Verizon, he sees much more to IPTV than just content plus interactivity, describing his vision as a "completely new business model for the content industry."
What does that entail? Leopold talks glowingly of a "real" VoD service, offering movies to dedicated pay-TV customers at the same time they open in cinemas for an "expensive" fee. He is equally enthusiastic about opportunities to self-produce special-interest content at lower cost or to collaborate with other operators during discussions with content studios to maximize negotiating power.
"We need better cooperation between players that have so far been completely separated," he says. "The aim is to accelerate market deployment and generate new ideas."
Such ideas could stimulate interest in IPTV, but they currently raise yet more questions about its commercial viability. Could exorbitant content-acquisition costs eventually bankrupt operators moving into IPTV, as some analysts have suggested? Will consumers stump up more money for a new blockbuster simply for the privilege of watching it at home? Is there any real market for niche, low-cost content–the so-called "long tail"?
And which operators will dare to find out?
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