By Mark Holmes

Industry executives increasing their portfolios with Euros and British Pounds witnessed dramatic changes in the European broadcasting arena, a phenomenon that may result in major ramifications for satellite businesses. Consolidation, interactive applications and financial upheaval surfaced, and all eyes are now following the changing programming landscape as it continues to evolve in Europe.

In Spain and Italy, for example, recent consolidation occurred within the satellite pay-TV platforms (Telepiu and Stream in Italy and Canal Satelite Digital (CSD) and Via Digital in Spain). In the cable industry, heavyweight players NTL in the United Kingdom and UPC struggled with financial issues. In terms of Digital Terrestrial Television (DTT), Freeview in the United Kingdom continues to lead the way, but other countries are now looking to implement DTT alternatives for European consumers.

HDTV

For satellite operators, the changing landscape is offering new possibilities, which in an era of tough market conditions will be vital. In particular, FSS executives will look toward High Definition TV (HDTV) for new revenue opportunities in the European broadcasting arena. Giuliano Berretta, Eutelsat’s CEO, and Ferdinand Kayser, SES Astra’s president and CEO, outlined some of the new growth opportunities for European satellite broadcasting operators. Both see HDTV as having strong potential. "There are a number of sports events coming up, such as the European Football Championships, the 2004 Summer Olympics and the 2006 Winter Olympics, which will attract a substantial audience. They could be the showcase for this type of application," says Berretta.

Kayser adds, "Free TV and pay-TV operators recognize HDTV as a possibility to gain a competitive advantage. They are tempted to produce more in HDTV. We also see interest from the hardware industry. We see HDTV as a possible separator of satellite from cable and DTT. HDTV might be possible on cable. It is extremely possible on satellite."

Tim Sheppard, director of strategic development at Tandberg Television, sees HDTV as a new revenue stream for satellite players. "One area that might be of interest is the high-definition area, where if you asked me a year ago, there was not the slightest bit of interest in Europe at all. Recently, we have talked to quite a few broadcasters, not just satellite ones but terrestrial operators as well, and they are now seriously considering their plans for HDTV. There has been an evolution to larger screen TVs, more Plasmas, etc. People are beginning to think about HDTV," he says. "There are a serious number of projects worldwide in the digital cinema arena, which are trying to compete with either the home cinema or with the digital cinema. I suspect there will be some high-definition channels next year."

Core Markets

While further expansion into new applications are integral for Eutelsat and SES, generating revenues from the Western Europe juggernaut region will still be a key. The consolidation in Spain and Italy can be interpreted that in most markets there is room for only one satellite pay-TV platform. In Spain, it could also spell bad news for either Hispasat or SES Astra. Via Digital’s operations had been based on Hispasat and CSD on SES Astra. While Sogecable (the owner of the merged platform, to be called Digital+) has delayed a decision on which satellite platform to base Digital+’s operations, it seems unlikely that it will continue with both SES Astra and Hispasat in the long-term.

Yet, despite the fact there are likely to be fewer satellite pay-TV platforms, both Berretta and Kayser believe this is good news. "The business model of [the] digital pay-TV operator is such that it is very difficult if not impossible for the number two player to survive. That means there are considerable pressures to merge competing platforms. This means in the end lower prices for the rights holders of premium content. In continental Europe, the prices for sports and entertainment rights have gone down in the last 12-18 months. This then enables the operator to have more money left for the marketing side to drive subscriber numbers. I do not believe this has an impact on the satellite operator," Kayser says.

Berretta adds, "I believe consolidation can benefit the overall business in Italy. We have seen BSkyB be extremely successful in the United Kingdom: their results are good and they reach into a large part of the population with a strong program line-up. In the particular case of Italy, Sky Italia may even generate more demand for capacity than two competing operators."

Others are not so optimistic. Mark Smith, CEO of BT Broadcast Services, says, "There is going to be a big challenge with the number of consolidations, which will effectively cause transponders to be made empty. I believe that will cause price pressure on those transponders that are not being filled."

Struggles Abound

Even with business opportunities growing, satellite pay-TV operators have had their struggles in Europe. In 2002, both CSD and Via Digital in Spain lost subscribers. Premiere in Germany rebounded toward the back end of the year and has been the turnaround story in the European satellite-pay-TV industry. Yet, it still faces a struggle in a market where Free-To-Air (FTA) competition is intense. Canal Satellite and TPS showed modest subscriber gains in France. Ironically, Telepiu in Italy had the strongest growth rate of any satellite pay-TV operator in the operators surveyed in the table below. This trend seems to indicate that News Corp., the majority owner of combined Telepiu/Stream platform along with Telecom Italia (TI), may well have gotten itself a great deal. News Corp. and TI were already the owners of the Stream pay-TV operation when they acquired its rival, Telepiu, in June 2002 from Vivendi Universal. The deal was completed earlier this year. The combined Telepiu/Stream platform has been renamed Sky Italia.

There is very little cable in Italy, and with still a high number of viewers using illegal smart cards, the potential for News Corp. to grow a highly profitable platform is there for all to see. Yet, operators are showing slow progress. BSkyB in the United Kingdom, which still remains the benchmark, added close to 850,000 subscribers in 2002.

While satellite pay-TV operators continue their paths toward profitability, the broadcasting landscape could see some interesting changes. Cable operators beginning to recover and getting their financial houses in order may pose more of a threat to satellite pay-TV operators going forward. If this trend is mirrored in Europe, satellite pay-TV operators could come under more pressure. The United Kingdom, which is arguably one of the most advanced broadcasting markets in Europe, has seen the emergence of a credible DTT alternative, "Freeview." This service, which comprises around 30 channels, means consumers can get a multichannel digital TV service without incurring monthly charges. The only cost is to buy a Set Top Box (STB) for around GBP100 (U.S. $157) to access the service. Freeview has seen significant growth rates with now more than 800,000 users in the United Kingdom.

With a number of DTT initiatives taking shape in Europe, an alternative to cable and satellite is being found in digital television. Despite its potential to be a threat to satellite, Berretta believes DTT also offers a great opportunity. "We are a candidate to be the transport mechanism for DTT in countries where this develops. Rather than just being the transport mechanism to terrestrial transmitters, what we are proposing is to deliver the signal direct to consumers who have no digital terrestrial reception. This means that we can simulcast direct-to-home and to transmitters," he says.

Smith adds, "I am not sure where the jury is on DTT. I think it will happen. I think it will happen in a very sporadic way. I don’t think it is a major threat to the satellite industry or solutions providers of bouquets because they are to some extent quite well-integrated already."

Interactivity

Another area of opportunity for satellite operators is the growing demand for interactive TV services in Europe. Operators are using more satellite capacity for interactive applications. One of the major issues is the implementation of the Multimedia Home Platform (MHP) standard. The standard enables digital content providers to address all types of terminals ranging from low- to high-end STBs, IDTV and multimedia PCs. MHP STBs have the potential to dramatically increase the number of interactive applications available to the consumer, which spells good news for the satellite operator. Kayser calls the implementation of MHP boxes a classic "chicken and egg" problem. "I would summarize the situation as the following. The development companies who are supposed to launch and develop MHP-based interactive services say it isn’t worthwhile investing in this unless there are two million MHP enabled boxes in the market. The industry and operators say, ‘Why should we go and deploy MHP boxes when there are not applications?’ This has been going on for years," he says.

Others Look To Profit

While satellite operators look for new ways to boost revenues, other players in the value chain are also looking to take advantage of growth opportunities in the broadcasting sector. "The broadcast industry is changing and it is moving [away] from the traditional model of very, very high bandwidth point-to-point to video file transfer, streaming, people taking niche channels on platforms at lower bit rates," says Smith.

He gives an example of the possibilities for video file transfer. "Video file transfer will become more and more important to the broadcast support industry. We have launched international facility lines. So, for those production houses who want to, for instance, communicate directly between Los Angeles and London, they can on-demand, have 270 Mbs of capacity, which they can lease by the minute or permanently. It depends on what they need it for," he says.

Smith also says the combination of satellite and fiber solutions will play a key role for channel providers in getting content to more people. "It is a great way we can effectively give a customer additional eyeballs and advertising revenues. If you take someone like Hallmark, what we do for them is take from Denver via fiber all the way back into Europe and then we uplink it onto a DTH platform in Europe, be it Sky or Hot Bird. The beauty for Hallmark is that they don’t need to change the programming whatsoever, but they get the extra eyeballs that are on those platforms," he says. "Our value add is to build a solution for our customer that makes him and his marketplace either get more eyeballs or more geography so that his advertising revenues or his PPV revenues go up. The beauty of what we are doing is that we are just reducing the start-up risk costs to these new channels."

One area of programming that is on the increase is the demand for ethnic programming. Roger Bolton, satellite segment manager, Tandberg TV, says this is potentially another key area. "There are now quite a few broadcasters moving into the supply of ethnic programming for their expatriates. In the United States, we always think of DirecTV and Echostar as the only two DTH broadcasters. Actually, Globecast has a 65-channel arrangement in the United States where they are providing ethnic programming. If you look at the Sky platform you will see quite a lot of ethnic content in some of the regions there. We are finding people who are now looking at systems, which would not have been viable four to five years ago in terms of set-up costs, that offer ethic content, educational content, specialist content, etc.," he says.

Thematic channel growth is also key for satellite operators to succeed. Kayser says, "Digital pay-TV operators are sales and marketing driven. If they want to generate additional subscribers, they have to go to the market with marketing campaigns. These marketing campaigns, in order to acquire new potential subscribers, have to be based on new products and services. This means new thematic channels [and] new interactive services. We do not anticipate major big platforms coming up in Europe, but existing platforms having a demand for incremental capacity depending directly on the development of the numbers of subscribers."

Technology Advances

While increased satellite and fiber solutions are increasing opportunities for broadcasters, technology advances will also play an important role. "A lot of broadcasters bought their equipment at the beginning of digital satellite television and we are almost at the stage where a whole host of satellite broadcasters are looking to upgrade to more up-to- date equipment. When broadcasters initially started pay-TV services over satellite, they were putting maybe four to six channels on a single transponder. Now, we know of people putting up to 18 channels on a single transponder. That has been facilitated by the improvements in MPEG-2 encoding technology," Bolton says.

David Mahlab, president and CEO of Scopus Network Technologies, adds, "A single transponder can now hold up to 16-18 digital channels. In terms of content distribution delivery, the market is stable. You can see satellite operators and broadcasters migrating from their first and second generation equipment to state-of-the-art compression systems."

The emergence of MPEG-4 technology is also boosting the prospects for satellite operators. Berretta comments, "In terms of MPEG-4, with the Open Sky platform we are not only dealing with Internet via satellite. We also have a video streaming capability where we transmit a number of channels in MPEG-4, which offers an even higher compression rate than MPEG-2. You can put 40 channels in one transponder. It may not be the same quality as MPEG-2, but it is still a very good quality. MPEG-4 is a promising technology which is best suited at the moment for events that do not need the big screen experience."

The Demand Is Out There

While the European broadcasting markets have suffered some tough times in recent months, satellite will continue to play a central role as the digital TV revolution takes off in Europe. A recent Datamonitor research report, Beyond the STB: New Device and Service Opportunities, states that in terms of European digital TV, satellite accounted for 78 percent of digital households in Europe in 2002.

The consolidation of satellite pay-TV operators in Spain and Italy could make those players stronger, both from a financial and operations perspective. This phenomenon will have a domino effect in terms of new channels and content for these platforms. Such a scenario can only be good news for satellite operators and other players in the value chain.

The demand for pay-TV services is out there. BSkyBs’ subscriber growth is evidence of this, if any were needed. Satellite pay-TV operators will have to compete effectively against both cable players, as well as the emerging threat of DTT, but they are still well-positioned in major European pay-TV markets, especially now that consolidation has taken place. New opportunities, such as HDTV, will also offer satellite operators plenty of incentives in the broadcast arena. As a result, the first decade of 21st century promises to be an interesting time.

Mark Holmes is senior editor of two PBI Media newsletters, Inside Digital TV and Interspace.