Beware! The telcos are coming to the TV market. What has been the domain of cable and satellite players has a newcomer intent on using its deep pockets to capture market share. Competition in digital television will never be quite the same. However, does the presence of telcos in digital TV pose a huge threat to the satellite industry, or will the status quo remain?

Internet Protocol TV (IPTV) is a reality around the globe, as telcos have launched services in virtually every major market to boost revenues in the wake of declining demand for landline voice service and stiff competition in the broadband market. From BT to Deutsche Telekom to AT&T, telcos have embarked on aggressive IPTV plans as part of their next-generation growth strategies, trying to turn TV from a standalone service into part of a triple-play bundle as they look to secure their position in the digital home.

Embracing New Customer

Traditional Fixed Satellite Services players are making moves in the IPTV space. SES Americom is launching IP-Prime, an end-to-end offering that processes content and TV programming and distributes it via satellite to telecommunications companies and their IPTV consumers throughout the United States. Intelsat has launched

Ampiage, a satellite-based, open-architecture, content delivery and management service targeting North American telcos.
IP-Prime is a vital part of SES Americom’s growth strategy, says Bryan McGuirk, president of North American media solutions. “We see this as a way of transforming the way we deliver and the way consumers use video. It is very important in our view that satellite-based solutions are out in front,” he says. “We are really a wholesaler in this bundle. We deliver a bundle to these markets, [and customers] can deploy IP-Prime in two ways. First, they can integrate it at the head-end the way BellSouth has with something like Microsoft TV, or a smaller telco can take it as a managed service all the way through to a consumer’s set-top box.”

The commercial launch of IP-Prime, is “an important milestone” for SES Americom, and McGuirk has high hopes for the service. “In 12 months time, I would hope to be talking about significant numbers of rollouts in each tier of service that is out there from large markets to small markets,” he says. “I’m convinced we will be talking about advanced services — from HD (high definition) and PVR (personal video recorder) to multi-stream capabilities. We plan to deliver hundreds of channels that are new to the digital dial. We’ve already commercially launched IP-Prime with [National Rural Telecommunications Cooperative] member telcos. I would expect a major telco to be running IP-Prime later this year. They are all getting in the business because they need to. Traditional telephony revenues have eroded so they have to offer new services to their markets.”

“I do think that SES and Intelsat have made a big progress in lowering the entry barriers to [capital expenditure]-limited telcos wishing to offer pay-TV,” says Christopher Baugh, president of NSR. “However, I think that these platforms will need to evolve beyond delivery to further enable telcos to differentiate and contain operating costs. Satellite operators will need to think outside the box with value-enhancing offerings that are an order of magnitude more valuable than self-buy. SES and Intelsat have very good long-term revenue potential, but the model really works if they can have hundreds of geographically dispersed telcos hooked to the service, so they need to further incentive telcos to jump in.”

SES and Intelsat could take their IPTV plans outside of the United States as well, but the companies will have to “validate their models success before looking at doing something similar internationally,” says Baugh. “A number of conditions have made the U.S. a good testing ground for satellite IPTV distribution: a large number of geographically scattered tier 2/tier 3 telcos with less that 50,000 subscribers, good broadband penetration, momentum in HDTV and moderate utilization of C-band capacity. I think there will be pockets of opportunities outside the U.S., but these outsourced models require a risk-sharing approach from satellite operators. Regions with high transponder utilization prompt operators to pursue less risky lease agreements.”
 

New Market Conditions For DTH Operators

The growth of IPTV will change the landscape for direct-to-home (DTH) satellite operators and their traditional competitor — cable. Some telcos are making strong inroads into the TV space. In Spain, Telefonica’s Imagenio service ended March with more than 400,000 subscribers,  compared to a little more than 2 million for DTH operator Digital+. IPTV operators are plentiful in France, with Orange (France Telecom), Free and Neuf Cegetel competing in arguably Europe’s top market for IPTV. “IPTV is now a basic requirement for a broadband service and pricing is very competitive,” says Bob Larribeau, principal analyst and founder of TelecomView.

Club Internet of France, recently acquired by Neuf Cegetel, was the first telco to launch a service based on Microsoft’s IPTV platform. While the IPTV providers are entering a market populated by seasoned competitors, Marie-Christine Levet, CEO of Club Internet of France, believes differentiation will be the key to competing. “We entered the TV market [10 years later than] the cable/satellite offers, but we did it after the launch of our own network so that we can control the [quality of services] from the first to the last point,” she says. “As we were one of the last players to propose a triple-play offer, we have chosen Microsoft as a partner, whose brand is about quality and customer experience. We wanted to create something strongly different. We focused on areas such as a very user-friendly interface.”

Telcos also can use their networks to try and gain an edge in the TV market, says Michelle Abraham, a media analyst at In-Stat. “Telcos have a broadband return channel as well as the ability to delivery unicast streams,” she says. “They can easily make the experience more personal than the satellite providers, which have an easier time delivering the same thing to everyone.”

Some satellite pay-TV operators such as Canalsat in France and EchoStar in the United States have formed partnerships with telcos to increase the reach of their bouquets, but such partnerships may only be a “marriage of convenience” says Paul Erickson, a media analyst at Austin-based IMS Research. “All telcos with IPTV aspirations will eventually attempt to maximize return on their infrastructure investment by grabbing as large a revenue piece as possible,” he says. “In the short term, they serve a need for the satellite players, bringing in incremental revenue and gaining some exposure and experience with the pay-TV business. In AT&T’s example, it also allows them to penetrate their brand into customer households in a pay-TV capacity in a much larger market than they can currently reach via U-verse. Once the majority of their infrastructure footprint has been upgraded to deliver the requisite bandwidth and the kinks with U-verse are worked out en masse, there’s no reason for them to continue working with EchoStar versus selling their own triple play into those households.”

Larribeau expects such cooperation in some markets to continue. “The Canalsat/Orange deal gives Canalsat access to large markets that they have been frozen out of by municipal laws that forbid the installation of satellite antennas in large cities such as Paris,” he says. “AT&T’s clear intent has been to replace EchoStar with its own U-verse IPTV service. AT&T is using EchoStar only as a gap filler.”

While satellite players and DTH players may remain uneasy bedfellows, they will be coming into direct competition more as IPTV grows. Whether these partnerships will ultimately continue once telcos really ramp up their IPTV plans remains to be seen, says  Simon Forrest, chief technical engineer, Pace Micro Technology. “A year ago, I might have said they were complementary, but now that we are starting to see a crossover in services. I think IPTV could become a perceived threat to the satellite market,” he says. “ Its interactive capabilities and always-on return channel in particular offer an advantage over satellite. In the early days of IPTV, it was about all the advanced services you can deliver down the pipe  like VOD (video on demand), but we are now seeing satellite operators also offering such services to the customer, together with telephony and a general move towards triple play.”
 

Leveraging Experience

For satellite pay-TV operators, there are many lessons to learn. DTH players have experience and, in many cases, significant content advantages which will be critical throughout the next five years, says Forrest. “Satellite is already ahead of IPTV in its ability to offer a wider variety of content and technically in adopting HDTV and PVR. They’re the front-runners,” he says. “Compare this with IPTV, which has the network bandwidth and quality-of-service issues to contend with. Most operators are offering VOD services over the network with broadcast TV coming from some hybrid element such as [digital terrestrial TV] or satellite. Telcos need to improve their content offering and get a solid IPTV service in place first before considering what other features they can add via the broadband connection.”

Some DTH players have not been slow out of the blocks to counter the IPTV threat. BSkyB has acquired Easynet and could set a template for other DTH players who want to move away from being a standalone satellite service, says Andrew Barron, COO of Modern Times Group, which owns the Viasat DTH platforms in the Nordic and Baltic regions. “If you look at BSkyB, what used to be a relatively simple video business — buying or making a few channels [and] packaging them and selling them to a single box in the home — has turned into a rather complicated video business where you have lots of devices, channels and all sorts of subtleties in the way you package the devices and not just the channels,” he says. “You have on-demand, PVR, time delay elements, HD, mobile. You have many complications in the video product. It is only going to get more so.”

Modern Times Group was one of the first DTH platforms in Europe to make its content available on IPTV when it signed a deal with Swedish telco B2 in 2004. Gaining sales through IPTV in now a vital part of its armory, says Barron. “I think more of our sales will be on IPTV. More of our subscribers will also be connected through IPTV,” he says. “We will be less a satellite company, and more of a technology agnostic company.”

Patacchini believes DTH operators need to “develop a return channel” or “develop [set-top boxes] where content can pushed for VOD,” he says. “We are at the stage of a breakthrough into new technologies and standards that address the demand for interactivity at competitive prices. WildBlue is showing the way in North America with success. Eutelsat and Skylogic are partnering with Viasat (the U.S company, not the Nordic or Baltic DTH platforms) to launch products in Europe using existing Ka-band capacity to offer TV over Internet Protocol, including time-shift TV, VOD, Internet access and [voice over Internet Protocol].”

But being more aggressive in the DTH space will require more financial investment. “An operator like Sky, DirecTV, Premiere (Germany), etc., likely has the financial resources to support a move to a DTH/IPTV hybrid offering as an answer to the lack of real-time VOD issue,” says Erickson. “For them, IPTV is both a solution to their problem and the way in which telcos are trying to compete with them. For other operators, IPTV is merely the competing technology of the telcos who are potentially trying to take their business via triple play.”

Larribeau believes DTH players cannot necessarily afford to stand still in the market and just be content with being a standalone TV operator. “The satellite companies need to offer broadband-based on-demand services,” he says. “A one-way broadcast only service is becoming obsolete. People want personalization. PVRs help but are not enough. The telcos can offer on demand and interactive services. [Network] PVR services should increase their popularity. The telcos need to focus on providing increased personalization of their services.”

IPTV Playing Both Roles

The bottom line is that IPTV represents “both an opportunity and a threat for satellite players” says Baugh. “For DTH players, telco IPTV is a threat in addition to the cable threat, but for wholesale satellite operators, telco IPTV is an opportunity because they can leverage satellite’s broadcast capabilities to efficiently distribute TV in an IP telco-friendly format to telco headends. So wholesale players with [business-to-business] offerings have new revenue generating opportunities. But at the same time IPTV puts more pressure on DTH offerings to find ways to fight churn.”

The question in the next few years is whether DTH players will be able to leverage their competitive advantages to halt the potential rise of telcos, and can satellite operators monetize this new space and work with telcos to boost their prospects in this space? Early signs indicate that telcos can be successful in this market and satellite operators can certainly not afford to be complacent. IPTV is no longer coming. It is already here, and it presents a double-edged sword to satellite players. Those who respond can find new revenue opportunities. The ones that do not may find their revenues eroding in a manner similar to what the telcos are seeing in the fixed voice arena.

Delve deeper into IPTV at the SATELLITE 2009 Conference with IPTV: Market Assessment.  For more information on the Conference, please visit www.SATELLITE2009.com.