In some of the world’s largest TV markets, IPTV is showing strong gains and beginning to make real headway in the market. While satellite remains an incredibly efficient infrastructure for delivering television, the telecommunications companies, which are cash rich, gradually are finding their feet in the TV market and looking for ways to boost their competitive position still further.

The news that France Telecom is talking to satellite operators about potentially launching a (direct-to-home) DTH service should come as no surprise, since telcos are looking more and more at satellite to help improve their position in the pay-TV market. In the United States, speculation continues about AT&T making a move for EchoStar, and Verizon has just surpassed the 1 million mark for customers for its Fios TV offer. All this indicates that telcos are now looking to take their IPTV offers to the next stage, and it is clear, that some are looking at satellite to complement their existing offers.

Numbers Game

In some U.S. markets, telcos are more than holding their own against satellite and cable competition. Verizon added nearly 700,000 subscribers in the 12-month period that closed at the end of September. In comparison, EchoStar added 940,000 subscribers in the same period, and DirecTV added 882,000 subscribers.

In Europe, the markets that stand out in terms of IPTV are France and Spain. While Canalsat’s numbers are hard to judge due to completion of its merger with TPS in early 2007, France Telecom has had an impressive start in the IPTV arena, adding 550,000 subscribers to close September with a total of 975,000. In Spain, Telefonica had nearly 470,000 subscribers for its Imagenio service, adding close to 165,000 subscribers in the previous 12 months. In the same Spanish DTH operator Digital+ added only 40,000 subscribers.

“In some markets, telcos have done very well,” says Neil Gaydon, CEO of Pace Micro Technology, a leading set-top box supplier to DTH operators. “If you look at France Telecom, they have done very well. Telefonica has made good progress. In others, it has been slower than expected. Some things are to do with the infrastructure, some to do with getting the technology stable. One thing you can’t ignore is the amount of money the telcos have and the long-term commitment to making this work. It will depend, market-by-market, on the strength of the telco, the strength of the telco brand and the strength of their commitment to offering pay-TV services.”

Innovations being introduced by the telcos is helping them make the inroads, says Michael Philpott, a telecoms analyst at Ovum. “BT in the [United Kingdom] integrated free digital terrestrial with IPTV interactive services and has just announced it will use Microsoft’s Xbox as an alternative [set-top box]. Verizon in the [United States] has perhaps the most technically advanced TV offering, based on its fiber-to-the-home network. Fastweb in Italy was probably the first in the world to offer a TV only service over DSL.”

Bob Larribeau, a media analyst at TelecomView says, “I think that France Telecom, Free and Neuf Cegetel have had excellent results in France. The growth of Telefonica’s IPTV service has slowed over the last year or so. It appears to me that the company is holding it back to some degree. BT in the [United Kingdom] is just getting started with an on-demand-only strategy that has a difficult business model associated with it.”

Competition In France

France remains one of the most interesting markets to look at when examining the pay-TV dynamics involving satellite and IPTV. This was only underlined with news that France Telecom could launch a DTH service in 2008 to complement its IPTV offering. It is not just France Telecom, but other telcos such as Neuf Cegetel and Free are making an impact. While most of these telcos have partnerships with Canalsat to broadcast some of their channels, their growing strength means their offers are becoming more attractive in their own right.

“When you look a the basic television offers from Orange — Free — you have some channels coming from Canalsat, but it is from the basic offer from Canalsat,” says Florence Leborgne, a media analyst at French telecoms and media consultancy Idate. “What is new in this space is the basic offers of IPTV were originally around 30 to 50 channels. You could then subscribe to a more developed package through Canalsat. But now the basic offers are well-developed, so you have more than 100 channels in the basic package for very little cost. You could either subscribe to Canalsat or some small packages proposed directly by the telecoms operator. You will find the full Canalsat offers through IPTV, but you can have some options independent of Canalsat.”

With this growth, the competitive advantage for Canalsat in the French pay-TV market “is decreasing,” says Leborgne. “The main advantage of satellite is the fact it can reach people in rural areas, which is not the case for IPTV now. But maybe in the future, IPTV will be able to reach some new parts of the country. For the moment, satellite will be the only technology to reach some specific parts of France. That could be the case for quite some time. There are still large parts of France which are rural.”

Georges Penalver, executive vice president in charge of FT’s strategic marketing and Orange Labs, says the operator’s ambition in the TV market is to offer to clients TV and video-on-demand programs and services on all devices, including TV sets, personal computers and mobile units. “The competitive advantage of satellite is obviously for the time being the possibility to have a national coverage, nevertheless IPTV is best suited to get HD (high-definition) services in urban areas where the installation of a dish may be difficult,” he says. “Orange offers also HD , which satellite cannot offer. We were the first in the world to launch MPEG-4 services and HD channels on ADSL, and we already offer four HD channels to our customers.”

Leborgne expects telcos throughout Europe to start putting more pressure on the satellite players, and there already is evidence of this with telcos taking a more proactive approach towards having their own unique content. “These telcos will try to enter in more direct competition with satellite players,” she says. “When you compare Telecom Italia, Orange and Telefonica, all of them are trying to develop their own content. Telecom Italia has its own subsidiary, Telecom Italia Media, Orange has its own content division. Even in Spain, Telefonica has a strong will to develop its own content strategy. If they manage to develop their IPTV subscriber bases, we can see the emergence of new channels proposed directly by these telcos. These will compete more with the satellite players, and then they may look to be more competitive in terms of content rights, not just [pay per view] and but also in developing their own movies and sports channels.”

Growth In U.S. Market

Verizon’s Fios TV offer is proving popular in the United States, and Larribeau believes this will become an interesting market for pay-TV competition “I think satellite is most under threat in North America,” she says.

Verizon is pacing this market, says Larribeau. “Verizon is doing very well in the [United States] and is on its way to becoming a leading, if not the leading, IPTV service provider globally. AT&T has been struggling, apparently, with its technology choices. It appears that its Microsoft software was a significant issue at the beginning of 2007. It has also appears to have had issues with its VDSL technologies, including exploding batteries. ”

According to Jerrlyn Iwata, director of programming for Verizon Fios, the operator has very strong “brand equity” and that quality of service is already proving a key differentiator. “Many customers tell us that there is a noticeable and positive difference in picture quality between Fios TV and that of their previous service provider. Word-of-mouth has been a tremendous and invaluable sales tool for us.” The operator also plans to increase its HD offerings. “There’s no doubt that satellite providers have raised awareness and interest in HD programming, but our customers expect us to lead in this category,” she says. “We offer around 30 HD channels in most of our markets today and will continue to add HD channels this year, bringing us to 150 HD channels by year end.”

In terms of how the U.S. pay-TV landscape will change, Iwata says, “The next two years will certainly be years of innovation and change. I think we will see the continuation of trends that are already in motion, and these trends may be tempered or accelerated by the regulatory and economic environment,” she says. “Technological advancements will continue apace and will create new and different ways for consumers to access and consume content. This will drive usage and engagement. Content will move across platforms bidirectionally, not only from the TV to the Web but also from the Web to the TV. I think we will also see more development on the interactive front, both utility- and entertainment-oriented features, and that the most successful of these will be closely tied to the underlying programing.”

In terms of whether AT&T may make a move for EchoStar and the issue of telcos using satellite more, Larribeau says, “I have expected that AT&T would do this for a long time. I think it would be a good move for both companies. We might see something similar in France, but that is less clear to me.”
But Michelle Abraham, a media analyst at U.S. consultancy In-Stat, is among those casting doubts on this possibility. “I don’t think regulators will look too favorably on telcos acquiring a satellite provider when they are a competing video provider,” she says. “Besides a satellite network means a separate network to maintain, so I think partnerships are more likely.”

Leveraging Advantages

“IPTV’s big advantage is that it is inherently two way, while satellite is inherently one way,” says Larribeau. “Satellite will need to develop relationships with the broadband suppliers to survive in the long run. These relationships may take two forms. The satellite companies may resell broadband services and integrate them with their satellite offering to provide two-way capabilities. The other approach will become content wholesalers that provide broadcast channels to the IPTV broadband retailers.”

The TV market is changing and satellite players have to keep abreast of the changes, says Philpott. “It is not just IPTV but Internet TV and social networking sites, mobile TV, and consumer electronic equipment vendors that are changing how people will view TV and video content in the future,” he says. “So satellite players do not necessary have to switch to IPTV, but somehow they must build similar functionality and capabilities into their service offering if they are to maintain market share in the medium to long term. BSkyB is certainly one of the market leaders — not just what it is doing in broadband — but in its thinking about a multi-screen services and working with consumer electronic vendors.”

For satellite pay-TV operators, competing against the IPTV threat means become a more rounded player and not relying solely on television service as a revenue producer. For someone like DirecTV, with Verizon making strong waves in the market, entering Verizon’s traditional space has become vitally important. “I think figuring out the strategic question of our broadband strategy is one of the most important issues facing any player in this space,” says Evan Grayer, vice president for broadband at DirecTV. “It is clearly important, but it does not necessarily mean there is one solution. Is the only solution to have your own broadband infrastructure? That is a potential answer, but that is not necessarily the only answer. Are partnerships the way to go? That is one potential answer. But paying attention to this question and having a clear and executable strategy is definitely important to DirecTV. We have a variety of options open to us. We have DSL, power lines, wireless, etc. Could they morph into one dominant approach going forward? Yes, that is a possibility. But that decision has not been made yet. Right now, we have the benefit of strong relationships with the telcos and a handful of long term options open to us.”

Bottom Line

Recent developments, particularly in France and the United States, indicate that the telco threat to satellite is growing, with some telcos already measuring their TV subscribers in the millions. France Telecom, while unlikely to launch a direct DTH rival to Canalsat, nevertheless is likely to use satellite to bring its TV services to areas where its telecoms network cannot serve. The more telcos subscriber bases build, the more likely they will bid for stronger content, driving up the cost of this content for all pay-TV providers. While in many markets, satellite and IPTV remain a natural complement to one another, it is clear that in some markets telcos are progressing at a healthy rate and could be ready to up the ante against the satellite and cable competition.