Reviving the fixed line: Part II

This eighth edition of the annual Exane BNP Paribas-Arthur D. Little joint report on telecom operators focuses on the move by operators into content. It drew three principal conclusions. On Friday   we looked at the first, the success of triple play, here we look at the second main issue, content.

The content revenue opportunity is neither irrelevant to telecom operators nor game-changing. By 2015, we estimate that the combined revenues from pay-TV, video-on-demand and advertising could potentially amount to the equivalent of 7% of incumbents' 2008 revenues, or €2.7 per fixed line per month.

As the table below shows, this could increase their 2008-2015 top-line CAGR by 1%.

Figure 1: Summary of the media revenue opportunity for fixed incumbents*

* In Germany, France, UK, Italy, Spain, Netherlands, Belgium, Portugal and Austria
Source: Arthur D. Little, Exane BNP Paribas estimates

Pay-TV accounts for more than half of this revenue opportunity and it is the most tangible part. Our model assumes:

1) increasing pay-TV penetration in Europe (gains of 5-25% by 2015 depending on the country);

2) incumbent operators grabbing 10-30% market share on pay-TV depending on the country;

3) pay-TV ARPU of €10-15/month for these players, assuming no investment, or only a small one, in content.

Video-on-demand is a promising but very crowded market, contested by all access players and many internet, IT hardware and media groups. Telecom operators may have a role to play in local and interactive advertising (a way to subsidise services and content), but our revenue estimates for both video-on-demand and advertising are low.

Paying for premium content is not the solution

Investing in high premium content to compete head-to-head with premium TV operators is a risky strategy for telecom operators. We show that a "˜high premium' content strategy, entailing investments at a comparable level to those of premium TV operators has a negative financial risk/reward for operators.

This is due to the high barrier to entry presented by content costs spent by existing pay-TV players (up to €2 billion per year per country). Such costs cannot be amortised on a telco's TV customer base.

A "˜light premium' content approach requiring only 15-25% of the content investment of a premium TV operator, offers a more balanced financial risk/reward for incumbent operators, while it still enables them to grab indirect benefits such as fewer line losses and a rationalisation of the broadband market, as alternative carriers cannot afford such a strategy.

Figure 2: Summary of the relative costs and benefits of different content strategies
Source: Arthur D. Little, Exane BNP Paribas estimates

To improve the economics of a premium content strategy, some operators are tempted to adopt a "˜closed' model whereby they subsidise content with access. However, such a model will not last very long, in our view, as many forces will favour "˜open' models:


"¢ the arrival of IPTV platforms fragments the pay-TV market, so content providers are willing to distribute their content on as many platforms as possible rather than to favour exclusive content deals with one operator;

"¢ companies from other parts of the value chain are partnering actively to develop attractive, easy-to-use internet-based television services for the TV screen, for example,  hardware groups (TV and digital video recorder manufacturers, gaming companies), content owners/TV channels and internet players. These will bypass the operators' "˜closed' services built around their proprietary boxes;

"¢ in many countries including the UK, France, the Netherlands and the US, regulation is pushing in the direction of net neutrality.

So what can operators do‾

They can take the lead in the development of the TV of the future: easy to use innovative content-related services aimed at enhancing the customer's experience, such as HDTV, catch-up TV, and so on.

Operators can develop such enhanced TV services internally, or through appropriate partnerships with other players along the telecom-media-technology value chain:

1) existing pay-TV packages;

2) local content groups/TV channels, bypassing to some extent the pay-TV packages and creating a differentiation versus the global content served by internet and hardware leaders;

3) Internet players seeking to get content on the customers' TV sets by all means;

4) software and hardware companies bringing their development capabilities;

5) and even gaming groups, using the gaming console in lieu of a set-top box for specific market segments.

Operators are partners of choice for all these players, as they bring unique assets to the bargaining table: access networks, the boxes, billing relationships and distribution networks - in short, access to the customer.

Such a proactive partnership approach, which is shared by many operators we met, will also allow operators to fend off potential commoditisation threats. The current economic environment gives operators more time to organise themselves, because, in our view, the recession will hinder the advertising-funded internet leaders and the cyclical hardware manufacturers in rolling out their development plans.