Senior Consultant, IDATE
Internet is becoming not-so-free
Internet Giants are increasingly finding themselves under scrutiny for unfair competition and tax issues – what was once regarded as a free OTT ecosystem is now facing regulatory challenges. Internationally operating players working in various domains and geographical locations are complicating this regulatory challenge, with different cultures and market conditions requiring different approaches.
While this past decade has seen a completely new economy evolve based on the Internet and OTT players (remember, Google’s IPO was only just over 10 years ago), new challenges have also been created by this phenomenon, one of which is regulation. Until recently, new Internet services and business models were being actively encouraged, with the aim of helping to galvanize the economy; however, there is now simply too much revenue involved and more regulatory intervention is becoming inevitable.
Major OTTs diversifying into various service domains
Source : IDATE, The Future Internet in 2025, July 2015
The domains in which regulation on OTTs is currently gathering the most urgent attention are the fields of taxation and fair competition, the regulatory needs being brought about by the sharp rise of leading sharing economy players such as Airbnb (accommodation rental platform) and Uber (car sharing application), where users can offer a spare room (Airbnb) or a car ride (Uber) between end users as opposed to using standard (more expensive) channels such as hotels and taxis. Such players are not required to work under the same rules as those of their traditional counterparts; licenses are not needed, insurances are not taken care of and rigorous safety concerns are not necessarily required. Further, tax issues are often overlooked, with many sharing economy participants not even aware that there is tax involved; they simply do not have the mindset that they are participating in a revenue-generating business, but are simply “earning a few bucks” in a relatively hassle-free manner. This then leads to an unfair playing field, giving the OTTs an unfair advantage over their traditional counterparts.
The regulatory response to these players currently varies from one country to another, or even from state to state in the larger countries.
• Citing the unfair competition landscape, Uber has been banned outright in Spain, whereas in Italy the application is allowed and the noise coming from the Italian government appears to be supportive of Uber, considering modifications to their regulation to make it easier for them. These are exceptions to the rule, however, with most governments placing an intermediate ruling whereby Uber is allowed but only for licensed drivers.
• Tax collection remains a hot topic, especially for Airbnb where local transient occupancy taxes (“hotel taxes”) are compulsory for all listings yet collection remains difficult. While initially Airbnb stressed that they were not responsible for the collection of the taxes, their stance has softened recently and since the latter part of 2014 they have started to automatically collect and remit the hotel tax in some areas, such as San Francisco and Amsterdam. It is understood that they are continuing negotiations with various other cities also.
It should be noted that while it is these startups that are causing the OTT regulation debate of tomorrow, the large Internet giants and in particular Google are also under scrutiny for unfair competition and tax issues. However these issues have been under investigation for a number of years and are evolving, albeit slowly, with occasional developments from time to time. The same can be said for regulatory debates on the likes of net neutrality, data protection and intellectual property (copyright) issues.
Europe is still debating over which approach to adopt
Such developments in the debates often come from the same countries, with the likes of the US, France, Germany, Spain and the Netherlands often ahead of the rest when proposing and/or enforcing OTT regulation. In addition to what has been mentioned above, net neutrality has continued to make headlines. While Europe is still debating over which approach to adopt, the United States has recently made a bold move by reclassifying broadband as a telecommunications service, thereby paving the way for strict net neutrality regulation. In Europe there are moves by the European Union as a whole, such as the proposed reform of the data protection directive, but some countries stand out more than others. The Netherlands, for example, were the pioneers of net neutrality deployment and the first country to introduce an “Airbnb law”, legalizing the business in exchange for tax payments. Germany has been strict on Uber, at one point banning the service as in Spain, although this motion has been overturned (for now), while both Germany and Spain have ruled that Google are required to pay for information published on Google News. France has strong legal frameworks on many OTT related domains, and is also at the forefront of debates concerning sharing economy players.
Find out more on Net Neutrality and key stakes for tax optimization, privacy, copyrights and other topical issues surrounding OTT regulation in our dedicated market report
Head of Consumer Electronics & Digital Entertainment Practice
"In 2015, more than 70% of video software revenues were generated by digital sales and distribution, compared with 22% in 2008."
Dematerialisation, a driver for disintermediation and growth in the video games sector
The global video game software market rose in value from 35.3 billion EUR in 2008 to 47.7 billion EUR in 2014, driven by dematerialisation, the emergence of new segments and the continued success of relatively new segments. Dematerialisation has meant an increasing number of consumers can be reached, on any platform equipped with a screen, fixed or mobile, and with increasingly varied content. In 2014, 69% of video game software revenues were generated by digital sales and distribution, compared with 22% in 2008. Revenues from dematerialisation have experienced an average annual growth of 26.8% over the period, compared with 9.7% for revenues from physical sales.
The video games sector, which is digital by nature, has a long history of dematerialising distribution and in-game content. Use of dematerialisation now seems to be accelerating and expanding into all segments of the sector. The success of browser games, massively multiplayer games, online gaming on consoles and personal computers, and smartphone gaming (since the end of the 2000s), has meant that 2012 was a defining year when the majority of revenues were generated from the digital side of this economy, switching over from the physical.
Breakdown of the video game software market by type of revenue, 2008 and 2014
Source: IDATE, Video Games in the Cloud, June 2015
Role redistribution along the value chain
Dematerialisation affects all segments of the video game industry. It has led to disintermediation in the value chain and raises questions over the role of certain stakeholders downstream. It has afforded new power to developers, who now have the opportunity to speak directly to their gaming customers. 'Online' has ultimately eroded a silo-based industry structure and allowed practices and cross-platform services to emerge that both benefit gamers and boost creativity within the sector.
Industry repositioning and revaluation up the chain
On an industry-wide scale, dematerialisation of video game market segments has moved value along the value chain. Value creation is now closer to players with a direct link to their customers. Disintermediation of the sector is moving in this direction.
In the PC gaming segment, value creation seems to centre around digital retailers (Steam, GOG), aggregators (Big Fish Games) and publishers (EA Origin, NCSoft). In the mobile gaming segment, value creation seems to have moved towards app store owners (Apple, Android, Amazon), and to the console manufacturers themselves in the case of console games.
On Smart TVs, anything is still possible between TV channels, the Internet giants and the proponents of a cross-platform ecosystem (e.g. Apple, Samsung, LG, Sony). Gaming platform operators, the major beneficiaries of these developments, have also had to rethink their revenue sharing models to the benefit of game development studios.
Dematerialisation has also allowed the sector to continue generating additional revenue, converting new customers to new types of game, especially ubiquitous games, which are playable simultaneously on multiple platforms, both fixed and mobile.
In this context where dematerialisation is continuing to gain ground on the physical market, the sector will continue its dynamic growth in the coming years. However, not all links in the chain will fully benefit from this growth, such as distributors, who are seeing their share captured by others.
Revenues earned by the various links in the video game market value chain (million EUR)
Source: IDATE, Video Games in the Cloud, June 2015
The impact of dematerialisation
The impact of dematerialisation varies depending on the market segment, but disintermediation is a common theme.
The PC gaming segment, which is easily accessible for independent (indie) developers, has diversified and opened up to casual and social games while retaining a special place for massively multiplayer (World of Worldcraft) or multiplayer (League of Legends) games.
The mobile gaming segment (on smartphones and tablets) has built itself around app stores, and the viral and rapid nature of these stores. With these devices now almost permanently connected, games are also being viewed as a potentially continuous entertainment experience. This implies a new approach is needed, based more on encouraging users to buy, rather than selling a product.
The console gaming segment has evolved and now allows all users to download indie and casual games, but also AAA titles. In addition, many features that use the cloud have emerged. These features may relate to the game, other content, consumption, user account management or access to broadcasting services. In this context, console manufacturers remain the cornerstone of this segment's economy with their e-stores.
Finally, on Smart or connected TVs, video games take the form of streamed content, known as cloud gaming or Games on Demand. This young segment, which first emerged around 2010, is strengthening and seems to be garnering interest within the industry.
Find out more about dematerialisation in video game industry, new strategies and organisation as well as forecasts and shifts in the value chain in our dedicated market report
Senior Consultant, DigiWorld IDATE
"The Cellular device (Tablets & laptops) installed base wil top 370 million devices worldwide in 2020, up from 54 million in 2013."
Connected cellular device is a device equipped with Internet access through cellular networks (2.5G, 3G and 4G). Connectivity is provided through an embedded module in the device (the SIM card could be removable or not). The main consumer devices addressed here are tablets and laptops. Some opportunities could be seen at the enterprise level especially to meet executive mobility requirements.
Unlike Wifi-only, the cellular module provides connectivity ‘on the go’. 3G and 4G connectivity provides an always-on feature which allows application notification reception. With Wifi-only devices, the device turns automatically into a sleeping mode. 4G could appear as a game changer as, unlike 3G performance, 4G offers more bandwidth and better latency which even excels Wifi performance. Nevertheless, unlike Wifi, the cellular connectivity is not free of charge. The end user needs to contract a specific data plan. The other drawback is that, even without a subscription, cellular products are more expensive than Wifi-only products because the bill of material is more expensive. Moreover, Wifi connectivity is increasingly widespread, with a Wifi module embedded in each new connected consumer electronic product worldwide, and is offered for free in hotels, restaurants and even bars. In some airports, the user can have free access for a short period and can buy units of time of Wifi connectivity.
The connected device value chain is mainly composed by two groups of players: the connected device manufacturers (Samsung, Apple, Nexus, HP, Lenovo and Dell) and the mobile carriers providing innovative models (subsidy-based and even on-demand connectivity models). Module makers are also very involved in this segment. They provide specific modules and chiefly promote the embedded SIM-based module.
33% of the tabelts are cellular, in advanced markets
In terms of market adoption, cellular products are clearly gaining traction and several market estimates show that around 33% of the tablets are cellular, in advanced markets. The adoption varies a good deal from country to country. Cellular laptops are mainly driven by the professional market as it is more affordable to use rather than using dedicated dongles. Nevertheless, according to industry sources, their adoption is very limited, especially on the consumer side. The main issue here is that the laptop market (cellular or not) has been in decline since the launch of the first iPad. Hence, cellular laptop offerings are still restricted to the business market and almost non-existent for consumer market. Nevertheless, the last year has seen the withdrawal of key laptop offerings, showing thus the real barriers for this market take-off.
How to simulate market adoption?
To stimulate market adoption, numerous business models are being offered to the end user, depending on the distribution/sale channel. Both OEM and connectivity players provide connectivity offerings. Indeed, even OEM players are offering connectivity services through pure paid services or even provide fixed month traffic amount for a specific time after device purchase, with a top-up option obviously available. In the domain of MNOs, beyond this wholesale model, they currently provide traditional retail connectivity and the popular subsidised model. Some carriers also integrate these devices in their mobile share plan. Innovative data plans should also become popular in a near future, such as the on-demand connectivity based on embedded SIM technology, ideal for short-time journeys, weekending or vacationing abroad, for instance.
The cellular device installed base will top 370 million devices worldwide in 2020
The cellular device installed base will top 370 million devices worldwide in 2020, up from 54 million in 2013.
• In 2020, tablets will be the most popular cellular device around the world, with 90% of the total market. In 2020, this market will be led by the USA, followed by China. Germany is expected to lead the EU5 market.
• In 2020, the personal devices segment should reach 270 million units, representing 72% of the market (a stable breakdown compared to 2015) but they will take 55% of the total world connectivity market, as professional devices generate more traffic and related ARPU is therefore much higher.
Find out more on Cellular Devices in our dedicated market report
Senior Consultant, IDATE DigiWorld
They have minimal impact on traditional telecom markets
In 2014, the OTT communication services market (the total of OTT revenues generated from VoIP, IP messaging and a share of social networking) will have surpassed 10 billion EUR. Growth is expected to continue and the global market value will reach 23.7 billion EUR by 2018, representing a CAGR of 21.6% from 2014 to 2018. Still, OTT counts for only a very small proportion of market value compared to that of the telcos.
What are the impacts of OTT communication providers on the telcos from a market value perspective? The figure below provides IDATE figures for both telco communication revenues and OTT communication revenues for the period 2012 to 2018. Telco communication revenues are composed of fixed telephony revenues, mobile voice revenues and mobile messaging revenues. OTT communication revenues are composed of VoIP, IP messaging and a part of social networking revenues (as already explained in detail in section 3).
Source: IDATE in OTT Communication Services, December 2014
The reality here is that compared to telco communication revenues, OTT communication revenues remain very marginal. As has already been seen, the OTT communication market value is set for growth with CAGR of 21.6% from 2014 to 2018. Still, looking at the big picture, even in 2018 OTT communication will only account for 3% of the total market.
Further, IDATE forecasts that the telco communication market will not decline over this period of time, although it will not particularly grow either, with a CAGR of 0.2%. As a result, the total communication services market (telco and OTT combined) is expected to see a CAGR of 0.6% from 2014 to 2018.
Judging from these figures, IDATE believes that the communication market is not a simple case of “OTTs taking away revenues from telcos”, which is the often-painted picture of the market. Rather, it is a case of the telcos maintaining their current market values, while OTTs are growing their market value by themselves.
Find out more about VoIP, IP Messaging, Social Networks and the main market players’ strategies in our dedicated market report
Head of Media & Digital Content Business Unit, IDATE DigiWorld
Who will come out on top?
The development of smart TV is inextricably bound up with the widespread availability of high-speed Internet access, a shift to more and more individual viewing and the proliferation of smart devices in the home. Together, these three elements are steadily revolutionising how viewers access their TV programmes, and providing them with an array of new functions and features.
Televisions can be connected to the Internet in several ways. Using:
• a smart or connected TV (direct connection, via Ethernet or Wi-Fi)
• a connected set-top box/DVR,
• a connected set-top box/DVR
• a streaming box or stick
• or a connected game console. or a connected game console.
Today, close to half of the televisions being shipped are smart TVs, even if their owners may not systematically take advantage of the Internet connection. At the same time, the market for streaming devices – whose main purpose is to play online videos – is progressing rapidly.
Within this market that is still populated by a great many solutions and services, several trends are taking shape:
• smart TV has shifted from "Internet-centric" to "video centric";
• managing connectivity with users’ personal devices has become a key issue, with app systems playing an increasingly central role;
• OTT services are moving to the TV and making real strides;
• viral platforms, which are “systematically” included on smart devices, are steadily consolidating their position in the video distribution chain.
Technological progress is also helping to vitalise the market, whether by increasing users’ connection speeds, through progress in compression thanks to the use of HEVC, or functionalities that improve the user experience, such as casting – i.e. the ability to send content from a personal device to the TV set.
The main stakeholders in the connected TV ecosystem can be broken down into three categories, based on their original sector of activity: consumer electronics (CE) companies, TV market players and the Internet’s leaders.
• CE industry players are working to improve their software interfaces, either through dedicated developments such as Samsung has done with Tizen, or by acquiring another company, as LG has done with WebOS. The aim is to capture the added-value in the marketplace, whether in the arena of services and/or by selling high-end devices.
• Players from the TV universe are developing their OTT products, and working to bolster their position on the software side of the equation with more open and hybrid platforms. The smart TV could enable them to renew ties with consumers, and better monetise their plans. Veteran TV market players nevertheless remains threatened by the shift to more individual viewing, the risk of being cut out of the equation and a dramatic loss of revenue. Smart TVs can actually accelerate the growth of on-demand services, which naturally threatens the business of TV channels, and especially specialty channels, as well as the business of those who assemble pay-TV packages.
• Lastly, companies such as Google, Amazon and Microsoft that dominate the Internet, are very knowledgeable about software, and changing consumer habits. So they are in the best position to deliver a top-notch user experience, whether in terms of smooth and intuitive interfaces, or providing recommendations based on user data. Their increasingly vertical positioning – covering everything from the content to the device – is also bolstering their potential to capture a growing portion of the video entertainment market.
Impact of the three scenarios on the smart TV market in 2025: size of the OTT market and smart devices used (billion EUR, %)
Source : IDATE, Connected TV, June 2015
The purpose of the three scenarios for “smart TV in 2025" is to determine which industries are likely to increase their control over the smart TV environment:
• TV market players: "Smart TV ";
• CE market players: "Consumer Electronics+";
• or Internet specialists: "Internet video".
The size of the OTT video market will vary considerably under the three scenarios, depending on how the environment evolves and so which industries prevail. We estimate that the market could climb to:
• 41 billion EUR under the most conservative scenario, “Smart TV”;
• 57 billion EUR if consumer electronic gain the upper hand, with earnings based on revenue sharing;
• 105 billion EUR if Internet companies prove the most successful, with an ecosystem tailor made for OTT video services.
The popularity of the different devices will also evolve along the same lines:
• the television will be used less to access services as the more disruptive scenarios come into being;
• eventually, the PC will be marginalised, replaced to a large extent by personal devices.
Regardless of the scenario, smartphones and tablets will be used more and more to watch videos, especially as viewing becomes an increasingly individual pastime.
Find out more on Connected TV in our dedicated market report
Senior Consultant, IDATE DigiWorld
Which pathways to broadband PPDR networks?
• Spectrum is at the heart of PPDR issues. Future usage for public protection and disaster relief (PPDR) worldwide is expected to concentrate on a limited number of frequencies. Allocation of broadband PPDR spectrum will be discussed at the WRC-15 in November 2015.
• 400 MHz frequencies are used for narrowband systems (TETRA, TETRAPOL, and P25) and considered for broadband.
• 800 MHz frequencies are used by narrowband networks in some countries or even regions and considered for broadband PPDR networks in some Asian countries.
• The 700 MHz band is the best candidate worldwide. In the USA, broadband PPDR spectrum was allocated in 2008 in the 700 MHz band. In Asia, the APT700 plan is likely to be adopted region wide; in terms of spectrum adoption in Europe and MEA, the question will be discussed at the WRC-15. The 698-703/753-758 MHz is a sub-band which could be made available for broadband PPDR at national level alongside SDL.
• TETRA-like narrowband technologies have served PPDR issues through dedicated PPDR networks using PPDR spectrum extremely well over the past decade. As these networks are by nature narrowband, they only support low data rates.
• There is now a clear global consensus that LTE will be the baseline technology for next-generation broadband PPDR networks. LTE still needs to be adapted: as from Release 12 of 3GPP LTE standards, LTE will be enhanced to meet public safety applications requirements. LTE extended capabilities are expected to be PPDR-friendly in future releases. Release 12 includes basic PPDR features. Its freeze, however, has been slightly postponed and some PPDR features formerly scheduled in Release 12 will be dealt with in Releases 13 and 14.
• A number of countries are actively working to provide a PPDR-friendly network to users. Several distinct initiatives are emerging around the world, ranging from commercial LTE networks using commercial spectrum on one side to dedicated PPDR networks using PPDR spectrum on the opposite side. Possibilities in between also exist, such as hardened LTE networks.
• Initiatives towards broadband PPDR systems are intensifying around the world. In Europe, a number of examples are flourishing, among them the Blue Light MVNO approach and the planned hardened LTE network pushed by the UK Home Office. On the other side of the Atlantic, the FCC had the opposite view and refused to use commercial networks. The First Responder Network Authority (FirstNet) is mandated to build a US-nationwide PPDR network with PPDR spectrum. Nevertheless, these latter two huge and complex initiatives are facing many hurdles.
Business models overview
Find out more about business models for PPDR, its status of allocations and PPDR over LTE-A
in our dedicated market report
Director of Telecom Economics Business Unit,
The announcement of the merger between Wind and Tre in Italy and the resulting shift from 4 down to 3 mobile operators for the country, confirms the telecom consolidation trend in Europe.
It takes two forms:
On one hand, with the multiplication of fixed-mobile consolidation operations, like the recent acquisition of mobile operator Base in Belgium by the cable operator Telenet. Other examples include the Orange-Jazztel operations in Spain, BT-EE in the UK, Numericable-SFR in France, and Vodafone-Ono, also in Spain.
On the other hand, we are seeing a concentration in the mobile sector, from 4 down to 3 operators, including the top 5 countries of the European Union (see map). Germany has already switched, with the merger between E-Plus and O2, the respective subsidiaries of KPN and Telefónica in 2014 after a long investigation by the European antitrust authorities. In the UK, the planned merger between Three, the local subsidiary of the Hong Kong group Hutchison Whampoa (also parent company of Tre in Italy) and O2, will likewise reduce the number of operators in the mobile industry from 4 to 3. In Spain, the sale of yoigo, proposed two years ago by TeliaSonera, was abandoned due to the lack of a buyer under terms that the Swedish group deemed reasonable but the Spanish market is de facto concentrated within three operators, the fourth and last arrival having just over 6% of the market (in number of customers), and having further declined since late 2014. But let’s recall that in France, conversely, Free Mobile has managed to win about 15% of customers (but some 8% of revenues) of the French market in three years. In this concerted process, the French market seems to be the only one continuing to swim against the current!
Beyond the five major European markets, a significant number of other member states of the European Union also have around 3 mobile operators, and only two in the case of Cyprus.
In total, of the 23 other countries, just half (12 in total) still have 4 or more operators. But for some (Denmark, Finland, Luxembourg, Sweden), the fourth operator has remained embryonic. Note also that while four countries still benefited from the launch of 4G to open the market for a new entrant (Bulgaria, the Netherlands, Romania and Slovakia), uncertainties remain on the sustainability of new licenses. Romania is also the only member state to host six operators. And finally, in Belgium, the allocation of a fourth 3G license to the Telenet-Voo consortium in 2011 was not finally acted upon: both protagonists relinquished their licenses in 2014! Finally, we should complete this inventory by highlighting the diversity of situations relating to MVNOs, in number and market share.
Nevertheless, with more than 100 licenses issued, the European market remains highly fragmented at Community level!
Number of mobile network operators (MNO) in the Member States of the European Union
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CEO, IDATE DigiWorld
After 14 months of study by FTC and FCC authorities, AT&T just received the green light this 24 July for an operation to take over DirecTV (the number 2 satellite TV operator with 20 million subscribers in the US and 18 million customers in Latin America) for $49 billion ($67.1 billion in debts).
Before approving an operation which will lead to hooking up 26 million subscribers in the US with the largest TV distributor (ahead of Comcast; see figure below), the FCC negotiated several conditions: (a) to make guarantees for the completion of a plan to extend its fiber infrastructure (Fiber to the Premises) to at least 12.5 million households, (b) to equip areas of concern such as schools and libraries, (c) to offer low-income households a discounted basic Internet access service, (d) to apply Net Neutrality by not using caps on Internet access to discriminate against video services in favor of DirecTV offerings, (e) to present the FCC with interconnection agreements made with the major suppliers of applications and programs (such as Netflix).
What reasons could there be for such a large operation, oriented towards Pay TV market that is saturated and under attack from new video streaming offers? (especially as after having paid some $14.4 billion in cash, AT&T will most likely need to invest tens of billions more in auctions for frequencies released in the 600MHz band).
• The power to attract consumers with bundles? AT&T has not lost any time on this. Several days after receiving approval from the authorities, the operator made a new offer public combining DirecTV channel packages (or programs offered on the FTTx "U-VerseTV" network from the telecom) with its cellular services (over 120 million subscribers): for a basic offer of $200/month, a household will have TV services with 4 receivers and 4 mobile telephone lines with 10GB to share. This is a promotional offer. In other words, it is a guarantee for a year in return for a commitment from the customer for two years (DirecTV) or one year (U-Verse) - which would represent a discount of $600. With this offer, AT&T Wireless hopes to win subscribers away from Verizon, T-Mobile, and Sprint. While DirecTV is in competition with Comcast, the other cable companies, Verizon-FiOS and Dish hope that its subscribers can benefit from an offer that its competitors can't reproduce.
• Possible Synergies? In its communications with investors, AT&T has focused on the synergies of the operation. The new combination could reduce the cost of acquiring TV programs 15% (/subscriber) due to the importance of size in this market. This is not insignificant as we know that programming represents some 10% of the cable market leader's expenses (Comcast) and that expense is growing faster than its revenues. In fact, AT&T became the leading Pay TV business with not only the ability to negotiate with channels, studios, and sporting leagues, but also the means to compete with Netflix and Amazon to invest in series by reserving exclusivity or priority. In the short-medium term, it is likely that DirecTV, whose linear TV model could lose its edge, will find that AT&T is an effective partner for developing video streaming offers.
• Other synergies lie in distribution, marketing, and back-office expenses. DirecTV and AT&T Wireless are national brands with storefront expenses (2000 points-of-sale and 5000 employees for AT&T Wireless), sales campaigns, marketing tools, and manufacturing who can be combined to generate substantial savings.
• A vector for expansion in Latin America? AT&T had prioritized on consolidating the mobile phone market in the US. This strategy reached its limitations when authorities blocked its plan to buy T-Mobile US. The telecom had, no doubt, envisaged this moment when Verizon Wireless spun off Vodafone to invest in Europe. In the end, AT&T prioritized its international investments in Latin America. This was illustrated recently by back-to-back investments in mobile phones in Mexico with the acquisition of lusacell, then Nextel. Beyond Mexico, DirecTV, which has 18 million subscribers in Latin America, can help promote AT&T's South American expansion strategy.
Will this operation mobilize others in the US market? We need to start from the principle that the FCC and anti-trust regulations will not authorize Mobile-Mobile operations (for example T-Mobile/Spring), nor any operations that would enable Comcast to increase its size significantly by absorbing another major cable operator (see the rejection of the Comcast-Time Warner Cable merger). Deutsche Telekom just moved to the 3rd tier of mobile operators (outstripping Sprint in the number of subscribers at the end of the second quarter) and we know that their management would be willing to sell T-Mobile US as soon as they can get the right price. They have defined the characteristics of an attractive offer as offering a relationship between the potential subscribers and the frequencies. This composite portrait has led to betting on an operation with Dish (14 million TV subscribers and rich with an enormous number of completely unused frequencies). However, this seems difficult. We could then consider Comcast which does not have quite as many frequencies (they have been sold to Verizon), but they have 22 million TV and Internet subscribers. Comcast has denied it is involved in discussions. There are still many other combinations without T-Mobile, such as Comcast-Sprint or Sprint-Dish.
Second question: should we look at the AT&T-DirecTV merger as a sign of future acquisition deals for TV groups and programs by telecoms? The answer is complicated. We feel that with the Internet offering faster and faster speeds and the application of Net Neutrality rules that favor OTT strategies, the main trend is towards "disintermediation" of video distribution (by DBS, cable companies, and telecoms) and it will be more and more difficult for national operators to maintain their independence (and margins) to offer TV distribution when faced with global players that self-distribute (Netflix). On one hand, it is a relatively long-term trend. On the other hand, this situation can also be seen as a factor for consolidation of cable companies and telecoms so they can be large enough to compete and retain their margins for video distribution and support the growth of their portion of the Broadband market (as with BT Sport).
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 It is the leading US telecom with $133 billion in sales revenue in 2014 (of which over $73 billion was from mobile phones) and net earnings surpassing $14 billion.
 In 2014, DirecTV's net earnings were $3 billion for around $33 billion in turnover.
 This commitment moves closer to the direction recently taken by AT&T to participate in the competition among Google Fiber, cable companies, and telecoms, announcing the deployment of Gigabit networks nearly everywhere in the country.
 Representing some 11.5 million households.
 AT&T already had a sales agreement with DirecTV for a TV offer for its ADSL (and therefore outside U-Verse) subscribers. It then becomes possible to imagine that if this bundle announced in the past few days mostly centered on the Mobile/TV pairing, some AT&T subscribers would have access to a quadruple play contract. We should however note that the number of households without a landline telephone has gone from 10 to 40% in the United States in 10 years.
 Remember that Verizon had signed a cross-promotional agreement with Comcast (Mobile-TV) which had been a flop, even if the agreement had not been formally revoked recently.
 DirecTV is known for its agreement with the NFL and its Sunday Ticket offer.
 65 MHZ in the AWS-3 band (1700MHz and 2100MHz bands), 40MHz in the AWS-4 band (2000MHz and 2100MHz), 5MHz in the 700MHz and 10MHz bands of the H-block band contiguous with its AWS-4 frequencies. .
 It might be that negotiations up till now have stumbled over issues tied to valuation of the spectrum as well as its terms (cash/exchange of shares/whether or not to maintain Telekom in the future entity).
 It should noted that Dish and Sprint started offering package deals in 2013; Dish with TV and Sprint with mobile phones.
Head of Media & Digital Content Business unit
The development of cloud TV solutions is part of the massive wave of change in today’s video market, and fuelled by users taking increasing control over their video viewing (on-demand, personal, multi-device, etc.). These changes require all service providers to adapt to the new paradigm and tailor their products to new viewer behaviours, and this inside an increasingly fragmented and competitive marketplace. The transition will also require them to find new ways to monetise content. The inherent uncertainties and complexity of this new state of affairs derive from the need to flexible, both from an operational standpoint and in the ability to roll out new services.
The cloud TV market can be broken down into three components. Cloud TV is said to be private when the service is being supplied over the vendor company’s own infrastructure, and public when the infrastructure is located in a data centre outside the company’s premises, while hybrid solutions employ a combination of the two. These elements are combined with the various levels of service integration, ranging from infrastructure (IaaS) to PaaS (platform) and SaaS (software).
The business model for cloud TV solutions is very similar to the one used by classic cloud computing products, i.e. payment based on consumption, or a monthly or annual subscription. It is the vendor of the cloud solution that invoices the TV provider. From a more general standpoint, adopting cloud solutions allows companies to convert their Capex into Opex by switching from a system of purchasing and amortising infrastructure to one of infrastructure rental.
A number of players are involved in providing cloud TV solutions: the Internet giants and software specialists, telecom equipment suppliers and TV solution specialists who have beefed up the cloud dimension of their services. The television and home equipment sector has also expanded its product line to adapt to this new paradigm.
Taking a broader perspective, the changes being forced on solution providers require them to acquire new skillsets, especially in the arena of software, but also in digital marketing, analytics, security, etc. These new skills can be acquired either through partnerships to create an ecosystem of solutions, or by taking over a specialised company.
Cloud TV solutions are tailored to the customer’s needs, and typically rely on an ecosystem of partnerships, which can in fact cover the entire video content technical chain, from production to viewing, by way of post-production.
Cloud TV products can occupy one or several niches, all aimed at satisfying customers’ new requirements. The market has been heavily influenced by video on-demand systems (incorporating nPVR), multi-device and unified interfaces, and systems for managing traffic surges on the network, notably thanks to hybrid cloud solutions.
But there are still a number of lingering questions and obstacles in the cloud TV market. The infrastructures’ ability to manage a growing number of unicast streams raises concerns over quality of service further down the road. Regulatory uncertainties, notably over the use of private data and content copyright, continue to impede monetisation and product development. We expect that finding the optimal way to monetise video products will be the next big challenge the market will tackle. Because it lowers barriers to entry, the development of cloud TV will also increase competition in the video distribution market.
It is also true that these solutions have helped make it easier to launch new video services – and especially more personalised and multi-device ones – by reducing the financial risks involved. This positive trend is on the supply side, where a great many vendors are positioned – including those from a TV industry is in the throes of a profound transition. But fully outsourcing content management does not seem to line up with market realities. What we are seeing instead is the development of hybrid cloud formats.
How cloud TV products are positionedClients’ needs
Cloud TV products
Development of time-shifted viewing
· nPVR: video recording in the cloud
· catch-up TV services
· Time shifted TV
· Management of consumption growth(server and unicast traffic peaks)
Multiple screens to address
· Multiscreen delivery platform
· Unified interface adapted to all screens, centrally managed
· Encoding & adaptation of the video format to the consumption screen thanks to adaptive streaming
Indoor – Multiroom/outdoor
· Multiscreen, network agnostic delivery platforms
· Encoding, adaptation of the video bitrate according to available bandwidth and network used
Mid- to long-tail content – Personalized viewing – Live viewing
· "Unlimited" storage
· Consumption monitoring and recommendations for TV/VOD/Catch-up services
· Live OTT for events and simulcasts
· Virtualized playout centre (not ready for prime time)
Content rights management
· Digital Rights Lockers (DRL)
· Centralised production, postproduction
Monetisation: Creation or improvement of advertising and pay-TV based business models
· Dynamic ad insertion
· Targeted ads inserted in the video stream or in the interface
· Centralised billing
Source: IDATE, "Cloud TV", March 2015
Find out more about Cloud TV in our dedicated market report
TV Head of IDATE’s Innovation Business Unit, IDATE
Key IoT and OTT markets are expected to represent close to 245 billion EUR in 2014 and could reach 440 billion EUR in 2018.
Telcos are being challenged on their traditional markets, with just 2.5% of CAGR for the upcoming years. Competitive pressure is coming from OTT players but also from within the telecom industry itself, with strong price pressure on connectivity products. At the same time, the development of OTT and, to a lesser extent, of IoT, itself often seen as a major threat for telcos, is increasingly perceived as an opportunity.
Within IoT and OTT markets, a few key markets are driving growth. The biggest markets are by far cloud and advertising (respectively 64 and 93 billion EUR in 2014), with more than 15% of CAGR in the next four years for both markets, thanks to RTB, SaaS and IaaS solutions. Video is the smallest digital market with 18 billion EUR but it is also the fastest growing, thanks to advertising-based formats and SVOD. Financial services are already well developed thanks to carrier billing and e-commerce, while NFC payments remain very marginal. Finally, hopes remain high around cellular M2M markets and the numerous associated markets (notably smart metering, connected health and smart cities), but the overall revenue growth remains moderate despite a huge expansion in volume.
In total, key IoT and OTT markets are expected to represent close to 245 billion EUR in 2014 and could reach 440 billion EUR in 2018, close to one third of telecom markets. Telcos can potentially benefit from a rich number of opportunities around these new markets. They can position themselves as service providers, competing head to head with OTT providers. There are countless other opportunities as technology enablers providing some of the building blocks.
Find out more on telco initiatives in digital services and the opportunities levered thereby
in our dedicated market report