CEO, IDATE DigiWorld
AT&T had only barely begun integrating DirecTV – the second largest pay-TV provider in the US, behind Comcast – when it announced its plans to acquire Time Warner for more than 85 billion USD (over 105 billion USD including debt).
This is no small chunk of change, as the company had to pay top price for a media conglomerate that is in fairly good shape and boasts a large stable of assets, including major Hollywood studios, the country’s top pay-TV channel, HBO, and several other cable properties such as CNN and TMC. The appeal of these assets has attracted a number of suitors since the spin-off of Time Warner Cable, including Apple.
A less welcoming environment
To assess the rationale for the deal, we should first give a bit of background.
• First, we should mention the very abrupt slowdown in the mobile services market in the United States. If AT&T (like Verizon) is a colossal enterprise, with more than 110 million mobile subscribers in the US, the market has become far more difficult following aggressive moves from T-Mobile and Sprint, and as consumer equipment matures. AT&T had sought to anticipate the change by merging with T-Mobile, but the FCC and antitrust authorities quashed the deal. As in Europe, intense competition is weighing on mobile operators’ margins, while the explosion in traffic is still hard to monetise and telcos will need to keep investing heavily in their networks to keep up. On the other side of the equation, the applications generating this explosion in traffic are largely the product of Internet behemoths such as Google, Amazon, Facebook and Netflix.
• Second, in those locations where it is a wireline telco, AT&T is having to contend with cable’s growing dominance (66%) of the Internet access market. For several quarters now, AT&T, Verizon and the country’s other telcos (Frontier, Century Link…) that offer connection speeds over 50 Mbps in only a small handful of locations, are losing customers to cable and its ability to deliver increasingly fast connections, thanks to DOCSIS 3.1 – giving it a steadily growing subscriber base and market share. Plus, the top cablecos appear resolved to enter the mobile market, with the belief that “mobile is the new cable!".
• Lastly, we need to remember the remarkable success of the deal that led the number one cableco, Comcast, to acquire another TV and movie industry giant, NBC Universal, back in 2013.
How will it maintain its cash-flow?
AT&T does not have that many options for maintaining its cash-flow and dividends.
• It is forbidden to engage in mobile market mergers. Of course, it can count on 5G to accelerate and widen its lead over T-Mobile and Sprint, as it managed to do (alongside Verizon) with LTE at the outset. But this lead would only last around 18 months.
• Acquiring cable companies could open up certain prospects – as the cable market’s consolidation is not yet complete – but will only be allowed in those areas where the carrier has no footprint.
• International investments are still on the menu, with the acquisition of two mobile operators in Mexico in recent years. And even if growth in more or less every telecom market is sluggish, AT&T did also have its eye on opportunities in Europe, and later in India… But, like Verizon, AT&T has been focused largely on its domestic market for more than a decade.
• It is true that the acquisition DirecTV is considered largely a success. It creates national cross-selling opportunities between mobile subscribers and satellite customers. DirecTV’s roughly 20 million subscribers bolster the company’s negotiating cloud in Hollywood, well above what it had with its 5 million U-Verse subscribers. With DirecTV, however, AT&T was still just a distributor and so sensitive to the slow but sure cord-cutting trend.
A deal that equals both vertical integration and diversification
So the acquisition of Time Warner would change all that. It would allow AT&T to move one or two notches up the programming value chain, positioned in both TV network operation and the production of premium TV series and films. The new AT&T would thus have a very impressive strike force on the content front, powerful enough to fuel its ambitious DirecTV Now TV streaming project.
This does not mean that AT&T is putting all its eggs in the vertical integration basket. It would be foolish to monetise its films, TV programming and channels only through its own fixed and mobile broadband services. So the deal can also be seen as a diversification move. AT&T has no doubt concluded that, more than ever before, content is indeed king.
We would be wrong take away from this merger the idea that is the pipes that govern broadcasting and content. The new understanding is more that, now that we can watch TV, live or in VOD, through a good quality streaming service, competition at the connectivity level will become more efficient, net neutrality rules will rein in the most direct attempts at discrimination… so it is not the pipes but rather the programmes that will be the decisive factors. Along with data on Internet users’ behaviour and habits.
Telcos do have several cards to play when it comes to the TV and video market. Cards that could allow them to stand out from other telcos, open up cross-selling opportunities, secure customer loyalty… When going head to head with the Internet titans, acquiring TV rights to sport and amortising investments in premium productions will nevertheless be possible only for the wealthiest telcos, with the most ambitious video strategies and tens of millions of subscribers. Like AT&T.
How will antitrust authorities react?
It remains to be seen how the Department of Justice (DoJ) and the FCC will react: they could oppose the deal or impose conditions. AT&T will argue the precedent of the Comcast-NBC merger, and the fact that no media or telecoms industry player would be eliminated or have its market share altered. Industry players and politicians that are against the merger will point to the dangers of having the country’s largest carrier get its hands on one of the largest media conglomerates. Others will see opportunities to strengthen provisions for increasing transparency on ISPs’ use of consumer data, and to expand net neutrality rules.
Check out the DigiWorld Summit programme
Senior Consultant, IDATE DigiWorld
A mini share of the global telecom and IT equipment market, but a maximum impact on the networks’ capabilities
72 telco SDN/NFV projects benchmarked
The latest IDATE report – “State of the SDN/NFV market” – spotlights the main pioneering players in terms of SDN/NFV implementation, and what they are doing today. The report provides a separate dataset with 72 detailed project fact sheets as of August 2016, as well as an analysis of major stakeholders – telcos and vendors – and their strategies to evolve and transform their networks to a software-based infrastructure.
“These projects are at different stages, ranging from trial to deployment, but a few (36%) have achieved a commercial launch. Whatever their level of development, most of these projects are taking place in developed countries: Europe, the US, Japan, South Korea and China,” says Tiana Ramahandry, the report’s project leader.
SDN/NFV projects per status
Source: IDATE DigiWorld, State of SDN/NFV and network investments, September 2016
Telcos’ adoption of SDN and NFV over the long term
IDATE DigiWorld analysts provide SDN/NFV market sizing data, with coming investment forecasts up to 2020. Even this market, which is expected to reach almost 19 billion EUR by 2020, remains very marginal compared to the telecom and IT equipment market, which itself is estimated at over 300 billion EUR, transformation potential in network management will be huge, as will telcos’ opportunities to adopt new services and innovative business models.
While a modest part of the global SDN and NFV market will be captured by telcos in 2020, NFV is being implemented more and more with the growing number of cloud and SDN solutions being introduced for new business services. Telcos’ large-scale deployments are expected to begin in 2016, and their CAGR over the next five years is projected to stand at 47%.
Indeed, the vast majority of the market will come from enterprises and cloud service providers that were the first to adopt SDN for use in datacentres, for both internal operations and connections with other datacentres.
Discover the perspectives, key trends, and scenarios about "SDN & NFV market" and contact Tiana Ramahandry for further information.
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Florence Le Borgne
Head of the TV & Digital Content Practice, IDATE DigiWorld
“For the first time ever, an OTT company – Netflix – made it into the world’s 20 top earning media groups in 2015.”
The United States: global OTT market leader
Still overshadowed by Netflix, which is present in 190 countries, and iTunes with services in 112 countries, Amazon is steadily building up its global OTT footprint through its e-commerce platform.
American OTT video services’ global footprint as of 31 December 2015
Source: IDATE DigiWorld, World TV market, July 2016
The United States: world’s largest OTT video market
With the exception of Starz, which lost 900,000 subscribers between 2014 and 2015, the top premium cable channels in the US continue enjoy a steady increase in subscriber numbers, and this despite stiff competition from OTT services. Between 2012 and 2015, HBO reported a 16.4% increase in subscribers to its linear channel, while Showtime and Starz reported a +1.3% and +0.7% increase, respectively.
But the momentum for signing up new customers is clearly with OTT services. During that same period, Netflix paying customers grew by 70% while Hulu Plus subscribers rose by an impressive 269%.
The top OTT services’ subscriber numbers in the United States in 2015 (million)
Source: IDATE DigiWorld, World TV market, July 2016
With its extremely dynamic national market, populated by consumers who are willing to pay for their TV content, the United States has become the world’s largest video on demand (VOD) market. Thanks to the popularity of Netflix, as well as Hulu Plus, Amazon Prime Video and more recently HBO Now, the US singlehandedly accounts for 57.5% of global VOD subscription revenue. If download to rent/own (DTR/DTO) are less popular with American viewers, the country still accounts for 47.8% of all DTO and DTR revenue.
Also noteworthy is that the United States continues to generate more than half of the world’s pay-TV revenue.
But the North American market is also showing the first signs of flagging, while growth in other parts of the world is progressing steadily.
Popularity of on-demand viewing in the US providing a global springboard for local players
If OTT services have not been adopted to the same extent in other parts of the world as they have in the United States, viewers across the planet are watching more and more on-demand programming and less and less live TV.
Although the balance between the two still tips heavily in favour of “classic” linear TV programming, which accounts for 86% of viewing time in the US, it is by now a foregone conclusion that VOD is not a passing phase, nor confined only to millennials.
Consumers in Europe, as well as in South America and in certain Asian and African markets, are also embracing OTT video. If national services have developed in most corners of the world, very few have managed to hold their own against the global juggernauts that are Netflix for SVOD and iTunes for DTO and DTR.
It does indeed appear that series are the main incentives for signing up for SVOD services. Which means the ability to attract new subscribers and keep them depends on being able to offer exclusive, high quality programming, which is something few players can do.
Netflix became the world’s second largest investor in programme production and acquisition in only a few years, outdone only by sport channel ESPN. Netflix spent 5.8 billion USD on content acquisitions and original productions in 2015, compared to the 5.5 billion USD that ESPN spent on acquiring TV rights and HBO’s budget which is estimated at 2 billion USD. At the same time, the company’s spending on original series continues to rise. Netflix invested 120 million USD in 2016 on its new series, The Get Down, or 7.5 million USD per episode, which makes it the new American titan’s most expensive show to date, ahead of Marco Polo which had a budget of 90 million USD.
But growing budgets coupled with slowing growth at home are making the search for outlets outside North America imperative. Clearly, the wealth of its library is one of the main reasons for Netflix’s global success, although international development costs and especially marketing costs are in no way detracting from the company’s profitability.
If Amazon and HBO are following, albeit more discreetly, in Netflix’s footsteps, it is hard to see what European player today could rival them, and most are put off by the size of the investment required and the meagre prospects for ROI in the short term. Vivendi appears to be struggling to build a pan-European offering, while Sky is advancing cautiously with plans to launch its Now TV streaming service in Spain by the end of the year, which would make the country the only market where it only sells an OTT product, with no satellite service to back it up.
The TV market did not enable the emergence of any major pan-European service. Will OTT give Europe’s industry a second chance?
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Project Leader, IDATE DigiWorld
Benefits and impact on mobile industry competition of Android and iOS
Have mobile OS helped create a mature and more open mobile ecosystem?
The study, commissioned by Google, illustrates the paradigm shift in the mobile industry introduced by iOS and Android, due to decreased fragmentation. It analyses the clear benefits that new OS bring to the digital economy, with more affordable and more powerful devices, and providing access to a host of applications and services. Lastly, it assesses the impact that new OS have on competition, arguing that they have not reduced consumer or developer options, and have actually enabled the rise of new players (Samsung) and even of major competitors such as Facebook.
• iOS and Android have helped to reduce fragmentation in the mobile industry and so were quick to attract developers.
• iOS and Android are the real driving force behind the rise of the smartphone and mobile Internet markets, where previous attempts with WAP and walled gardens failed.
• This has led to a thriving mobile app economy in Europe, with close to 1.5 million jobs and 13 billion EUR in revenues (paid apps, advertising) in 2016.
• We have seen a great many success stories independent from iOS and Android, especially in the mobile gaming industry (e.g. Rovio’s Angry Bird) or around Facebook.
• Competition is stronger in the device market than before the launch of iOS and Android. Android has even opened the way for newcomers thanks to low prices.
• Developers are using multiple platforms, especially by leveraging cross-platform tools.
Deputy CEO, IDATE DigiWorld
Director of Consulting and Innovation, IDATE DigiWorld
Our faith is clearly being tested these days. There is a growing sense of mistrust amongst the electorate, users and consumers, but digital could be an exception?
At first glance, the answer appears to be yes: digital technologies continue to spread just as quickly and to penetrate our lives more and more deeply, as they make their way into sectors that had not yet embraced the digital path: sectors as diverse as transportation, healthcare, education and travel are making the leap as they feel the pressure of mobility, Big Data, artificial intelligence (AI) and the Internet of Things. So it is imperative that we have a firm grasp of the risks surrounding hyper-connectivity, to prevent the hopes of growth attached to this digital revolution from being dashed.
The heyday of the Privacy Paradox
However paradoxical it might be, the digital universe has not been spared its own crisis of faith. Everyone knows, more or less, that the new services on offer are not perfect: 60% of Internet users do not trust the Internet as a whole. A level of trust that deteriorated, in fact, between 2011 and 2015 for online banking, e-government and e-commerce. Only social media’s trust levels are rising, but only up to 43%, and topping out at 35% when it comes to cloud services. (“Digital Trust Barometer for France” ACSEL-CDC by IDATE DigiWorld, 2015).
At the same time, it is impossible not to see that this lack of trust is in no way impeding consumption. We have agreed to hand over our personal data in exchange for free services on our favourite social networking sites, fully aware that this information is being exploited for commercial purposes, and believing that it’s just “the price we have to pay”. We now accept that our new (and quite expensive) connected objects will utilise increasingly private information in exchange for services which, however promising, are still far from perfect. The latest statistics are not reassuring: cyberattacks rose by 38% around the world in 2015, and by 51% in France (PWC survey). As a result of this hacking plague, more than 700 million data were lost or stolen in 2015 (Breach level Index). It is both the frequency and the scale of the attacks that are striking: in early 2016, 80 million dollars were robbed from the Bank of Bangladesh. But it is still surprising that, if piracy is hurting the reputation of the company’s that have been the victims of it, the consequences ultimately stop there: no enterprise has yet been destroyed by a cyber attack, no matter how widely publicised it was.
And here is the crux of the paradox: the extraordinary acceleration of Internet services, with the GAFA quartet at the helm, their new challengers (Netflix, Airbnb, Tesla and Uber) and the multitude of start-ups in their wake, is playing out in a climate of latent mistrust.
The digital planet under pressure
What does the next chapter have in store, at a time when sensors are tracking our various actions (locating and monitoring our info and movements in real time), mapping our behaviour using AI and predictive techniques? Our computers and phones, and soon our driverless cars, our connected doorways and electrical outlets… are relatively easy to hack. Even blockchain, despite is reputation of being unhackable by design, is suffering its first failures: a hacker managed to siphon 3.6 million ethers, or 46 million euros in Ethereum cryptocurrency, from its DAO fund.
Will we continue on the current trajectory of a tricky imbalance, where innovation wins out over trust and security issues? Or will the change in scale and the sensitivity of the data used by third parties (well beyond the socio-demographic data being shared today) force a real change in the arena of trust? The debate is far from over*. And a new balance will be established depending on the responses that users, public policymakers, hardware suppliers and service providers offer or manage to impose. The stakes are high as very different Internets could emerge, depending on the collective choices that are made. One of the key hypotheses of our “Digital Economy 2025” scenarios is based on accessing data that users share with third parties, and in accordance with local laws. If access remains open, as it is today, we will likely keep the current Internet: one that is dominated by veteran heavyweights (along with a few newcomers from Asia or the retail sector), and characterised by the rising use of new generation predictive applications, integrated virtual assistants and recommendation tools.
If, on the contrary, we are forced to deal with a crisis of faith, which is indeed possible, an entirely other Internet would emerge, one where data exchanges are confined to trusted third parties and players whose prime concern is security (banks, telcos, etc.). This would trigger a technological arms race aimed at guaranteeing users’ protection (biometrics, encryption…), as well as a legal battle to limit the ability to exchange data outside sector-specific silos (insurance, transport…). How we answer the question of what new ecosystem will the right one to manage our most private information, health-related data, genome data, for instance, will be key in shaping the next chapter. This is thus a crucial challenge for Europe, as it could mean an opportunity to regain control of its digital destiny.
*A debate that will be one of the focal points of the upcoming DigiWorld Summit, devoted to the theme of “The Digital Trust Economy” (15-17 November 2016)
This Viewpoint was published in Les Echos on 23 September 2016
Check out the programme and register to the DigiWorld Summit 2016 conference
Debate over the crucial role that trust will play in the digital economy’s future
The 38th annual DigiWorld Summit will run from 15 – 17 November 2016, and have as its central theme: The Internet of Trust. It will be an opportunity to engage in a meaningful international debate over digital trust issues – starting with security and privacy – which have become major sources of concern for all of the ecosystem’s stakeholders.
As the number of reported cyber-attacks worldwide is growing by close to 40% a year, we expect that upcoming stages in digital technologies’ evolution will only amplify the phenomenon. And this to such an extent that any future scenario is possible: from a continuation of the current chaos to a breakdown in trust that would lead to the construction of a new digital economy, which will no doubt differ in many respects from the one we know today.=
• Are we reaching a tolerance threshold for online trust?
• How can veteran digital industry players (equipment suppliers, telcos, IT companies) capitalise on the current climate?
• Are verticals threatened by the situation or, on the contrary, on the winning side of trust and security issues?
• Do we need a new regulatory framework to govern, or reassure, market players and consumers?
> Including the 120 speakers on this edition:
• Eva BERNEKE, CEO, KMD
• Anne BOUVEROT, CEO, Morpho
• Isabelle FALQUE-PIERROTIN, Chairwoman, CNIL
• Pierre, CHAPPAZ, Co-founder & Executive Chairman, Teads
• Didier LAMOUCHE, President & CEO, Oberthur
• Joseph LUBIN, Founder & CEO, ConsenSys, Co-Founder Ethereum
• Carlos LOPEZ BLANCO, Global Head, Public and Regulatory Affairs, Telefónica
• Stéphane RICHARD, Chairman & CEO, Orange
• Corrado SCIOLLA, President Europe, BT Global Services
• Nicolas SEKKAKI, CEO France, IBM
Choosing the theme for the 2016 DigiWorld Summit came about quite naturally. The vast majority of IDATE DigiWorld were eager to tackle the topic of trust.
For some time now, trust has been recognised as a vital ingredient in the success of a brand, an economy or a society. This is all the more true in a world being transformed by digital innovation. In its scenarios for 2025, IDATE DigiWorld underscored that trust was one of the key variables in tomorrow’s digital ecosystem. To shore up this belief, we need only look at some recent headlines:
• the cyberattacks against telcos, TV networks and government agencies,
• the legal wrangles between Apple and WhatsApp and government authorities wanting access to the encryption key for the devices or messages;
• the very drawn out European Union negotiations over new data protection rules;
• the end of the Safe Harbor transatlantic agreement and ensuing debates over the new Privacy Shield;
• questions over the dangers surrounding connected/driverless cars, and the growing ubiquity of the IoT in general;
• the ad–blocking phenomenon;
• questions over what impact multiple FinTech solutions will have on the soundness of the banking system, and blockchain’s ability to replace today’s trusted third parties;
So trust is a focal point for telcos, cloud computing companies, Internet giants, start–ups, governments and regulators, but also for every economic sector across the board, not to mention consumers and citizens.
And, as always, acknowledging risk must not prevent us from also analysing opportunities, in terms of innovation, differentiation strategies and the competitive advantages available to many market players.
Once again this year, the vital meeting place that this international conference has become, will include plenary sessions that will provide a springboard for a series of high–level specialty forums. These forums are an opportunity to delve deeper into the main trends we expect to see in mobile networks with the advent of 5G, ultrafast broadband, the Internet of Things, the TV market’s transformation in Europe, FinTech, video games, the digital promise in Africa and what makes a smart city.
A unique international forum for debate and networking
|> DigiWorld Week
A week devoted to understanding what makes our new digital world tick (12 – 20 November 2016)
|> The DigiWorld Awards
Recognising the best digital start-ups created by French entrepreneurs abroad
Key facts & figures
Europe’s trailblazing conference on the digital economy
The DigiWorld Summit is an annual event organised and hosted by IDATE experts, with the support of DigiWorld Institute members. Every year it holds ultra high-level international debates on the core issues shaping the digital economy, with the finest speakers and industry insiders.
• Participants: 1,200 participants at the DigiWorld Summit and more than 5,000 at DigiWorld Week
• Speakers: 120 speakers from around the world; 400 at DigiWorld Week
• Partners and sponsors: over 100 partners and sponsors (businesses, public sector, media…)
• Social media: 15,000 tweets (trending topics) and 2,000 live followers
For more information, visit our website: www.digiworldsummit.com
CEO, IDATE DigiWorld
How to keep up with the fast-paced changes in our industries without being buried by the avalanche of news which, every day, urges us to read about some new important disruption? On a more practical level, how to gain access to vital data, benchmarks and preliminary independent analysis to begin planning a project or considering a market?
Thanks to its teams of highly qualified consultants and analysts, IDATE DigiWorld is able to deliver a complete set of telecoms, Internet and media market watch services.
I hope you’ll allow me to use this month’s editorial to highlight how invaluable these services can be, taking as examples three reports on timely and crucial topics that were published by our teams this summer:
• How much importance should be given to pioneer user experiences and the first LTE plans for fixed services? This report that was just published by Carole Manero ("LTE for fixed access: the next big thing ?") takes a look at the factors that make for a more credible solution after the failures of LMDS and WiMAX… but also taking into account Google’s recent announcement that it could be scaling back spending on Google Fiber projects in the US, to focus instead on wireless solutions, and the news that AT&T and Verizon do not have the national carrier status when it comes to deploying LTE or even 5G fixed wireless products, based on early trials.
• Sport: live TV’s last bastion? Florence Le Borgne seeks to answer this question in her report entitled, ("Sport content: TV vs. OTT") – analysing the impact of skyrocketing TV rights resulting from competition between TV networks, competition from VoD and the Internet giants’ growing ambitions.
• Should we expect an end to telecom market consolidation in Europe? In his report ("Telecom consolidation in Europe: toward new challenges?"), Christoph Pennings takes a look back at in-market mergers and acquisitions of recent years, and explores the paradigm shift created by (notably fixed-mobile) convergence deals, but also policy changes coming out of Brussels.
I could just as easily have cited several reports that are currently in the final production stages, on IoT, Industry 4.0, the new generation of LEO satellites, blockchain, FTTH rollouts around the globe… For more information about these upcoming reports, and our complete catalogue, visit the IDATE DigiWorld website, or contact our head of sales (firstname.lastname@example.org) or the consultants listed earlier.
PS: -"Yves Stourdzé, explorateur et éclaireur des mondes à venir": Some of you may have noted that IDATE’s headquarters are located on "allée Yves Stourdzé". Yves, an academic who was appointed Director of CESTA (Centre for the Study of Advanced Systems and Technologies), was among those who believed in IDATE’s development and supported us in our early days. Following a symposium in Paris on his work, held at the Ministry of Research, I urge those of you who are French speakers to acquire the book entitled: "Yves Stourdzé, explorateur et éclaireur des mondes à venir" – providing insights into the man and analysis of his work, through contributions from 25 personalities. This same publisher (Sens & Tonka, www.sens-tonka.net) will also be soon releasing a new edition of the main works of Yves Stourdzé.
Florence Le Borgne
Head of the TV & Digital Content Practice, IDATE DigiWorld Contact
As the number of TV channels has exploded over the past several years, acquiring premium content has been one of the key strategies used by TV networks to distinguish themselves.
At the heart of this coveted selection of content, sport has enjoyed a spectacular increase in the amount that broadcasters are willing to pay to carry it. If this is especially true of major league sports and events, secondary ones are also capitalising on the boon, thanks to new generalist and sport channels providing new outlets.
In recent months we have also seen top Internet players display a growing interest in acquiring the rights to live streaming sporting events both nationally and internationally, either by acquiring the rights directly or by forging partnerships with rights owners. Whether to increase their user base or to a secure the loyalty of existing users, YouTube, Yahoo!, Twitter, Facebook and Amazon all plan on establishing themselves as key partners in distributing and monetising sport.
This newfound competition only exacerbates the one that already exists between heavyweight telcos, some of whose content policies focus purely on sport (Cf. Proximus) and some which include sport amongst a wider array of content (Cf. Altice/SFR). The amounts spent by these companies have often enabled them to increase their IPTV customer numbers and/or their ARPU, but have also contributed to an unprecedented spike in the price of sports rights, which makes it harder and harder to break even, especially in a universe populated by a growing number of rivals.
As the price of sport content drives up programming costs, traditional TV channels are being forced to adapt:
• Veteran general-interest channels are choosing to cut back on their acquisitions and concentrate on a few flagship events, and to use these major events to showcase their technological savvy and their ability to innovate.
• New TV channels are not looking to compete head on, but opting instead for the rights to events that are exploited very little or not at all elsewhere, which enables them to build a reputation at a price that is in line with their budget.
• The equation is becoming increasingly challenging for the major specialist channels, which are forced to up their bids for the major sporting events that are essential to their brand image, but are also the victims of growing competition and of cord-cutting. Their subscriber numbers are shrinking while programme acquisition costs are rising exponentially. If online distribution (Cf. Sky) and the search for partners to distribute a complete sport package (Cf. Canal+/beIN Sports) are some possible solutions in the current climate, one of the main challenges is to negotiate lower rights acquisition prices.
If OTT will probably take hold over time as a credible solution for broadcasting sporting events live, there continues to be a plethora of technical issues surrounding the distribution of video streams with higher than average quality. For now, OTT distribution can only compete economically with broadcasting (in MPEG-4) when streaming to several thousand users. So it is still an interesting option for supplying bonus content, but not as a replacement solution, especially when it comes to major sporting events.
What is being built today is essentially a bridge between broadcasting and OTT in terms of:
• countries covered;
• available content;
• the ability to show a wider variety of sports;
• enhancing the viewing experience.
A lot of (digital) ink has been spilled since Verizon announced that it would be taking control of Yahoo! (except for its patents and shares in Alibaba and Yahoo Japan), including stories tracing the company’s history, and history of missed opportunities.
The most interesting question in all of these commentaries is the following: Will being part of Verizon equal revival for Yahoo!, even though major overhauls in strategy and management over the past decade did not manage to narrow the ever widening gap that separated it from Google and Facebook in the online advertising market?
Some of the explanations being put forth for the deal include the technologies and content resulting from the acquisition of AOL last year, along with several other deals, agreements signed with studios and sports federations, as well as the launch of the Go90 mobile video service. The additional technical expertise and content will probably allow the newly expanded conglomerate to increase its market share by a few points, but not much higher than 4% to 5% for the online advertising market, which still puts it very far behind the combined 50% share enjoyed by Google and Facebook (and around 70% when looking at the mobile Internet alone). But the future Verizon does have other assets, not least the telcos’ roughly 115 million mobile customers and 20 million wireline subscribers.
Can telcos turn the tide on decreasing revenue with new business models?
Taking a look at another challenge that does not pertain so much to the future of Yahoo! but rather the future of telcos in general. Here is the question: can telcos turn the tide on the growing trend of shrinking revenue with new, more content and advertising-centric business models? Even if Verizon is one of the world’s most successful telecommunications businesses, with remarkably healthy margins, its revenue appears to be on a downwards trajectory due to competition (T-Mobile), a sudden slump in the replacement rate and dwindling subsidies for smartphones, along with cable’s supremacy in the consumer fixed market in the US.
The oft-cited competition from OTT services and players is a questionable argument when we see that the mobile sector in the United States continued to grow up to 2015, well beyond the time when the GAFA quartet took control. While it is true that Netflix, Amazon and Hulu may have a negative impact (cord cutting) on fixed service revenue, the impact is limited given the TV revenue earned by a telco such as Verizon. On the other hand, the creativity and popularity of OTT services, and especially video services, is translating into heavier use of fixed and mobile broadband services, demand for faster connections and a massive increase in traffic. Fundamentally, these are opportunities for telcos to generate additional revenue, even if it does require continual spending on their networks.
When contemplating the delicate equation of how to monetise 4G and fibre access, telcos can seek out complementary solutions in content or by monetising their relationship with customers through advertising and data markets in general. We can substantiate this hypothesis by pointing to the Verizon acquisitions listed earlier, but also the much larger deal orchestrated by AT&T last year when it took control of the country’ second biggest pay-TV provider, DirecTV. But if we stick to only these two operators, it could be said (and rightly so) that few other M&A deals are available to them, since antitrust authorities are against any further consolidation in the mobile market.
What assets can telcos leverage to become key content market players?
The first thing that usually comes to mind is telcos’ role as pipes, in other words the suppliers of the technical infrastructure that carries programmes to consumers’ homes. This argument needs to be put in perspective, however, at a time when there is real competition over access and net neutrality rules are being put into place. Still, telcos do have credible assets in two areas.
• First, if they are massive enterprises with tens of millions of customers, they can hold their own against veteran TV networks when bidding for TV rights and exclusivity deals, thanks to their ability to amortise their spending both through their subscribers but also through marketing if they enjoy an image boost and increased market share for their core business. Here it is nonetheless worth mentioning that, in terms of economies of scale, the most powerful pure OTT players have an almost global footprint, which gives them a clear edge over telcos.
• The second argument in favour of telcos is their relationship with their subscribers, their sales network (and especially their shops), the quality of the ecosystem they provide through user interfaces and network boxes, and of course the information they have that provides them with detailed knowledge of their customers. By way of illustration, we could say that even if Netflix does not need to be listed in telcos’ interface to exist in a national market, it can certainly help. On this second point, telcos have a clear advantage over broadcasters or pay-TV providers that have no return path that would enable them to target customers. It is less of an advantage compared to OTT companies that have managed to develop a model that generates relevant consumer data. Telcos still need to prove their ability to be serious rivals for Google and Facebook in the online advertising market. But it also remains to be proven that telcos’ ability to monetise their data requires investments in content.
To sum up, even if telcos want to complete the tiering and differentiation strategies used to monetise their access products with substantial revenue from content and advertising, they need to be very big (which could also be seen as an argument in favour of cross-market consolidation deals) to stand up to the growing globalisation of the rights market, and find ways to monetise their customer data without losing their customers’ trust.
CEO, IDATE DigiWorld
A recent report from IDATE DigiWorld underscores the extent to which European markets as a whole lag behind the superfast access targets set by the Digital Agenda, including: 50% of Internet households subscribing to a connection of more than 100 Mbps in 2020.
At the 10th annual Assises du Très Haut Debit (Superfast broadband symposium) hosted by Aromates and IDATE DigiWorld in Paris on 6 July, we delivered a sneak peak of our coverage figures for Europe at the end of 2015, drawing on our own FTTx databases, the latest data collected from regulators and operators, along with our freshly released market report, “The Digital Agenda for Europe: a snapshot”.
Clearly, the situation varies dramatically from country to country, and the objectives set by Europe will be hard for some countries to achieve without a major policy push. The most advanced countries benefit from a strong cable footprint and an incumbent carrier that has made less ambitious technical choices than extensive FTTH rollouts. Belgium, for instance, combines vast a and dense cable system that has been upgraded to the latest Docsis technologies (>100Mps) and the top carrier’s choice to upgrade its legacy copper network to VDSL (>30Mps).
On the whole, the largest countries in Europe are less likely to achieve all of the Digital Agenda objectives. In France, for instance, the combination of giving top priority to achieving extensive FTTH rollouts, the relatively limited cable coverage (40% of households) and the very gradual deployments in the country’s more rural areas based on public-private partnerships – which will eventually coverage 40% of access lines – have put the country among the lowest ranked in terms of availability of superfast access lines and average connection speeds. The situation is better in the UK and Germany where BT and DT were quick to deploy VDSL (>30 Mbps) access products, in response to aggressive competition from cablecos. Meanwhile Spain, which has combined investments in FTTH and cable, also tops France in the rankings. Only Italy, whose incumbent dragged its heels on significant spending on FTTH and was unable to capitalise on a cable system, is faring less well than France.
The IDATE DigiWorld report reveals that, once ultrafast access networks are in place, customers are eager to sign up. We have therefore noted a much higher NGA take-up rate in those areas where ultrafast access (100 Mbps and faster) is available. This means that we can count on a virtuous cycle of differentiation that encourages market players to invest in faster networks, not with a view to continually increasing the price of access plans, but rather to enable solutions that meet a growing array of needs.
When considering these future scenarios we must not, however, underestimate the complexity of the regulator’s task which, up until now, has been defined by European copper LLU rules. The fact of replacing ADSL with VDSL (with Vectoring/Bonding and G.fast) and FTTH would seem to give the incumbent a natural advantage, setting up a duopoly with cable. But this is too simplified a view since we also need to take into account (particularly when looking at the regulatory situation in France) the potential for duplicating superfast infrastructures in very high-density areas, how it is in operators’ interest to pool their investments in medium-density areas, and the role of public-private partnerships in sparsely populated areas, not to mention the promise of superfast mobile.
Hope you all have a great summer!
Delve deeper into our analyses of superfast access in Europe by ordering our latest reports:
And don’t miss other recent releases from IDATE DigiWorld: