Consultant Senior, IDATE DigiWorld
IDATE has just released its latest market report on connected cars, which is part of its ongoing series on the Internet of Things and M2M. The report provides an opportunity to take stock of a major market whose rate of development appears to be accelerating, with a series of announcements, veteran industry leaders such as Mercedes talking about driverless cars, the rise of newcomers such as Tesla, and connected car projects coming out of China, as foreshadowed by the new joint-venture between Internet giant, Alibaba and one of China’s first car-makers, SAIC Motors.
This is a market that every stakeholder along the value chain is gearing up for.
The strategy of most manufacturers is to make their cars connected. The main driver here is based on the regulation related to safety issues in Europe and the underlying revenue opportunity for them. In the USA, the recent GM announcement to embed 4G modules in all new cars is seen as a key trigger for market take-off. For telcos, the revenue opportunity could be interesting as the connected car will generate traffic that telcos will charge for indirectly (through the automobile manufacturer).
All main M2M mobile carriers are involved in the connected car space, as the connected car represents one of the major markets in volume. In a context where their traditional mobile revenues are flat and even declining in some regions, providing mobile connectivity in cars is a key business opportunity for telcos. Beyond car-related applications in driver assistance, from the perspective of a telco, the car can be seen as an additional cellular device, with a potential high-consumption service profile with such usage as the mobile Internet, entertainment on demand and mobile hotspot features. The prime business model remains the traditional wholesale relationship (B2B2C), even though some telcos like AT&T try to address end users directly through B2C models (through a retail data plan) and the integration of an automotive into the mobile share plan.
For Internet players, the strategy here is clear: the automobile is an additional connected device just as smartphones, tablets and laptops and needs to be addressed. However, Apple and Google do not have really the same approach. Indeed, whereas Apple aims to introduce its technology to interface with its products, Google is promoting the embedment of its technology into the car as a regular device. Google also wants to collect data to provide the most accurate advertising as possible, such as a related point-of-interest, based mainly on location.
A market that is starting to take off
On the market side, according to IDATE, in 2020, 420 million automobiles will be connected, representing a 34% CAGR on the 74 million connected vehicles in 2014. Nevertheless, this growth is not homogeneous for each category of connected cars. The embedded systems will lead the market by 2020.
Asia will lead the connected car market in 2020. Europe benefits from a 39% CAGR by 2020, mainly thanks to eCall regulation, entering onto market by end-2018.
In 2020, connectivity revenue for connected cars will exceed 9 billion EUR. In value, North America will be the leading zone, mainly due to higher ARPU than anywhere else in the world both for telematics and infotainment offerings. This encompasses direct connectivity through embedded systems but also indirect revenue related to smartphone usage. The major issues to be raised here are on the real willingness of the user to pay for such services. To encourage users to subscribe, telcos and manufacturers are already contemplating different revenue models including share plans. All the same, adoption is likely to remain limited over the next five years.
Forecast for connected car evolution, by implementation technique
worldwide, 2020 (%, Million units)
The headlines are full of the self-driving vehicle, which is on everyone’s lips in the industry. Automation could be framed at six levels, ranging from zero autonomy to fully automated. The leading manufacturers are, at the first steps, mainly luxury car providers. The traditional car manufacturers are focused on the semi-autonomous route, but the ‘upstarts’ from the realm of the Internet, such as Google and Apple, are straightaway testing the waters of the fully autonomous car. Nevertheless, many issues need to be removed to see the self-driving car market take off. Currently, they are legal (on how to handle accident responsibility), cultural (seeing no real demand from end users) and economical (on who will fund the infrastructure).
Find out more information on "Content economics market" in our dedicated market report
By Alexandre Jolin
Introduction by Florence Leborgne
The central question is: Will internet replace TV? More and more users are switching from their television sets to connected devices to watch TV, including their personal portable devices. This trend is at its most prevalent amongst the youngest viewers. Will this disruptive behaviour amongst 16 to 35 year olds become the status quo?
In terms of supply, TV programmes share their screen time with the Internet and its new forms of video content, such as UGC, professional and semi-professional shorts and VoD movies.
Of course, the traditional TV market is feeling the effects of this behaviour. Cord-cutting and cord-shaving are growing in the United States: 10% of TV households in the US are cord-cutters, 7% are cord-shavers and 3% are cord-nevers. Most of them are young people in the workforce who have never subscribed to a multichannel pay-TV service. In Europe, the situation is more mixed, and it is still impossible to say whether cord-cutting is becoming a trend, based on subscriber statistics.
We can, however, confirm that video on demand (VoD) is hugely popular across the board. Consumers still appear to be willing to pay to access the content they want. This willingness to pay is also contingent on price points which, for VoD, vary between 10 and 15 USD a month, compared to an average 60 USD for classic multi-channel cable, satellite or IPTV pay-TV plans.
SVOD services are also contributing more and more to financing TV productions, and becoming key actors in the rights market. In 2014, Netflix spent more than HBO on programming rights.
Even if the approach to marketing the content is completely different, the channels run by YouTubers are attracting as many if not more viewers than most pay-TV services. Moreover, we are seeing a sector of professional and semi-professional content produced specifically for distribution on social media sites emerge.
For now, the revenue generated by on-demand channels, SVOD and video advertising is still a far cry from the revenue generated by traditional linear TV.
But what does the future hold for television? Several models are emerging: syndicated offerings such as Hulu and Freeview Play, online multi-channel platforms such as Molotov TV, multi-channel networks that make it possible to target viewers who are still interested in TV content, but have abandoned classic distribution channels.
Interview – Olivier Huart
OTT services appear poised to oust traditional media in all areas. Should we be afraid of these new entrants, or instead welcome their arrival, and the innovation momentum they are setting off?
"OTT and live TV are bound to complement one another for several more years to come.” Live TV is still by far the most popular mass medium around the globe, including France. Even in the United States people still watch an average 4 hours and 30 minutes of live TV a day, compared to an average 30 minutes of OTT video.
Plus OTT video’s share of screentime far outweighs its market share in terms of value. Linear TV channels account for 96% of spending on TV production in France. Some content also remains fully the dominion of live television, namely sport. To paraphrase Mark Twain (or Steve jobs): "Reports of linear TV's death are greatly exaggerated".
Despite the massive popularity of mobile devices in everyday life, TV is still the device of choice for watching video content: 75% of the content viewed on Netflix is watched on a television. Smartphones, meanwhile, are tending to be used as a controller, a remote control for multi-screen platforms.
From an economic standpoint, there are clear advantages to using alternatives to broadcasting to distribute video content. The terrestrial TV network covers more than 97% of the population in France. Internet connection speeds still do not make it possible to deliver programmes in HD with the same high picture quality as broadcasting networks. Plus TDF was one of the first broadcasters worldwide to conduct trials on 4K UHD broadcasting. But additional spectrum resources will be required. This transition to UHD also depends a great deal on the willingness of channels wanting to monetise this new value proposition.
The future will be a mosaic of solutions, and less and less of a monolithic model. And consumers are the central ingredient. Seventy percent of them want a package that includes live TV and on-demand content they can play on multiple devices. So traditional channels have three paths available to them:
- create proprietary applications, such as myTF1;
- pool the content belonging to several channels onto a single platform, as with Freeview Play;
- have live TV viewers foot the bill for the transition to the open Web.
Round table – Ingredients of an OTT-only success story
François Abbé – Mesclado: moderator / Britta Schewe – gretegrote Interproduktion UG / Luc Reder – producer Page&Images
Luc Reder:Page&Images produces chiefly television documentaries, institutional films and transmedia storytelling systems. For now, the producers are still taking a wait-and-see attitude. “OTT models are seen as not lucrative enough compared to linear TV channels”. A lot of people are working on these avenues, but few on what we are putting out.
Production costs for video content dropped significantly when we made the transition from an analogue to a digital production chain.
Britta Schewe: I began working on the Internet before going to work for VIACOM and Deutsch Telekom, before realising that the Internet was a more dynamic sector. The keys to success on the Web are the same as on TV. “On both the internet and on television, you need to be able to produce attractive content and know how to reach your audience".
Luc Reder: The economic equation of TV production is still very much tied to the TV screen. Some of the content we are seeing on the Internet is either experimental or just what’s in fashion. Web documentaries, for instance, are tending to disappear. On the other hand, we are seeing a growing maturity in the production of video content for the Web.
Britta Schewe: The future of OTT distribution as a whole is hard to predict. I think that some TV channels will disappear. “The more a television channel bases its programming grid on purchasing broadcasting rights, especially to American shows, the greater its chances of going off the air.” “In the future, in-house production will be the dominant business model for channels.” Content is still king!
The issue of content discovery is key to successful online distribution.
Keynote Speaker – Nicolas Weil – AKAMAI TECHNOLOGIES
Our message is one of inverting yield curves between linear TV and on-demand services, mainly on the open internet. Every day, Akamai delivers 30% of the world’s internet traffic. Akamai believes in fully OTT channels, but picture quality is a crucial criterion. As the number of available 4K services grows, the bandwidth needed to receive these programmes increases dramatically.
The user experience is the central consideration, especially on mobile devices. Lag time affects usage. “50% of users are lost if a video does not launch within 10 seconds.” Only around 10% of households in Europe are able to receive video content in 4K over the open internet.
As the datarates required for online video increase exponentially, the investments that ISPs need to make in content delivery networks are becoming far too high. So the logic that governs CDN needs to be extended to users’ devices. There are several technical solutions that address this: Peer-Assisted Delivery (P2P), Store and Play Later and Multicasting.
Round table – From live TV to OTT: an inexorable shift for veteran players
Moderator: Eric Scherer – Director of Future Media – Groupe France Télévisions / Matthias Buechs: Director of Online – RTL Interactive / Roux Joubert: General Manager Platform – BBC Digital / Richard Lucquet: Verizon onCue – Director, Business Development Technology, Partnership & Licensing.
Eric Scherer: The road to OTT will be slippery for broadcasters. Linear TV start to show decreasing aspects. Cord-cutting appears to be real. Among young people in the US, 65% of video consumption happened on demand and mostly online. The online traffic on CBS news has shifted from 6% on mobile devices in 2011 to 60% in 2015. SVOD is surging everywhere but its growth remains lower in France and Germany.
The consumer is now at the centre of a new demand side driven economic paradigm. Consumers are now involved in the editorial process. They can help to fund the production of content with crowdfunding solution or even deciding of the deprogramming of a TV Show.
New internet players aren't only distributors. They tend to become producers & content creators including the creation of new format and story-telling schemes.
Matthias Buechs:Television is highly under pressure in Germany but still profitable. Amazon is the dangerous competitor as the service doesn't need to be profitable by itself. Video sharing platforms are competitors in terms of time consumption but not yet on consumer spent market.
Roux Joubert: The BBC has always been an innovator. Last year, it has been the first broadcaster to stop airing a linear TV channel to transfer it on Internet on an on demand format. It also provides pre-TV programs on BBC i>Player and broadcasted content available until 30 days after being aired.
Richard Lucquet: "Millennials are spending more time using their mobile devices than sleeping" on a daily base. To reach that audience, Verizon launched the go90 application, a service melting the best of TV and of online content on just one platform including social features. Verizon is planning than go90 could generate as much revenues as Fios TV within 5 years. "Internet is alive because of video".
Senior Consultant, IDATE DigiWorld
IDATE estimates the global content industries market reached 145.5 billion EUR in 2014. On a global scale, 41.2% of revenues came from dematerialised channels, nearly twice that of 2011.
A sector worth 145.5 billion EUR in 2014
• Publishing is the leading market in value, with a total of 52.3 billion EUR generated. Between 2011 and 2014, revenues in the sector decreased by 1.9%.
• The music sector started to grow again from 2012, with 3.6% growth over the 2011–2014 period and 0.9% in 2014, attaining worldwide revenues of 13.2 billion EUR in 2014.
• The video game sector saw revenues grow 29.3% between 2011 and 2014, reaching 47.7 billion EUR in 2014.
• After a period of inertia, the video market is back on a growth path. In 2014, total revenues for the sector amounted to 32.2 billion EUR, compared to 31.9 billion EUR in 2013, which translates into a 0.9% increase.
More value captured by producers and rights holders
Losses in the end market, attributable to a decrease in the unit price of content, which is not always offset by a rise in sales volume, does not necessarily imply losses for all players in the value chain.
In the book market, the share of end-market value captured by rights holders and publishers has increased by 26% in the physical value chain to 55% in the dematerialised value chain.
Nevertheless, the difference is less pronounced in the recorded music market, a 46% share from videogram sales to a 49% share from digital sales.
About the video game market, 59% of end-market revenues from title sales are captured by publishers and developers in the dematerialised value chain, nearly 20 points higher than in the physical value chain.
Finally, the biggest difference appears in the transactional video market, where 54% of total market revenues are captured by producers and rights holders, compared with only 21% in the combined segments of videogram sales and rentals.
Find out more information on "Content economics market" in our dedicated market report
Senior Consultant, IDATE
The World OTT communication market will reach 22 Billion EUR in 2019
This report provides an in-depth analysis of the OTT communications market, both through figures and forecasts of market value (global, EU28, APAC and US), and through strategic analyses of the major players concerned.
The VoIP market (such as Skype), the IP messaging market (such as WhatsApp), and a portion of the social networking advertising market (such as Facebook) make up the OTT communication market, and the dynamics of each of these market segments are examined.
The various business models that have appeared, and the recent trends of acquisitions in the market, are also analysed.
One of the key analyses in this report is the comparison with the telco communication market. The myth of 'OTTs taking away telco revenues' is scrutinised, together with the effectiveness of the responses available to telcos.
OTT communication has very little impact when compared to the telco market
Actually, OTT only accounts for 1.8% of communication market in 2015… and despite its growth, will still only account for 3.3% in 2019.
Meanwhile, the telco communication market will see slight decline with CAGR from 2015 to 2019 of -0.4%. At least, total telco communication vs OTT communication revenues, 2012 to 2019 (billion EUR). For that matter, OTT communication services have not significantly adversely impacted the Telcos.
There exist greater factors such as the economic climate, internal competition and regulation that significantly affect the telco market values more than OTTs:
• The French example: competition between telcos was already intense before arrival of OTTs, minimising their impacts
• The Spanish example: telco communication revenues were already in decline due to economic recession, and OTTs served to accelerate the decline through cheaper alternatives
• Voice and SMS are no longer a cash cow for the developed countries
Telcos are obliged to invest in their networks, whereas OTTs are not
• The values attached to voice and SMS, which used to be fully captured by the traditional telcos, potentially being diverted to OTT providers
• Further, OTTs use the telco data network, yet OTTs are not required to invest in this network
Find out more information on OTT communication services market in our dedicated market report
CEO, IDATE DigiWorld
Our sectors took very little time off this summer, and generated a string of headlines. Below are some of the highlights.
Telecoms in Europe: ongoing consolidation and the first signs of a recovery
In Europe, following the announced merger of O2 (Telefonica) and Three (Hutchison) in the UK, and of Wind (Vimpelcom) and 3 Italia (Hutchison) in Italy, mobile markets in the EU continue their shift towards a three-player configuration, as illustrated on the map below (and explored in an analysis piece by our expert, Didier Pouillot).
But these mergers are being closely scrutinised by the European Commission which has no qualms about making their approval contingent on severe remedies, as we saw in Spain where the ultimate green light came after eight months of investigation, giving Orange the nod to acquire primarily fixed operator, Jazztel. Over in the UK, Ofcom have undertaken a wide-reaching strategic review, which will naturally included an examination of whether or not to alter the status of Open Reach, BT’s fixed access branch. And there is nothing to indicate that the assets swap, or the acquisition operation, between Vodafone and Liberty Global will be settled anytime soon.
As to the telecom sector’s performance in Europe, the results of the first two quarters of the year underscore that the recovery is still only nascent, with revenue down in virtually every market, even if we are seeing some improvement in margins.
Looking at the Internet and the GAFA quartet, Google’s responses (which created the Alphabet holding company) to the arguments raised in the European Commission enquiry make us think it will be a long, drawn-out procedure. There was also a great deal of talk about Uber and Airbnb this summer. Ultimately, however, it is European industry veterans Audi, BMW and Mercedes that will be taking control of Nokia’s Here. On a broader scale, debates over Internet platforms’ dominant positions in certain markets are grappling with sizeable issues. These issues will be one of the central themes for the 2015 DigiWorld Summit that will run from 17 to 19 November. I also invite you to get your hands on the latest issue of our Communications & Strategies journal for real insight into platform economics.
USA: the Gigabit race
In the United States, there have been a wide range of views on what drove AT&T to take control of the country’s second largest pay-TV provider, DirecTV (cf. our own analysis of the situation). At the same time, the Gigabit race – i.e. announced rollouts of networks delivering connection speeds of over 1 Gigabit/s – continues, with certification testing begun on Docsis 3.1. cable modems (worth mentioning here is Technicolor’s acquisition of Cisco’s CPE business, inherited from Scientific Atlanta).
These questions over the relevance of this new Gigabit access milestone will be also discussed in Montpellier, in a dedicated forum at the DigiWorld Summit on 18 November. Over in the mobile market, the summer brought the unsurprising news that T-Mobile US has pulled ahead of Sprint in terms of customer numbers. On the whole, although margins are stronger in the US than they are in Europe, American operators’ revenue appears now to be also oriented on a negative trend.
China: between acceleration and the first signs of saturation
The takeaway from China this summer was both the mobile market’s spectacular ability to make a swift transition to 4G – starting with China Mobile which managed to attract 100 million LTE customers in only six months – and the first ever quarterly decrease in smartphone sales, keeping in mind that China accounts for 30% of the global market. The upcoming DigiWorld Summit comes to mind here again since China will be our Guest Country this year.
Microsoft: driving the digital transformation… and undergoing its own
The last bit of headline news worth mentioning is the launch of Windows 10, which is a big deal for Microsoft in more than one respect as it is the successor to Windows 8, the previous and disappointing version of its OS, in addition to being the centrepiece of the company’s hopes for regaining credibility in the mobile business (thanks to its ability to attract both users and developers to its single operating environment for computers, tablets and smartphones) and of its new, clearly software and cloud-oriented strategy. At a time when everyone is talking about businesses’ and industries’ digital transformation, it will be very interesting to watch Microsoft and its new chief’s attempt to make the company the once and future king of digital innovation.
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
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).
More informations about IDATE's expertise and events :
 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
Back from a brief trip to San Francisco, I wanted to share some of the industry news making headlines over in the United States.
Now that the Comcast – TWC merger has fallen through, new deals are in the works. As America’s biggest cable company, Comcast, has put an end to its plans to merge with the number two player, Time Warner Cable, largely because anti-trust authorities were proving hostile to the deal, everybody is wondering what will happen next, as there is little doubt that the country’s cable market will continue to consolidate. It is entirely possible that the number four cableco, Charter, will make the first move, reviving an earlier attempt to take control of TWC that was quashed by Comcast’s bid – albeit compensated to some degree as the company was able to pick up a few assets in the bargain.
The deal could start by Charter merging with Bright House, sixth biggest cable company in the US and an old TWC spin-off, before making a play for TWC. This merger would not be without consequence for the Europeans as Charter’s biggest shareholder is Liberty (more precisely, Liberty Broadband and its redoubtable CEO, John Malone. It is also worth considering that John Malone swooping back in into the American cable market might pave the way for a deal in Europe between Liberty Global and Vodafone…
This consolidation in the cable market cannot be seen separately from the growing popularity and presence of streaming video services (Netflix, Hulu, Amazon, HBO Now, CBS, YouTube, etc.) which represent a threat to cable companies’ revenue – with a potential ability to cut them by half. They will need to become more powerful, to stand up to this new source of competition, protect their exclusive rights to feature films, series and sport. Otherwise, they will be pushed out of the market, and reduced to the status of dumb pipe…
Ubiquitous Gigabit networks in the near future?
We still don’t know what Comcast plans to do. If it can continue to improve its clusters in the main markets through customer swaps, it no longer appears to be in a position to expand its footprint by increasing the number of households it covers. In fact, it may become increasingly bent on protecting cable’s supremacy in its broadband market franchises: currently accounting for more than 60% of the market and close to 80% of all new subscriptions each quarter for several years now. The danger here appears to come from the momentum triggered by Google Fiber to deploy symmetrical 1 Gbps access (for 70 USD a month, without the TV channels), with the first plans available in several cities, including Kansas City, Missouri, Austin, Texas and Provo, Utah. Taken first with some scepticism ("Fiber To The Press Release"), today Google’s initiative has translated into subscriber numbers in the tens of thousands, which is making ISPs sit up and take notice. It is a move that has won the support of the Chairman of the FCC who early on stated his plans to abolish the ban on municipal networks that exists in some states, and has attracted real interest from a number of cities. From a list of around 34 cities whose applications are being examined, five – Raleigh-Durham, Charlotte, Nashville, Atlanta and Salt Lake City – were selected early in the year for the next Google Fiber rollouts. As this initiative gathers pace, and feeling their franchises threatened, telcos and cablecos have responded by announcing their own Gigabit network rollouts. AT&T, which had focused chiefly on hybrid fibre-copper networks with VDSL, has begun to deploy FTTH at 1 Gbps in Austin, Texas.
Since then, the country’s biggest telco has reveal plans to follow up with similar rollouts in 21 more metropolitan areas, including cities such as San Francisco and Los Angeles where Google Fiber has no plans to set foot as yet. Century Link has also unveiled its plans for Gigabit network rollouts. Verizon, meanwhile, has taken something of a back seat, increasing access speeds on its Fios FTTH lines to 500 Mbps, and for its video bundles, but does not appear to have plans to enter the fray and expand its fibre footprint. Over in the cable market the number three player, Cox Cable, was the first to deploy Gigabit networks – in Phoenix, Omaha and Las Vegas – and has committed to steadily expand into other markets. This was the backdrop to Comcast’s subsequent announcement of 2 Gbps connections for 1.5 million households in Atlanta by next month, and for a total 18 million households by the end of the year – but no mention of how the plans would be priced.
Although we are hearing more and more Gigabit network announcements in the United States, a grain of salt would not be unwarranted. First, because we are all aware of the inevitable gap between headline speeds and actual speeds. Second, because figures on the scale of the rollouts, the actual increase in the number of homes passed and the sums earmarked for the deployments remain unclear. And, lastly, because there has not yet been any feedback on the use of these plans speeds…
Will the FCC and FTC also block the AT&T – DirecTV merger?
More than a year after the 49 billion USD merger was announced, the two protagonists are still waiting for authorities to greenlight the deal. In theory, the merger has set off fewer alarm bells than the Comcast/TWC deal, as it involves a telco and a satellite pay-TV provider. But it would nevertheless consolidate the position of the country’s biggest pay-TV provider, which already has 26 million subscribers in the United States, compared to fewer than 6 million for AT&T’s U-Verse and more than 20 million for DirecTV. This tremendous market clout is the central argument being put forth by Netflix and others who are demanding certain commitments in exchange for the deal going through.
Faced with the likelihood that the FCC and the FTC will give the merger the nod, discussions today have shifted to what these commitments might be: an obligation to sell broadband and pay-TV services separately, forbidding the new company from unduly favouring its own OTT TV programmes, for instance by imposing data caps on the use of rival services, etc.
The final thing to remember is that the merger would also provide AT&T with an opportunity to strengthen its offensive on the Mexican market, where it has already made substantial investments in its mobile business via Iusacell and Nextel, and on Latin American in general, where DirecTV already operates.
What does the future hold for T-Mobile?
The first thing to mention is the dip in the US market: after rising steadily, contrary to the European market, revenue (year-on-year) began to decrease for the first time in Q4 2014 – a trend that carried on through the first quarter of 2015 (46.093 billion USD versus 46.880, year-on-year). With 39 million customers, Deutsche Telekom’s 67% owned US subsidiary is poised to overtake Sprint in prepaid/postpaid/wholesale market share – 15.8% versus 15.9% – to become the country’s third biggest mobile operator. In Q1 2015, the telco’s aggressive pricing strategy brought in 1.125 million subscriptions, including 991,000 mobile phone accounts – the remainder being for tablets. At the same time, T-Mobile needs to sustain very high spending levels to achieve LTE coverage nationwide. The company’s finances will also feel the pinch of the second digital dividend auctions (600 MHz band) in 2016.
So it is with all this in mind that market watchers keep waiting for a new merger or acquisition deal to be announced. As it seems unlikely that the authorities will agree to a major merger inside the sector, many see Dish as the most likely candidate. The satellite pay-TV provider acquired more than 100 MHz in the different frequency bands and spent more than 10 billion USD at the latest AWS3 actions, without saying what the spectrum will be used for. Another option would be for Comcast – which, like other cable companies, is very committed to its Wi-Fi strategy – enter the mobile market. One major story making the rounds is the launch of Google’s Wi-Fi First service, based on agreements with T-Mobile and Sprint. Certainly less ambitious in scale and means than Google Fiber, this initiative nevertheless raises the same questions: is this the Mountain View company’s way to stimulate competition in the access market? Or should we see it as a desire to diversify by developing a presence over time in the telecommunications sector?
Follow-up to the FCC’s net neutrality decision
Debates since the regulator’s decision have gone in two directions. The first are over how the courts will rule in opposition cases. Among the FCC’s opponents is cable association, NCTA, whose former long-time chairman now heads up the FCC, and whose chairman today is Michael Powell who was the FCC chairman in 2005 when broadband access was classified a Title I service. The second topic of debate concerns interpretations of the FCC decision. Those who are criticising Facebook in India and its Internet.org offer are stoking the polemic over how compatible the different zero rating options are with net neutrality. Not least because Canadian regulator, the CRTC, recently cracked down on zero rating offers from Videotron and Bell Canada.
Verizon acquires AOL for 4.4 billion USD
Verizon is pushing through with its strategy to snap up the content that will allow it to sustain its LTE market leadership, and its mobile video business ambitions. In addition to the content brought in from AOL, the deal gives Verizon control of the adap.TV platform that AOL bought in 2013, which should prove an interesting asset when going up against Google and Facebook in the sale of advertising inventory (the two heavyweights currently accounting for close to 70% of the market).
The end of the Patriot Act and the NSA’s unchecked powers?
The House of Representatives voted in favour of a bill that would put an end to the most controversial sections of the law that was passed after the events of 9/11. Topping the list, wire taps will once again need to be authorised by a judge. The bill is still being hotly debated in the Senate, but hopes are high that it will go through.
Google cars hitting the road in California
We may well see city road testing begin on the first driverless Google cars this summer. Although authorities have demanded that Google put a steering wheel and brake pedal back in the cars, to allow the user to take control of the vehicle if necessary.
More informations about IDATE's expertise and events :
Over the past few decades, TV service providers’ market power guaranteed them a certain leadership in production.
Thanks to a steady relaxation of competition rules in the United States, the resulting vertical integration trend has seen production studios merge with TV networks and cable companies. In other markets, such as France, public authorities have continued to oppose such a trend, underscoring how vital production independent of the top networks is to sustaining diversity and creativity.
A new way of consumption
Here too the Internet is changing the status quo. We watch more and more videos. We watch them more on our own, and from increasingly global sources. Content providers and pay-TV distributors are being penalised both by their costs and their only national footprint, and are having to contend with two major threats: being cut out of the service equation and being cut off from customers. Market heavyweights like the ones found in the United States are having to weigh the pros and cons of working with a platform such as Netflix that is expanding worldwide, versus setting up their own over-the-top solution… and protecting what is still their main source of income, i.e. selling programmes to TV channels (including affiliate stations). But their dilemma is still less dire than the one facing Europe’s independent providers, who have a primarily national footprint and which are often restricted in the extent to which they can exploit the rights to the programmes they help finance.
Ecosystem and legislation
The European Commission likes the idea of having TV rights negotiated for the EU as a whole. It would provide an opportunity to introduce the idea of economies of scale in a lucrative sector, and one that has a tremendous cultural influence. Unfortunately, in its revised version, this plan, which is one of the pillars of the Digital Single Market proposal unveiled in early May, is coming up against Europe’s very disparate set of national TV ecosystems. As national laws – and especially the state of the industry – currently stand, very few companies in the EU can hope to come out winners in any negotiations for rights to all 28 European markets. Bluntly put, a very cut and dried application of such a scheme would more likely be a boon for outsiders such as Netflix, Google, Apple, Facebook, Amazon, etc.
Despite which, our desire to be optimistic leads us to hope that the steady and inexorable development of the OTT video model will drive a change in legislation across Europe, and lead to cross-border and possibly continental deals between Europe’s TV sector players.
For the publication of the last study about "OTT Regulation" and the 15th edition of the DigiWorld Yearbook, IDATE is organizing a conference on the perspectives and key trends that will structure the digital economy for the next decade, DigiWorld Future
More informations about IDATE's expertise and events :