8Aug/13Off

Internet Services: where is the value?

 

Vincent BONNEAU
Head of Internet Business Unit at IDATE

The Internet services industry is often perceived as a world of completely free services (and thus implicitly low quality), where everything is supported by advertising. In reality, the situation is obviously more complex. The majority of Internet services revenue comes from paid or transactional services, and the proportion of advertising revenue is trending downward (see Chapter 2, Internet markets) with the development of new services around mobile, cloud computing and even social networks, which rely more and more (at least partly) on paid solutions.

A low-cost approach to services?

Many services are actually offered in freemium versions, with a basic free version (often ad-supported) and a more premium paid version. Spotify and Deezer use this model for online music distribution, and Dropbox and similar services use the same for cloud computing. The goal is to establish a large user base by offering free services, and to then use this base as a lever to attract users to the paid services. The associated marketing costs are therefore next to nothing. The bestperforming players are managing to convert almost 15% of their user base to the paid versions.

Even paid services providers (including freemium models) are adopting low-cost pricing strategies, which breaks with traditional pricing models (like Skype for VoIP, Netflix for SVOD, Amazon for e-commerce and PayPal for payments) and thus undermines traditional service providers. However, this does not mean that Internet players never offer premium services.

Telco and OTT provider revenue in Europe's 5 biggest markets

Premium services still exist on the Web

Where monetisation and value creation of Internet services has seen the most success is when providers have used an approach that combines lower-cost pricing and premium services aimed at the end user and/or third parties (such as merchants, advertisers and developers). It is often the functionality offered to the user rather than the price that is premium, especially in terms of customer service (Amazon), scope of the service, account management and device support (Netflix), decision support, ease-of-use (PayPal). Most players also rely on a two-sided approach.

The service offered to third parties who connect with or capture data from users is premium. The price per unit for this is often moderate, too. But the service is very attractive for advertisers and merchants in such terms as quantity and quality of available data, ease of implementation, value-added services, targeting capacity. Advertisers are always willing to pay more for advertisements to reach the most attractive targets. The CPMs are therefore much higher on financial information sites. It is, then, ultimately data, and personal data in particular, that constitutes the premium resource of the Internet.

How top internet companies are positioned

Premium services need advanced tools

To effectively implement premium services on the Internet (and consequently data management and processing), most players are investing heavily in infrastructure for both hardware and software. Major Internet players are positioning themselves around essential technological cornerstones, such as data centres, the Cloud, browsers, operating systems and even devices themselves, or specialized solutions such as DRM. They are implementing their own solutions and developing proprietary approaches if necessary, even offering their resources to third parties (such as Amazon Web Services, Google Analytics, Facebook Connect). Google invests almost one billion USD per quarter in infrastructure.

Advanced software solutions are also central to many Internet players’ activities, particularly around data processing and analysis, which is the focus of the recent growth of big data (see the Big data section in this chapter). Google is therefore indirectly behind the current reference service Hadoop, which derives from Google’s MapReduce.

Averageannual per-user revenue for digital content

Premium Internet services involve platform development

Premium services also require vast amounts of data to be collected. This data capture can be direct (via user tracking),declarative or from various sensors. It can also come from third parties through agreements (possibly via their API).

This has pushed most of the major players to develop platforms capable of collecting data from third-party services. This platform links users of the Internet player’s service with developers, merchants and advertisers who want to connect with a wide audience, with varying levels of targeting. It is therefore an essential intermediary tool. To increase interest in their platform, the major Internet players are also keen to offer a part of their infrastructure and devices (Nexus, Kindle Fire) at low costs, despite their relatively premium specifications.

About the Digiworld Yearbook

While digitisation will bring more growth to certain developed markets, the next decade will show a marked decline in linear television revenue in the video sector, and a corresponding increase in new on-demand services. For the incumbent audiovisual operators, their capacity to generate revenue from these new services will dictate whether they can sustain their levels of turnover. They will, for all that, only find growth opportunities in emerging markets.

digiworld yearbook 2013
197 pages that deliver the finest market insights from IDATE experts who track the changes at work in the globe’s telecom, Internet and media industries throughout the year.

the DigiWorld Yearbook is published in English and French and available in print and PDF format. An iPad edition, developed by Forecomm, is also available.

The 2012 edition can be downloaded for free
The 2013 edition is available for purchase. Print: €99.99, incl. VAT; PDF and iPad: €54.99, incl. VAT

 

  • You can have a look at the digiworld yearbook 2013, purchase it or even download the 2012 version for free at : www.digiworld.org/yearbook/
5Aug/13Off

TV Advertising faced with the New Media Challenge

Florence Le Borgne-Bachschmidt
Florence Le Borgne-Bachschmidt
Head of the TV & Digital content Practice, IDATE.

Despite strong competition from the Internet, television is still a dominant media platform among those currently available.

Television is adopted at an unrivaled rate across all age groups combined, is used frequently and for considerable lengths of time, and these consumption patterns are still showing growth. It is both a source of information and leisure time, and with its ability to reach a mass audience, television wields incomparable influence. Therefore, it is no surprise that, having captured a large audience, advertisers have also been drawn to television looking for visibility and brand building.

Television is still the leading platform for ad spending

40% of advertisers' above-the-line media spending is received by television, on average (excluding below-the-line investment). Revenues are also continuing to rise, while those of the press are crumbling faced with the rapid increase in the Internet's influence.

However, despite resisting well so far, the first signs of slowing growth are appearing, especially in Western markets where TV is beginning to lose market share to the Internet. The sector is in fact facing two phenomena:

  • The proliferation of new channels is resulting in audience fragmentation, which is detrimental to the major channels' audience figures and, by extension, to their advertising revenue;
  • TV program consumption is becoming more personalised. It is transferring to "new" screens, in real time and delayed (via time-shifting, recording programs or catch-up TV services). Although the same content is being consumed, these phenomena are leading to a decrease in broadcast audience figures and therefore to decreasing advertising revenues in some cases.

The capacity of traditional TV channels to capture a wide audience allows them to keep rates high, even to increase them despite decreasing viewing time and audience share, at least at certain times of the day (the "premium to the leader" phenomenon).

Cost of a 30 second spot on national channels according to time slot, USA, 2009-2012

TV ad cost evolution in USA

Source: IDATE based on TVB, TV ad faced to new media challenges, June 2013

However, channels are questioning the ability of online video services to become genuine growth drivers. For now, broadcast TV seems to retain certain benefits:

  • In terms of coverage: The current gap between an online video service and a free national channel remains substantial. In the United States, the major networks have a reach of around 70%, compared to 32.4% for YouTube's and 9.0% for Hulu;
  • In terms of exposure: A viewer in the United States is exposed to an average of 72 minutes of TV advertising per day, while an online video service user will be exposed to an average of 23 minutes 30 seconds of video advertising per month;: A viewer in the United States is exposed to an average of 72 minutes of TV advertising per day, while an online video service user will be exposed to an average of 23 minutes 30 seconds of video advertising per month;
  • In terms of average cost: Broadcast channels and premium video sites are still comparable, though. The average CPM on a site like Hulu or on the sites of US television channels cost between 15 and 20 USD in 2012, compared to 13.8 USD to reach 1,000 homes via a national channel.

Although TV advertising has so far largely demonstrated its effectiveness, it's the concept itself that may lose focus in the next few years. Will it still only involve ads broadcast on the TV set during the programming stream, or will it be any ad spot aired at the same time as a TV program, be it broadcast or streamed, in real time or time-shifted?

Even if they invest heavily in online advertising, TV channels are facing new competition and especially different requirements from advertisers, who are seeking efficiency and ROI rather than more visibility and branding. How will channels adapt to this new paradigm?

This analysis is an extract from our TV Advertising faced with the New Media Challenge Market Insight which we propose within our ongoing monitoring of Television & OTT markets.

28Jan/13Off

Telecommunications versus Over-The-top communications


Soichi Nakajima

Senior Consultant at IDATE

OTT communication service
will account for 6% of total
communication service revenues by 2020

In 2020, for the USA and EU5 combined, OTT communication service revenues will have increased to 15 billion EUR from 7 billion EUR in 2012. Yet they will still only account for 6% of total communication service revenues, with telcos accounting for the remaining 94%. The total market will decline, mainly due to the telcos’ devaluation of the market, rather than the OTTs taking their revenues.

Drawing on IDATE’s extensive work on the latest trends in communication services, this latest study, “Future of Communication 2020: Telco & OTT communication - market forecasts” delves deeper into our analysis and forecasts the paths which the market is expected to take between now and 2020.

The six key trends shaping the market
In this study, IDATE outlines the 6 key trends happening in the communication services market which will shape the market through to 2020.

1. The aggregation of communication types: IDATE notes that most communication service providers are aggregating and providing several communication types to the market. For example, Facebook is primarily a social network (which is a communication tool in itself), but also offers voice, messaging and file sharing services too. In the case of operators, they of course traditionally offer voice and messaging as their core product, but are now looking to diversify into file sharing too, either through cloud products or the GSMA-led RCSe (Rich Communication Suite enhanced) initiative, marketed as ‘joyn’.
___________
* EU5: France, Germany, Italy, Spain, United-Kingdom

2. Beyond traditional communication for telcos: The telcos are now looking to offer more than simply voice and messaging, in order to remain competitive in the market and to remain more than a dumb pipe. IDATE sees three main ways in which telcos are striving to achieve this: providing their own OTT communication service (such as Telefonica with their TU Me app and Orange with their Libon app); partnering with OTT communication service providers (such as Verizon and H3G UK with Skype and H3G HK with WhatsApp); and joining the GSMA-led ‘joyn’ initiative, launched by the three principle operators in Spain (Orange, Telefonica and Vodafone), which aims to offer enhanced communication services across all mobile phones in the same simple way as traditional voice and SMS today.

3. Voice and messaging becoming a telco commodity: The need for telcos to offer more than the traditional voice and messaging service is largely due to the commoditisation of such services. These services are today taken for granted, and virtually all telcos offer them in abundance; that is to say for a certain fee, users get massive amounts of minutes and messages that in reality are hard to use all up, and there are also many cases of unlimited offerings. This means that the value of such services is decreasing. Another trend for telcos is bundling, from double to quadruple play. Whilst such marketing strategies are intended to increase user appeal and also reduce churn, the fee itself is normally reduced and hence further devalues the standard voice and messaging services.

4. Mobile data and WiFi makes strong case for OTTs: For OTT communication services to work on mobile, there needs to be Internet connectivity on the mobile. Especially with the exploding popularity of smartphones, this Internet connection is increasingly provided by both mobile data plans and WiFi. Unlike voice and messaging, unlimited mobile data packages are relatively rare with at the very least throttling usually involved. Especially in the case of messaging there are only small amounts of data involved and thus this poses no problem. Video communication, on the other hand, is often banned by operators, but is possible through WiFi; and in many situations where one wants to use video communication, the user is stationary anyway (such as calling loved ones far away).

5. The rise of video communication: IDATE also notes the increased interest in the market for video communication. The concept is hardly new since operators have in the past tried to market the service, but with limited success. In particular, one of the demerits of operator video-calling propositions was the high cost for users, but now OTTs have come in with a free proposition using WiFi, including the likes of Apple and Facebook. Further, the concept of WebRTC, which allows video calling directly from the browser to any other browser could potentially boost video calling; there is no need for users to download software as WebRTC is an API for developers.

6. Genuinely free OTT offers in exchange of user data: One of the obvious advantages of OTT services is that it often comes for free, or in some cases, a very low fee. As an overall trend in the Internet market, the advertising model is becoming standard and the advertising market is set to grow with better tools and analytics, especially for mobile. The communication market is no exception, and is set to profit from advertising. However, generally speaking, users see advertising as a nuisance, and there is also a market for low-cost services with no advertisements, as demonstrated by the highly successful WhatsApp application.

Project Manager: Soichi Nakajima

Soichi joined IDATE as a senior consultant in January 2009. His main area of endeavour is the mobile communications market, such as the mobile Internet, applications, contents and services, the analysis of strategies employed by the various players, scenario building and forecasts. He also works on other business potentials for the mobile Internet, such as smart grids and VoIP. Before coming to IDATE, Soichi worked for NTT DoCoMo, Japan’s largest mobile network operator by subscriber numbers, where he played a leading role in the strategic planning of the roll-out of Japan’s first 3G M2M data-only tariffs. Soichi holds a Bachelors degree in mathematics, from the University of Nottingham in the UK.

To learn about more about this topic and our related market report please visit our website

6Aug/12Off

World Internet Markets: On-line advertising

NAKAJIMA Soichi

Soichi NAKAJIMA

Senior Consultant at IDATE

 

The global market of online advertising will rise from 60 billion EUR in 2012 to 108 billion EUR in 2016

 
Our recent research on the world Internet markets which we conduct permanently – and more precisely on Online Advertising – has given interesting results we would like to share with you:

USA dominant in the field, with APAC growing rapidly

  • The USA leads both the EU27 and APAC for online advertising value, claiming 36% of the market in 2012
  • However, it is APAC, and especially China, who leads in terms of growth: from 2012 to 2016 China will see CAGR of 26%, and as a result APAC will generate revenues in close proximity to USA by 2016

Online advertising important part of total media advertising

  • Online advertising is already, and will remain an integral part of the total media advertising market
  • No large differences between the regions, with online advertising expected to account for roughly a quarter of total media advertising in 2016, up from around a sixth in 2012

Video, mobile and social networks lead the way

  • Advertising driven mainly by the global juggernauts in these markets: Google (including YouTube), Facebook, Apple, Hulu…
  • By 2016 mobile advertising will generate the most revenue, spurred by both increasing mobile (smartphone) usage and developments in advertising tools. CAGR from 2012 to 2016 will stand at 34%.

Highest per-user revenue for advertising on social networks

  • Through their social graph, social networks can provide effective targeted adverting, and this is reflected in the high revenue return per social networker.
  • All three segments will see growth in per-user revenue, through developments in advertising formats specific to each segment.

Soichi NAKAJIMA
Senior Consultant at IDATE
s.nakajima@idate.org

> Visit our website for more information on our World Internet observatory updated half-yearly.