26Mar/140

Edito by Yves Gassot

GASSOT Yves
 
 
Yves Gassot

CEO, IDATE
 

Telecom: Heavyweight manoeuvring in France and in Europe

 

So Vivendi chose to enter into exclusive talks with cable company Numericable’s main shareholder for the sale of SFR, France’s second largest mobile operator and number three ISP. The deal which, straight away, would reduce Vivendi’s stake in the new operator to 32% and guarantee its future full withdrawal. This option was chosen over the one offered by Bouygues Telecom, France’s third largest mobile operator and fourth largest ISP, which would have resulted in the creation of the country’s largest mobile operator, with close to 50% of customers. Bouygues Telecom had even anticipated the French competition authority’s qualms about the merger by agreeing to sell off its network of 15,000 towers to France’s fourth MNO, Free, which serves 12% of the country’s mobile users.

It is possible that Vivendi was looking for the quickest exit from SFR. Both SFR and Bouygues Telecom have been members of the IDATE programme for a number of years, and we had no part in the negotiations. So we will keep ourselves from further comment.

But three general remarks are worth making:

• The “telecoms war” that has been going on in France for the past several weeks is not a game of Monopoly, or some form of industrial Meccano. At the very least, it is emblematic of a broader economic crisis in the sector. And, unfortunately, this situation – which includes a massive drop in revenue that is weighing heavily on margins, debt rates (debt to EBITDA ratio) and investing capacity – has hit all of Europe’s main markets.

According to IDATE, telecom services revenue in Europe’s five biggest markets has shrunk by 12% in five years. If France has been the focus of market analysts’ attention over the past few days, we have been waiting on the DG Competition decision over the sale of O2 to Hutchison Whampoa in Ireland, and especially over the deal that would allow Telefónica to take control of a merged O2 and E-Plus (KPN) in Germany, Europe’s largest market.

• Market consolidation, which appears inevitable, could take several forms. Given anti-trust authorities’ reluctance to see fewer players competing in the marketplace, it may take the form of infrastructure sharing schemes. These deals have existed for mobile systems in certain countries for years now, and their numbers could grow considerably. Among other things, they allow telcos to reduce their CapEx and OpEx, but do not eliminate any rivals. So in a price war situation, they make a decrease in ARPU more tolerable, rather than stabilising or helping increase margins.

In Europe, then, consolidation tends to focus on putting an end to market configurations of four network operators (in favour of three MNOs plus MVNOs) that have emerged from public authorities’ award of some 20 additional licences since 3G-UMTS launched in Europe – even if a great many of these operators have since closed up shop. The negotiations between Vivendi/SFR and Numericable nevertheless illustrate a different kind of consolidation: fixed-mobile. The impetus behind this consolidation lies both in the potential of quadruple play bundles and the growing overlap of wireline and wireless systems, with the advent of small cells and ultra high-speed mobile.

Not long ago, we saw Europe’s top mobile operator, Vodafone, acquire Cable & Wireless and spend more than 7 billion EUR for Kabel Deutschland. This deal, along with Liberty’s recent takeover of Virgin Media and Ziggo, helped drive up the price of cable assets, which Altice and Numericable were able to capitalise on – as will no doubt Ono in Spain not far down the road. If there appears to be no lack of support from the banks for these mergers, the money may not be so free flowing for a third type of consolidation, namely cross-border deals inside the European Union. Synergies there are less overt, and national consolidation appears to be a mandatory prelude to financial markets supporting offensive strategies that result in the creation of truly pan-European operators. The danger is that, by delaying national consolidations, European consolidation could fall into the hands of outside players.

• And, finally, do we need to choose between operators’ financial health and consumer interests? It seems a bit of a caricature. There no doubt needs to be some assurance that rebuilding margins does not result in unreasonable price hikes and collusion. But this seems unlikely. First, because regulatory authorities in Europe are both well entrenched and experienced. Second, because technical progress in this industry is such that margins which enable cost-effective investments, and a steady rate of equipment renewal are the basic conditions of lower unit prices and improved quality.

23Jan/140

Hybrid TV: Wireline operators’ new video distribution strategies

Jacques Bajon
 
 
Jacques Bajon

Head of "Video Distribution" Practice

 

The market report entitled, “Hybrid TV: challenges and opportunities for telcos and cablecos” published as part of IDATE’s video distribution series, explores the biggest changes that wireline operators are facing today, and the options available to them. It details the three main strategic options that operators will need to choose from: strengthen their video service provision business, charge for OTT traffic or focus on internet connectivity.

Project Manager Jacques Bajon says that, “how telcos’ and cablos’ video strategy evolves is becoming an increasingly important issue, as the growth of OTT video and its impact on internet traffic will change the balance of power for video distribution on wired networks”.

Verizon recently announced its upcoming takeover of Intel’s Media Assets, a division devoted to developing cloud OTT video products and services, as part of the carrier’s bid to step up the rollout of new generation video services for all devices.

While the impact of these changes will vary depending on the region, the state of competition, the influence of the market leaders and the strategies adopted by operators, broad policies and choices are nevertheless becoming clear. Operators will be able to choose their positioning from, increasingly hybrid, strategies.

Strengthening the role of video service provider

Many telcos have joined cable operators in a providing 'traditional TV' services. The underlying reasons are varied and often non-exclusive, and include improved ARPU, triple-play subscriptions and reduced churn. This strategy can be extended, allowing operators to:
• provide new OTT services,
• become a publisher of TV services,
• go beyond their technical network coverage by relying on broadcast partner networks or 'public Internet'.

Charging for OTT video traffi

With the net neutrality debate still hanging over this option, where discrimination is being tolerated only for operators’ OTT services targeting their customer base:
• The first grey area agreements have been made between some service providers generating large volumes of traffic and telcos
• Development of operator or telco CDNs can help with internet traffic optimisation and can also become a traffic quality solution for third-party service providers.

Relying on online connectivity

With this option, operators can rely primarily on internet subscription revenues by assuming the role of neutral distributor of IP services, including video. For telcos, this is a case of returning to their incumbent business, but is a change of role for cable operators.


• More information on Hybrid TV market insight : Challenges and opportunities for telcos and cable operators

22Jan/140

Cutting the Cord: Common Trends Across the Atlantic

Published in COMMUNICATIONS & STRATEGIES No. 92, 4th Quarter 2013


Joint Interview between Gilles FONTAINE, IDATE and Eli NOAM, Columbia Business School

Summary of this issue: "Video cord-cutting" refers to the process of switching from traditional cable, IPTV, or a satellite video subscription to video services accessed through a broadband connection, so called over-the-top (OTT) video. The impact of cord cutting will probably differ among countries, depending on the level of roll-out of digital cable, fibre optic networks, and/or IPTV, on the tariffs of legacy video services, on the quality of broadband access and on national players’ strategies.
Regulation will play a key role in this new environment, as a strict enforcement of net neutrality could prevent network operators from leveraging their access to customer base to market their own video services.

Eli NOAM<br />
Columbia Business School,<br />
New York, USA<br />
 Exclusive:

 Joint interview with

 Gilles FONTAINE, IDATE,
 Montpellier, France
 
 Eli NOAM, Columbia Business School
 New York, USA
 

C&S: How would you define cord-cutting, from a US or European perspective?

Gilles FONTAINE: Cord-cutting, in Europe, is seen mainly as a USA phenomenon, where consumers would trade-off their pay-TV subscription for over-the-top Internet services. The last years, in Europe, have rather seen the rise of powerful cable and IMPTV operators competing in the pay-TV market with legacy satellite packager.

Eli NOAM: Cord-cutting is the dropping, by consumers, of expensive cable TV subscriptions in favor of online access to TV programs and on-demand films. Drawbacks for consumers are less certain quality (bandwidth), less availability of live programming such as sports, and absence of some channels. Advantages are cost-saving, no need to pay for undesired channels, better search, less advertising, greater choice, more control. In a broader sense, cord-cutting is a transition of TV from a broadcast/cable push model to an individualized pull model. So this is not just about switching to yet another delivery platform. That's the easy part. It is much more fundamental. Looking ahead, one change will be that by going online, TV will move from a slow-moving, highly standardized technology controlled by broadcasters and consumer electronic firms to a system where multiple technical approaches compete with each other and propel video delivery into an internet-rate of change and innovation. And that's just the technology. Equally important changes will take place on the content level, and in the structure of the media industry, in the advertising and business models, and in the policy.

Do you see any evidence that cord-cutting is really happening?

Gilles FONTAINE: Cord-cutting, in Europe, is not happening, or is not happening yet. Several reasons account for this: on the one hand competition is intense in Europe between networks, and is driving Internet access and television prices down, therefore limiting the incentive to "cut the cord". On the other hand, Internet services are far from having the same level of offer as US ones, even if catch-up television is increasingly available throughout Europe. Also, the video-on-demand market is very fragmented, with still limited catalogues and interfaces that could be improved and subscription video on demand is nascent, and mostly pushed by US-bases players, even if some European players have launched first services. Finally, the penetration of connected TVs and connected set-top-boxes is probably also lower in Europe than in the USA.

Eli NOAM: In the short run, there is less cord-cutting than media reports and hype suggest. For a variety of reasons, almost all participants in the media industry have an interest in dramatizing the issue. Broadcasters are making investments in ‘second screen' distribution, partly to be prepared for change, and need to justify them. ISPs are expanding bandwidth to position themselves as providers of mass entertainment options. Telecom companies, similarly, need to upgrade their networks. New providers of bypass service to broadcast and cable, such as Aereo in the US, create buzz to their market-disruptive activities. Media cloud providers such as Amazon or Netflix present new options. And even cable TV operators, who are the ones negatively affected, have an interest in presenting the problem as a crisis, at least to policy makers, in order to gain regulatory relief.

The reality is more modest, at least in the short term, but not insignificant. According to a credible analyst, Craig Moffett, The "pay TV sector" – cable, DBS, and IPTV – lost 316,000 subscribers in a 12 month period mid-2012- mid-2013. Since IPTV has gained subscribers, cable losses must have been larger. That is a loss of about 0.3%. Another estimate for 2012 has the number at 1.08 million. In a 4-year period 2008-2011, anywhere between 3.65 and 4.75 million subscribers were lost. But that was in the midst of the Great Recession, and thus not all can be attributed to cord-cutting.

Do OTT services really challenge telcos and cablecos managed TV and video offers?

Gilles FONTAINE: Many studies seem to show that OTT services propose a better customer experience than the equivalent launched by the telcos or the cablecos. OTT services are Internet natives, customer friendly companies, with a rhythm of innovation that is difficult to compete with. Telcos and cablecos still concentrate on the "linear television model", even if they have developed their own on-demand offers, whereas OTT services specialize in on-demand services. But telcos and cablecos still benefit from a privileged access to the TV set through their TV set-top-box, a competitive advantage which is about to be undermined by low cost solutions to connect the TV set, such as Chromecast from Google.

Eli NOAM: Overall, the extent of video streaming has been quite large. In the evening hours, about two-thirds of internet traffic are video-bits. Netflix alone has added 630,000 streaming subscribers in the US in 3 months in 2013, to a total of 30 million. Thus, while the numbers of cord cutters is not huge yet, as mentioned, a steady loss of subscriptions is to be expected, and it is backed up by surveys in which cable subscribers grumble about staying with expensive subscriptions which they do not fully utilize. This is particularly true for the younger generation. 34% of the Millenials (cohorts born 1980-2000) say that they watch mainly online video and not broadcast TV. For Gen X and for Boomers the numbers drop to 20% and 10%.

With OTT available, the traditional business model of cable companies unravels. In the past, they were able to raise prices and to pass on the raises by channel providers. This becomes more difficult. Similarly, it becomes more difficult to offer only bundled channels ("prix fixe"). Similarly, the ability of channel providers to offer content to viewers directly reduces their bargaining strength considerably. If they want to keep up, they also need to develop expertise in online technology, social networking, and mobile communications.

UK cableco Virgin Media and Sweden cableco recently signed a distribution agreement with Netflix. Do you foresee any revision of the cablecos and telcos triple-play model?

Gilles FONTAINE: Building an IPTV service is not straightforward for a telco: network costs can be high to ensure a homogeneous quality of service. They also face high programming costs and the complexity of negotiating with the media world. On-demand services hardly prove to be profitable, because of the market power of Hollywood studios combined with the strong competition between telcos and cablecos, has for instance led to almost unrecoupable minimal fees to access programs. The situation can be similar for a cableco that would not have the resources to acquire exclusive, attractive content: the recent deal between Virgin Media or Com Hem and Netflix heralds a change of strategy for the smaller telcos and clablecos, which could favor to comfort their Internet access business by offering the best OTT services rather than pushing their own television packages.

Eli NOAM: Overcoming all of these challenges is possible but requires an acceleration of internal processes, major investments, and a willingness to give up some control. There are signs of change in that direction. Comcast, which has just paid $ 39 billion for NBC Universal, thus gaining vertical control from the camera lense to the eyeball, has now announced a trial of a cord-cutting offer to subscribers: if they take a Comcast broadband service (of a quality that is today an upgrade for most customers) they get at basically no additional charge HBO Go (HBO's archive of self-produced shows plus current other shows, available anywhere in the US from most devices), plus the free broadcast channels. The regular monthly price $ 70/ month, compared to a price of $ 135 for a full complement of 200 channels including HBO Go. So the viewer willing to skip regular cable channels saves a lot of money. The data cap for such a service is 300 Gigabytes. This is about 120 hours of HD viewing per month, which is adequate for single viewer but tight for a multi-device, multi-viewer household.

So this shows that cable companies are considering to embrace cord-cutting as an inevitablity. Another development in that direction is the US cable industry's considering to integrate Netflix into its operations. They are holding talks with Netflix to make Netflix an option on their set-top boxes. In such a scenario, Netflix would, in effect, become cable companies' major VOD provider and revenues would be shared. This, together with the cable MSO's own cord-cutting option, would in effect accelerate cord-cutting. However, cable companies would not be entirely bypassed. They would mitigate cord-cutting into channel cutting. Ultimately, cable companies' main asset is their transmission network. Its exploitation will undergo transformation.

TV channels also face another form of cord-cutting, as viewers may directly choose their on-demand programs. How do you see their future role, if any?

Gilles FONTAINE: TV channels, as aggregators, may lose their specific role if on-demand consumption develops significantly. However, they will evolve proposing more and more live events to continue gathering strong audiences at the same time. Moreover, there is still a need of arranging the on-demand catalogues, pushing the right content to the right viewer at the right time and on the right device. TV channels should be able to leverage their linear programming to play their aggregator role in an on-demand market. But they will need to heavily invest in IT and review their trade-off between linear and on-demand distribution.

Eli NOAM: TV channels gain and lose. They gain in bargaining power over cable and other distributors. They can deal directly with users, though more likely they will go through new types of intermediaries such as Apple and Amazon.com. In a profusion of content offerings, strong brands are a valuable way for users to search for content. And if they can identify users or user characteristics they can fine-tune and individualize advertising. The danger for channel providers is that the loss of cable MSOs hold over viewers means that they cannot share in the MSOs pricing power. Furthermore, content providers can disintermediate them by going directly to viewers. Sports leagues, for example, could deliver their events directly and cut out the networks. Most of the channels do not have major operational IT expertise, and this provides an opening for an entire industry of new service providers and video clouds.

Gilles FONTAINE's Biography

Gilles FONTAINE is IDATE's Deputy CEO and is also in charge of IDATE Business Unit dedicated to media and digital content. During its 20 years experience in the Media sector, Gilles Fontaine has become an expert of the media economics and of the impact of Internet on content. He directed numerous studies for both public and private clients, including the EC, governments and local authorities, telcos and TV channels. Recent assignments have included a participation in the future MEDIA programme ex-ante assessment, the analysis of new video internet services economics, a long term forecast project on the future of television. He has also monitored the impact of digitization and online distribution on other media, radio, press and music. Mr. Fontaine holds a degree from the highly reputed French business school, HEC (Ecole des Hautes Etudes Commerciales, 1983) and from the Institut MultiMédias (1984).

g.fontaine@idate.org

Eli NOAM's Biography

Eli NOAM has been Professor of Economics and Finance at the Columbia Business School since 1976. In 1990, after having served for three years as Commissioner with the New York State Public Service Commission, he returned to Columbia. Noam is the Director of CITI. He also served on the White House's President's IT Advisory Council. Besides the over 400 articles in economics, legal, communications, and other journals that Professor Noam has written on subjects such as communications, information, public choice, public finance, and general regulation, he has also authored, edited, and co-edited 28 books. Noam has served on the editorial boards of Columbia University Press as well as of a dozen academic journals, and on corporate and non-profit boards. He was a regular columnist on the new economy for the Financial Times online. He is a member of the Council for Foreign Relations. He received AB, AM, Ph.D. (Economics) and JD degrees, all from Harvard. He was awarded honorary doctorates from the University of Munich (2006) and the University of Marseilles (2008).

Published in COMMUNICATIONS & STRATEGIES No. 92, 4th Quarter 2013

Contact
COMMUNICATIONS & STRATEGIES
Sophie NIGON
Managing Editor
s.nigon@idate.org

10Jan/141

OTT Video

ROPERT Samuel

Samuel ROPERT
Lead Analyst, IDATE


Opportunities for Telcos around VoD, SVOD and Telco CDN

IDATE delivers its analyses and conclusions on OTT Video in its recently published market report. Our experts spotlighted the different opportunities for telcos and examined the drivers and hurdles for video delivery over-the-top.

Synthesis of selected player strategies

Global telcos video delivery strategies

Source: IDATE, market report "OTT Video", December 2013

Consumer OTT video already represented an impressive worldwide market of almost 7.4 billion EUR in 2012, with revenues well-balanced between advertising and paid videos (pay-per-view or subscriptions). Nevertheless, VoD still generates more revenue on managed services, captured mostly by telcos and cablecos, at around 60% of total VoD sales in 2012. On-demand paid services over managed services represents for VoD and SVoD together around 45% of these service sales on both managed and OTT services. Video is therefore also a key market for telcos, and not just a traffic issue with significant impacts on telcos networks.

Video is indeed clearly gaining traction. It now represents a large part of Internet traffic and requires even more investment with no direct revenues, at least for those telcos offering unlimited flat rate plans -- the extra consumption of bandwidth is obviously charged in metered plans. This video traffic is nonetheless indirectly paid by broadband access. With the explosion of traffic, however, it is becoming harder for telcos to cover costs. Thanks to the abundance of free content, online video is indeed a mainstream service on the Web, as is search or social networking. It is typically still focused on short YouTube-like formats but with a growing consumption of free premium programming, specifically TV series from both legal services (catch-up TV), and low-cost paid solutions, as with SVoD from Netflix. The general strategy of content providers for both ad-funded and paid services is to differentiate their offering from others. To achieve this goal, they are adopting both quantitative (larger catalogue) and qualitative approaches by acquiring exclusive content through, for example, sports and partnerships with studios.

The delivery strategy of the content providers really depends on the video traffic delivered and therefore on the size of their own architecture for the largest content providers (Google/YouTube and Netflix overall) and more and more third-party CDN solutions for intermediate players. Some players, premium and ad-based platforms and especially those trying to better monetise their content, are looking at multi-CDN approaches to increase QoS as well as to benefit from price competition. Others are waiting for the deployment of telco CDN for better QoS.

The major operators are also involved in the TV/video delivery on their own account but, increasingly, also for third parties. Video has been part of triple-play solutions from most telcos for about 10 years, first with linear TV (delivered through multicast) and then video-on-demand solutions. It is even the prime business for cablecos – they have also generally been considered as telcos since their triple-play developments. Non-linear service strategies depend on the ISP, ranging from total control of distribution with rights acquisition, billing, and packaging to pure pipe solution with costs savings and total externalisation. All the major operators, essentially the incumbent operators, have implemented telco CDN solutions.

Telcos still have real opportunities around paid content in leveraging managed services, i.e. a combination including the customer base, the network with QoS, the billing service and set-top boxes, which remains necessary for now for mass market access to the TV set. The retail option (i.e. reseller or packager) has clearly more potential, as the world market for on-demand video will be close to 6.2 billion EUR in 2017 on managed networks (mainly telcos/cablecos) or 44% of the total video market. The big challenge remains the capacity of telcos to develop further the SVoD market (which may grab some market shares from the VoD market) for which they are only capturing 25% of revenues. For telcos not ready to invest into managed services (network and CPE costs), telco CDN still represents an option, especially as it can be developed in combination with transparent caching, allowing a similar efficient result without deals with content providers but also without the revenues. The short-term opportunity is rather small, even though telco CDN can also be used for managed services. In the long-term, i.e. by 2020, with heavy traffic from mobile, the opportunities will be even greater (telco CDN could benefit from mobile to reach about 15% of the market by 2020, at more than
2 billion EUR
).

Read more: Discover OTT Video Market insight contents

8Jan/141

Big Data for Telcos

Julien Gaudemer

 

Julien GAUDEMER

Consultant at IDATE

 

How big data can get new revenue
and reduce costs?

Telcos are now in a position to use their data assets to generate value. Through big data techniques, ‘data services’ can generate new revenue or can help telcos to enhance their internal processes and core businesses, as stated previously. Not all data services are efficient for telco businesses, each service having varying efficiency.

Potential benefits of big data applications for telcos in terms of new revenues and potential savings, based on telco revenues and costs in 2012

Big data applications for telcos

Source: IDATE, market report "Big Data for Telcos", publication date Dec. 2013
N.B.: APIs are not included in this table as they are not a real big data application but an enabler for customers.

Internal purpose services

Internal purpose services aim at improving internal operations as well as enhancing customer relationships and products. Most of them use internal data (customer anonymised data or network data) with processing done internally: personal data protection is therefore as important as it is for external purposes and there are no questions of business model or competition. These services are thus easier to roll out and implement than external purpose services (with operations outside the company).

Optimisation of network and real-time DPI

The main benefit of the optimisation of network platforms and real-time DPI is material and financial. Such a service can lead to rationalisation and optimisation of current network infrastructures in the short term, and a more efficient use of the equipment in the long term.
On the financial side, a small reduction in capex by just a few percentage points can be generated immediately thanks to optimisation. It will especially lead to a shift of capex in the long term as investments will be made later. However, a few percent of capex is actually significant for a telco as it can represent several million euros each year. The ROI for optimisation systems can be, however, be significant.

Improvement of products

Big data techniques to improve products are aimed at increasing customer satisfaction (indirectly reducing churn) and attracting new customers. The main consequence of such benefits can be increased turnover due to new customers or a reduced churn rate.
A small increase of ARPU can also be expected in the short term as new products can attract existing customers and generate additional sales. These new products can also provide a competitive advantage to the telco in the short term.

CRM and Sales

The main goal of data services related to CRM and sales improvement is to generate new sales, and especially up-selling and cross-selling. It can increase revenues moderately, in the long term.
In addition, these services can bring a better knowledge of customers and can therefore increase customer satisfaction to a decent degree, reducing churn indirectly and maintaining revenues in the long term. The subscriber acquisition costs (SAC) can also be reduced in the long term as these techniques improve the customer acquisition process.

Churn prevention

In addition to previous data services helping to reduce churn, specific churn prevention techniques using data exist. Churn is, in any case, an important for telcos in a very competitive environment. Churn reduction leads to revenue stability and can avoid massive migration of customers in the case of new attractive plans from competitors.
These new tools can thus lead to a reduction of subscriber retention costs (SRC) in the long term, but with an increase in the short term to implement the churn prevention platform.

Fraud detection

Fraud detection is an important stake for telcos as fraud represents an important cost. Systems to detect fraud are therefore crucial for telcos and are a profitable investment in the long term. Fraud detection can thus lead to sensible reduction of fraud cost and losses.

External purpose services

Services provided by telcos to third parties can generate new revenue from data sold to these parties, or through services based on internal data analysis.
Contrary to internal purpose services, external services have to be analysed in their competitive environment and in their specific market. Each service has multiple ‘external’ constraints, more or less important, depending on the market and the environment.

Insights

The market for ‘insight’ services is relatively new, having started at the end of 2012. It is thus small and telcos can have a strong position as they own geolocation data from their mobile subscribers. If only a few telcos currently provide such services, others could join the market in the years ahead. Large OTT players would also be able to provide insights with their own data, but their data seems to be less accurate.
Improvements from new techniques such as real-time analysis (currently available) can bring value to insights but a lot of technical and privacy issues remain. Partnerships with other telcos seem to be not essential as a telco can, for instance, define the number of individuals on an area extrapolating the number of subscribers in this area. However, a partnership with other such players as pure players from the survey market could bring value to such services.
However, the growth potential of this market remains limited as potential customers seem to be limited as well. Such services are not well known at this time, and telcos should communicate more about their benefits, to attract more customers.

Audience measurement

The audience measurement market is not a new one, as some players have been active in the TV audience measurement segment for a long time, followed by Internet website audiences and, to a lesser extent, in mobile application audiences. Telcos have introduced this market to measure mobile audience (for both applications and Websites), as they have a closer presence of mobile devices.
On the mobile segment, OTT players cannot really compete with telcos. The major OTT players on this market are Nielsen and comScore. Thus, to invest in other market segments, and especially those related to the Web, telcos should make partnerships with such players as they both have value to add in a common service.
In the end, the potential growth of this market is significant as the mobile measurement market segment should grow over time, with growing mobile uses.

Raw data sales

This market is still small as few initiatives exist at present. It is mainly composed of partnerships between telcos and other players interested in telco data and especially on very location-specific data.
Such a service is therefore based a discussion between the customer and the telco to define the kind of raw data to provide, and how to exchange it. The process is not automated. An automated system would consist in providing APIs sending the same data for all customers, or insight services with the same result of analysis for all customers.
In terms of competition, telcos are not the only players to provide such data as OTTs can provide it too. However, both face privacy issues as consumers are increasingly afraid of sharing their personal data with third parties.

Ad networks

The advertising market is very large and generates important revenue. Its growth is also very important as advertising is the core of many business models. Competition is very high.
In this environment, telcos can push specific strengths allowing them to get a competitive advantage, namely the data they can use to provide efficient targeted advertising.
However, the share of telcos on the mobile advertising market remains low – IDATE estimates this share at about 8% of the mobile ad market. Partnerships with other telcos or other players would be interesting in order to obtain a larger share of the cake and to reach another target.

Recommendations

The recommendations market is still small and mainly held by such OTT players as Facebook and Google. Their advantage is in providing service through their environment: a social network or even an operating system gathering data on customer habits.
Telcos also have strengths in providing recommendations: location data as well as other declarative data can be used here. This may, though, not be enough to compete with OTT players with their multiple diffusion channels for their recommendations. Recommendations would be thus of limited value for telcos.

APIs

The API market is quite specific as it does not generate substantial revenue and is heavily segmented. In addition, APIs cannot be really considered as big data applications. They are mentioned here as an important tool for telcos to share internal data.
The only API currently generating revenue is carrier billing as telcos get a share of the transaction amount. This market is thus very small in value, yet significant in the volume of data exchanged.
In terms of competition, APIs provide specific data that depend on each provider. Carrier-billing APIs are proper to telcos. User profiles are usually provided by social networks, but can be also be provided by telcos, as with Orange. In this specific market segment, telcos compete directly with some large OTT players, but only in terms of the kind of data and not in terms of potential revenue.
Alliances of telcos can bring practical benefits in order to reach a larger share of population worldwide, and in order for developers to develop API connections with only a few players (and not with each telco).

Conclusions on big data services for telcos

Of these big data services, some help to reduce costs whereas others can generate new revenues directly or indirectly. They do not, though, provide the same ‘potential’ benefits in that the final benefits may differ between implementations. The figure below provides an overview of the potential benefits of each service or application in terms of new revenues and savings. These figures are estimations of the potential impact for the global retail telecom market, for a full year. It gives an overview of the benefits of each kind of application.

More information on Big data for Telcos

IDATE delivers its analyses and conclusions on Big Data in its recently published market report "Big Data for Telcos". Our experts spotlighted the different opportunities for telcos and examined the drivers and hurdles of a massive use of Big Data.

17Dec/131

Interview with Craig MOFFETT MoffettNathanson LLC, New York

Published in COMMUNICATIONS & STRATEGIES No. 92, 4th Quarter 2013


Video cord-cutting

Summary of this issue: "Video cord-cutting" refers to the process of switching from traditional cable, IPTV, or a satellite video subscription to video services accessed through a broadband connection, so called over-the-top (OTT) video. The impact of cord cutting will probably differ among countries, depending on the level of roll-out of digital cable, fibre optic networks, and/or IPTV, on the tariffs of legacy video services, on the quality of broadband access and on national players’ strategies.
Regulation will play a key role in this new environment, as a strict enforcement of net neutrality could prevent network operators from leveraging their access to customer base to market their own video services.

Craig MOFFETT<br />
MoffettNathanson LLC, New York
Exclusive:
Interview with Craig MOFFETT
MoffettNathanson LLC, New York

Conducted by Raul KATZ,
CITI (Columbia Institute for Tele Information),
New York

 

C&S: Is cord-cutting affecting equally cable TV and telcos in the US?

Craig MOFFETT:

There's a fundamental difference between the cord-cutting experienced by the cable operators, which is all about video, and that experienced by telcos, which is all about voice. Video is a high bandwidth service and voice is a low bandwidth one.

Low bandwidth services are the easier target, so up to now we've seen much more aggressive cord-cutting in voice than in video. The fact that the cable operators have a more robust physical plant than the phone companies has left the telcos losing share in broadband as well as in voice, making the losses all the more painful for the telcos.

Video is such a high bandwidth service that video cord-cutting is only just beginning. By our estimates, there are now as many as 2 million households that have cut the Pay TV cord in the U.S. That's only about 2% of the market, but it is a growing segment. In these early numbers you can see the beginnings of a bigger problem.

What are the different retention strategies deployed by each type of player to prevent an acceleration of cord-cutting trends?

The telcos seem to have concluded that they are fighting a losing battle to retain wireline voice customers. The residential voice market as a standalone business is vanishing before our very eyes. Unlike in Europe, bundling wireline and wireless therefore isn't really an option. In the U.S., the telcos have regional wireline footprints but also have national wireless ones. Naturally, they are reluctant to make a compelling integrated offering for fear that it will simply reduce the competitiveness of their wireless businesses outside their footprints.

Cable operators have an advantage in that they've got the best physical plant (at least where there is no fiber-to-the-home alternative). So they've been able to bundle video and broadband, and even voice, as a retention strategy. That has proven very sticky. And by tilting the pricing of their services – higher for broadband and lower for video, at least on the margin – they can make it less and less attractive to leave.

And the cable operators have another advantage. It is easier to defend high bandwidth services than it is to defend narrowband ones. The key is whether the cable operators will be able to begin charging for broadband usage. If they can, defending against high bandwidth video streaming becomes relatively easy. Or rather, it becomes a moot point, since a carrier charging the right price for usage is economically indifferent whether video is delivered via traditional Pay TV or via internet-based OTT (over-the-top) alternatives. The question here is entirely regulatory. Whether they will meet regulatory resistance to their early trials is unclear.

Would any changes in the content arena (e.g. sports content) accelerate the cord-cutting trend?

In many ways, sports programming holds the key to how the ecosystem will evolve in the U.S. Today, sports are exclusively available via the traditional model. Cutting the cord is therefore appealing to a relatively smaller segment of the population. If the most popular sports events were to be made available over the Internet you would suddenly begin to see a much more rapid migration to video over the Internet.

Conversely, if traditional cable and satellite operators are ever able to force the unbundling of sports networks by putting them on a separate tier, they would relieve what is otherwise a tremendous pressure point on the system. In theory, that would slow down cord-cutting. Today, cord-cutting is primarily about cost, not technology. And the biggest driver of cost inflation is sports programming. Taking it out of the basic programming tier would lower the cost to non-sports enthusiasts, reducing their incentive to cut the cord.

Would you see that cord-cutting would trigger additional changes in the content value chain (e.g. backward/forward integration, M&A)?

For distributors, the key question is whether the economic value of the video transport function can be preserved in an over the top model. If it can, the distributors will fare relatively well. Even satellite operators would benefit, since the economic benefit of cord-cutting would be mostly eliminated, which would naturally slow down the migration. Again, the real questions here are regulatory, not technological or economic.

For programmers, the key question is whether cord-cutting will necessitate unbundling. Most consumers think that content bundling is driven by the distributors. It is not. It is driven by the programmers. The programmers sell bundles of cable networks to the cable operators, and their contracts require that those bundles be kept intact.

Cord-cutting is typically assumed to entail a move to unbundling, or a la carte, programming, but that doesn't necessarily have to be the case. One can imagine a model where video is delivered over the Internet in the same unwieldy bundles that are today delivered by cable and satellite operators. If things evolve that way, the implications for the programmers will be relatively modest. On the other hand, if programming is ultimately unbundled as it moves to the Internet then the value chain as we know it will be upended. Value in that model would move further and further upstream, ultimately to the actors and artists, accelerating a migration we've been witnessing in slow motion for years. The value of the media conglomerates would radically decline as their revenues declined and as their costs of content acquisition and production rose. At this point, it is too early to say whether this will happen in video. It already has in music, and the results haven't been pretty.

Biography

Craig MOFFETT is the founder of MoffettNathanson LLC, an independent institutional research firm specializing in the telecommunications, and cable and satellite sectors. Mr. Moffett spent more than ten years at Sanford Bernstein & Co., LLC as a senior research analyst. He was previously the President and founder of the e-commerce business at Sotheby's Holdings. Mr. Moffett spent more than eleven years at The Boston Consulting Group, where he was a Partner and Vice President specializing in telecommunications. He was the leader of BCG's global Telecommunications practice from 1996 to 1999. While at BCG, he led client initiatives in the U.S. local, long distance, and wireless sectors, in both consumer and commercial services, and advised companies outside the U.S. in Europe, Latin America, and Asia. He was the author of more than 20 articles about the telecommunications industry during the 1990s. He published analyses and forecasts

Published in COMMUNICATIONS & STRATEGIES No. 92, 4th Quarter 2013

Contact
COMMUNICATIONS & STRATEGIES
Sophie NIGON
Managing Editor
s.nigon@idate.org

3Dec/130

Interview with Terry DENSON, Verizon Communications, New York

Published in COMMUNICATIONS & STRATEGIES No. 92, 4th Quarter 2013


Video cord-cutting

Summary of this issue: "Video cord-cutting" refers to the process of switching from traditional cable, IPTV, or a satellite video subscription to video services accessed through a broadband connection, so called over-the-top (OTT) video. The impact of cord cutting will probably differ among countries, depending on the level of roll-out of digital cable, fibre optic networks, and/or IPTV, on the tariffs of legacy video services, on the quality of broadband access and on national players’ strategies.
Regulation will play a key role in this new environment, as a strict enforcement of net neutrality could prevent network operators from leveraging their access to customer base to market their own video services.

Terry DENSON, Verizon Communications, New YorkExclusive:
Interview with Terry DENSON
Vice President, Content Strategy & Acquisition
Verizon Communications,
New York

Conducted by Raul KATZ,
CITI (Columbia Institute for Tele Information),
New York

 

C&S: Is the telco voice cord-cutting experience at all applicable to video distribution?

Terry DENSON:

I would not necessarily agree that the voice cord-cutting experience is the salient point. I believe the applicable lesson from the transition of voice from wireline to wireless is that the wireline relationship was literally and figuratively connected to the household while the wireless relationship is personal (e.g., it is common for several, if not all, members of a household to have their own device, which is personal to them). I see a similar opportunity in video distribution: the long term winners will be those distributors who are able to develop and offer video relationships (subscription or otherwise) that are targeted toward individuals (and all of their devices) and not solely the household.

What do you believe are the Telco's key assets in facing cord-cutting (either voice or video)?

Telcos have two key assets that make them well-positioned to establish and maintain market leadership in video: 1) The best bundled broadband product; and 2) the best platform for offering consumers a wider and deeper choice of live, recorded and on-demand content across all devices on a personal basis than any OTT player.

How do you believe Telco's fare relative to cable companies to face current and future video cord-cutting trends?

I believe Telcos are in a better position to prosper (especially those with a material wireless business) because they will be better able to: 1) monetize video traffic over the networks through high speed wireless and wireline networks; and 2) deploy compelling video services based upon those networks that provide more value and choice to customers than an OTT only player.

Do you expect any changes in value creation along the chain as a result of future cord-cutting trends?

I expect two long term changes in value creation: 1) the enhanced value of owning the broadband pipe based upon consumers increased reliance on greater capacity; and 2) the expansion of the video pie based upon the proliferation of video access points on devices and increased personal relationships and subscriptions for video access on those devices.

Biography

Terry DENSON is Vice President, Content Strategy & Acquisition for Verizon Communications. He is responsible for Verizon's content strategies and acquisition across all platforms including FiOS TV, Broadband, Verizon Wireless and Redbox Instant by Verizon (Verizon's joint venture with Redbox). He previously was vice president of Programming and Marketing, a position he was named to in August 2004 when he joined Verizon. In that position, Denson oversaw the creation and implementation of FiOS TV's content packaging, pricing and marketing strategies and video content acquisitions. Prior to joining Verizon, Denson served as vice president of programming for Insight Communications where he led the acquisition of programming, in addition to the development of analog, digital, video-on-demand, high definition TV, Broadband and interactive content strategies. Previously, as director of business development for the Affiliate Sales and Marketing department of MTV Networks, a division of Viacom International, he negotiated affiliation agreements. As general attorney for ABC, he managed numerous content rights and distribution matters. A graduate of Harvard University, Denson holds a J.D. degree from Georgetown University.

Published in COMMUNICATIONS & STRATEGIES No. 92, 4th Quarter 2013

Contact
COMMUNICATIONS & STRATEGIES
Sophie NIGON
Managing Editor
s.nigon@idate.org

13Sep/13Off

Are great shifts afoot in the telecom sector?

GASSOT Yves

 

Yves Gassot

CEO, IDATE

 

The warning signs are increasingly visible. And the fever could well take hold of the telecom sector. In Europe, the sector’s health is febrile to say the least: plummeting revenue, shrinking margins and tumbling share prices. These facts are no longer open to debate, nor is the massive impact that the economic crisis has had on telcos. Listening to market watchers’ opinions nonetheless reveals tremendous disparities in diagnoses.

Is this dire situation the result of a regulatory framework that imposed a state of competition too intense for the market to bear? No doubt, but we also need to remember that these same policies had long been seen as something Europe had done right, something that enabled the former monopolies to evolve, for new entrants to become profitable companies, and for consumers to enjoy the benefits (often more quickly than in other Western markets) of mobile telephony and high-speed internet.

It should also be said that regulation is not a summary of public policies, and that government actions – e.g. maximizing spectrum prices, the inherent ambiguities of State ownership, growing number of taxes, etc. – have their share of responsibility here too. Lastly, we should mention the already forgotten impact of the crisis that the telecom industry suffered soon after the internet bubble burst, of optimistic goodwill in company accounts, and the anesthetizing effect of financial markets which, by giving priority to debt reimbursement and then dividends, did not really encourage company heads to invest and prepare their business for the long term.

It should also be said that regulation is not a summary of public policies, and that government actions – e.g. maximizing spectrum prices, the inherent ambiguities of State ownership, growing number of taxes, etc. – have their share of responsibility here too. Lastly, we should mention the already forgotten impact of the crisis that the telecom industry suffered soon after the internet bubble burst, of optimistic goodwill in company accounts, and the anesthetizing effect of financial markets which, by giving priority to debt reimbursement and then dividends, did not really encourage company heads to invest and prepare their business for the long term.

One area where regulation, and public policies in general, have fallen short was in coming late to an awareness of the massive transformation that telcos were facing. Ultimately, the advantages that innovation would deliver to consumers – not to mention suppliers – in the medium term, should have counted for as much as demands for lower prices.

The Commission is testing out a few ideas that it wants to make concrete.

Using the single European market as its springboard. It is going back to what in the 1990s was presented as the counterbalance to market liberalisation. It is also responding to a European sector that is extremely splintered, compared to the concentration we find in other markets. So there’s the idea of a “passport” that would allow telcos to enter the different national markets without impediment, through a complex cooperation between national regulatory authorities. The ongoing pursuit of harmonized regulation and enabling pan-European strategies are not, in principle, to be rejected. They could be positive things for both telcos and their customers, and especially their enterprise customers. But given the state of most telcos’ accounts, and of national markets, we do not think this would solve the problem. In other words, if Deutsche Telekom is not present in Italy, it is not because of licensing problems (with the very real exception of frequencies which appear destined to remain under national control for some time to come), nor even because the terms and conditions set for accessing existing fixed and mobile infrastructure would be exorbitant. It is above all because of the difficulties the telco is suffering in the markets where it already does business (starting with Germany), and the problems that all companies operating in Italy are having to contend with. For the time being, we will not delve into the (at first glance tempting) bonus that the idea out of Brussels could generate, by virtually doing away with roaming charges within the EU.

So, what now?

During this current review of European directives, it would be wise to give the sector some breathing room by letting up on ex-ante regulation, in exchange for commitments to investing and by putting faith in ex-post actions. It also seems likely that, in the current environment, the course of trade will get the upper hand, and that anti-trust decisions will counterbalance the influence of the sector’s regulatory framework. We believe that a scenario of the very gradual diminishment of telecom markets’ and telcos’ power in Europe is no longer the most likely. Given mergers and acquisitions that are in the works, and others being spoken of, it is starting to look more like a race between European operators’ ability to rebuild their margins through a restructuring in national markets, and the huge appetite of operators from emerging regions and from the United States, whetted by plummeting share prices. If Europe is unable to organise the sector’s fixed-mobile consolidation on its own (either via mergers or infrastructure-sharing, firstly at national and later at pan-European level), outside forces will do the job for it. In which case we would lose what is still one of our major assets in our bid to tap into the massive opportunities embedded in the digital world.

16Jul/13Off

Telcos and the investment challenge

MANERO Carole
Carole MANERO
Project Leader, Digiworld by IDATE


Capex momentum still positive, with telcos spending €237 billion worldwide

“CAPEX spending in 2012 was at its steadiest rate ever, coming in at 7% or slightly higher than in 2011”

IDATE has released the latest version of its annual report on telcos’ spending strategies around the globe. As always, the report is a chance to check in with an indicator that has become a key measure of the telecom industry’s health.

Carole Manero, who directed this report that draws on a unique global database of telco capex on fixed and mobile systems, says that, “spending in 2012 was at its steadiest rate ever, coming in at 7% or slightly higher than in 2011”. As a result, capex for telecom carriers worldwide in 2012 was higher than in 2008.

Mobile investment is driving growth

According to IDATE, spending reached €132 billion in 2012, which is €9 billion more than in 2011 (about €15 billion in total CAPEX growth between 2011 and 2012), and driven especially by telcos investing in migrating infrastructure to mobile broadband.

France, the biggest spender among EU Member countries

In Europe, France was the biggest spender among EU Member countries: €6.8 billion in 2012, only just ahead of the UK where telcos spent €6.7 billion

Breakdown of total CAPEX worldwide, in 2012

Worldwide CAPEX breakdown

Source: IDATE, July 2013

Emerging markets also driving CAPEX growth

According to IDATE, CAPEX in emerging countries (BRIC + MEA + LATAM) grew by nearly €9 billion in 2012, representing 57% of total growth between 2011 and 2012.
- Emerging market countries need to build their networks, including cellular, and upgrade them.
- These countries are relying chiefly on mobile infrastructure, due to a lack of landline infrastructure.
- Worth noting is that China has become the biggest spender in Asia-Pacific which is still by far the most dynamic region, with an aggregate capex in fixed and mobile systems of over €100 billion in 2012.

Streamlining Investments

Telcos have several ways of streamlining their investments, including resource pooling, outsourcing and even insourcing, even if we are not seeing any common thread emerging, either nationally or by carrier profile.

Telco spending patterns around the world, 2008-2012

CAPEX Dynamics

Source: IDATE, July 2013

This is an excerpt of our insight Telcos face to investment challenges being a part of our ongoing monitoring service Telecom Players & Markets Watch

3Jul/13Off

Mobile and Online Payment

Julien GaudemerJulien GAUDEMER

Consultant at IDATE


Opportunities for telcos:
NFC & carrier billing

OTT players and telcos have been involved in the payment market for several years already, having designed their own payment systems.

On the one hand, most OTT players have an internal payment system allowing users to pay for virtual or physical goods directly on their platform. Telcos, on the other hand, have developed carrier-billing services that allow users to pay through their phone bill. This market segment is still growing and generates a significant volume of transactions. IDATE estimates the worldwide carrier- billing market to be 15 billion EUR in 2012 and expects it to reach 22 billion EUR in 2017. The internal payment systems of the large OTT players – Google, Apple and Facebook – generated about 10.5 billion EUR of virtual goods sales worldwide in 2012 (for these three players). Amazon generated 45 billion EUR of worldwide virtual and physical goods sales in 2012. These figures include payment card transactions, carrier-billing transactions and their payment system transactions. In addition, the PayPal payment system generated 73 billion EUR of transactions worldwide in 2012.

Overall e-commerce market estimated by IDATE at 789 billion EUR in 2012

Such figures, however, have to be taken in comparison with the overall e-commerce market, estimated by IDATE at 789 billion EUR in 2012. Furthermore, carrier billing remains a limited payment system as users can only pay small amounts of money and mainly for virtual goods. Hence, some telcos are trying to extend their payment activity to remote online payment systems, of the likes of PayPal; one such is Deutsche Telekom with its ClickandBuy system. In addition, telcos and the large OTT players are seeking to have in-store payment, in addition to online payment.

Positioning of telcos on the main payment services

NFC services, Carrier Billing, Mobile payment and bank account

Source: IDATE

The in-store payment market is still led by ‘plastic’ payment cards and cash payments, but some new payment systems are progressively being introduced at the point-of sale: NFC mobile payment, barcode or QR code mobile payment or payment with a mobile bank account, the latter in developing countries. Non-NFC payment systems are generally used by specific retailers, such as Starbucks, for internal use, except for PayPal introducing its payment system in-store through various non-NFC techniques. The NFC mobile payment system is still in its early stages; the number of users was estimated by IDATE to be 5 million worldwide in 2012, generating 1 billion EUR of transactions and likely to reach 141 million users in 2017 with 51 billion EUR of transactions.

5 million NFC mobile payment system users worldwide generating 1 billion EUR of transactions – in 2017 these figures will represent respectively 141 million user with 51 billion EUR of transactions

These figures should be compared with the number of payment cardholders – more than
4 billion. NFC-enabled phones are increasingly available among the smartphones currently for sale, allowing 248 million users to be equipped with an NFC phone in 2013, worldwide, according to IDATE research. As for NFC mobile payment services, OTT players and telcos are currently involved in a fierce battle. On the one hand, the OTT players are providing services on their own, or with a limited number of partners, avoiding banks and telcos (and thus obviating intermediate costs. Telcos, on the other hand, are setting up partnerships with banks and other telcos to provide a unique telco mobile payment application. The business model of NFC-payment application is mainly advantageous to banks and payment systems (as with Visa or MasterCard); it is not a gold mine for telcos, with their fees from SIM rental, or OTT players. In fact, telcos and OTT players may generate more revenue from services associated with the payment process than with payment itself.

Loyalty programmes – couponing sytems – transportation: such services on a 'mobile wallet' may generate extra revenues for telcos or OTT players

The services related to payment are usually loyalty programmes, couponing systems or transportation. The integration by telcos or OTT players of such services on a ‘mobile wallet’ may generate revenue from, for instance, retailers or consumer brands. Some telcos even launched these related services before launching their payment solution. This was the case with the UK telco O2; it launched a multi-brand loyalty programme that now already attracts five million users. Google provides its NFC mobile payment application Google Wallet along with the coupon application Google Offers or the pushed suggestion application Google Shopper. The adoption of NFC technology on mobile devices by consumers will thus probably be facilitated more by the development of these related applications than by the payment application alone. However, related applications require partnerships between telcos or OTT players and retailers, and the design of user-friendly applications that may integrate multi-brand couponing system or loyalty programmes.

This is an excerpt of our insight "Mobile and Online Payment" being a part of our ongoing monitoring service Telco vs OTT watch