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Google TV could be a telco’s best friend in the battle for the multiscreen market, says Rob Gallagher
04 February 2011 Rob Gallagher
Telecoms operators once thought they would rule the world. They foresaw a future where people would communicate, access the Internet and watch TV via their mobile phones, PCs and a number of as-yet-unimagined screens. And thanks to their brands, customer relationships and control of the wired- and wireless-broadband networks that would carry the new services, telecoms operators would be best-positioned to profit. It didn’t quite work out like that. But not for the operators’ lack of trying. Throughout the course of the last decade, many sought to expand the control they have over their networks to almost every element of the new-media industry, from content and delivery platforms to devices and embedded software. Unfortunately, the operators overestimated their ability to control these other parts of the value chain, most strikingly in the mobile phone market. Consumers shunned the operators’ mobile portals when they found they could access their favorite PC-based Internet services “over the top” (OTT) of their mobile networks. Pouring salt into the wound, the content, devices and software companies have proved much more effective at entering each other’s markets than the operators have. Search engine Google’s Android mobile operating system (OS), for example, has effectively achieved take-up operator efforts could only ever dream of. Apple’s iTunes, meanwhile, has trumped operator music stores spectacularly in almost every market it is available in. As a result, the value chain for multiscreen services that span the PC, TV and mobile is increasingly looking like a forbidding place for telecoms operators to play. TV: the last-chance saloon for operators? Except, apparently, in one regard: TV. Numerous telecoms operators are continuing to invest heavily in their own homegrown IPTV platforms or white-label ones from traditional telecoms-equipment vendors. Orange is even planning to launch its own connected TV, called SoTV. But the same transformation that happened to the mobile industry is threatening to happen to TV. Apple TV, Google TV and Samsung’s Internet at TV have each garnered enough headlines to worry telco TV operators, though not necessarily the results to back them up. It’s important to point out that the mobile and TV markets differ in many ways. Mobile content was more or less an opportunity waiting to happen for the Internet and consumer-electronics firms, thanks to the failure of most traditional telecoms players to fully explore its possibilities. TV is already well catered to by numerous successful free-to-air and pay TV operators and broadcasters, which have decades of understanding of how people use it. Arguably, their position could be threatened by players with a greater grasp of how people use niche, or “long tail,” Internet content and Web 2.0 applications, such as social networking. But it remains to be seen how well these applications will translate to the TV, since they gained popularity on personal devices, such as mobile phones and PCs, rather than the TV, which people tend to have a much more passive relationship with. OTT threat to pay TV overrated In any case, it seems likely that the forte of traditional TV companies – mainstream TV shows, movies and sports, the “big head” to the long tail – will remain a key part of any successful TV offering. And as long as it does, the Internet and consumer-electronics (CE) firms’ offerings may struggle. A number of major US broadcasters, for example, have blocked Google TV devices from accessing their PC-based online-video services for fear of undermining their traditional TV ad revenues.

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For such reasons and others, Google TV et al will not pose as great a threat to pay TV operators as some of the industry’s more enthusiastic commentators have made out. Informa’s forecasts show that the number of cord-cutters – homes that cancel their pay TV subscriptions in favor of some kind of OTT alternative – will be equivalent to only 2% of pay TV subscriptions worldwide in 2015 (see fig. 1).

Fig. 1: Global cord-cutters, 2010-2015

... but telco TV won’t fare much better This is not necessarily good news for telecoms operators. The fact is, the vast majority of them still won’t be major forces in TV either. Informa’s forecasts show that IPTV subscriptions will make up just 4.7% of TV households by 2015 (see fig. 2). In terms of pay TV, direct-to-home (DTH) satellite and digital cable TV will continue to account for the bulk of the market.

Fig. 2: Global, share of TV households by platform, 2015

The reality is, most telecoms operators will have to do something different if they want to compete in the TV market. One option would be to pursue the same “blue ocean” strategy as the Internet and CE firms, pushing features that contrast starkly with traditional TV, such as apps, connected-home features and the ability to access content on multiple screens. This option makes the question of which TV platform to use even more pressing. A telecoms operator would have to make its offerings as least as good as Google TV and Samsung Internet at TV, which are likely to be embedded in a growing number of TVs, Blu-ray players and other boxes, whether consumers want them or not. That said, both Google’s and Samsung’s products have not had the disruptive effect their makers perhaps would have wanted. Google TV is by many accounts a bit of a turkey, a judgment backed up by the search giant’s reported decision to advise its manufacturer partners to drop their Google TV devices from their launches at the biggest consumerelectronics show of the year, CES. Internet at TV, meanwhile, has attracted only 2 million TVapp downloads – and free ones at that – despite Samsung’s prediction that it would sell 35 million connected TVs last year. www.informatm.com © 2011 Informa Telecoms & Media 2

Scale and the lessons of history But experience from the mobile market would seem to suggest that telecoms operators and traditional telecoms-equipment vendors are not in the best position to develop the kind of platforms that attract the kind of app developers that helped make the iPhone such a runaway success. For example, Orange and Etisalat’s attempt to create the same kind of excitement around the connected home, Soft at Home, appears to have attracted only a handful of thirdparty developers, mostly from the IPTV industry. In addition, traditional pay-TV operators might stand a better chance with their own efforts. Clearly, few are ready to partner with Apple. US satellite operator Dish is bundling Google TV devices with its packages, and lead Google TV-device manufacturer Logitech claims that more pay TV operators will follow suit. But the sizable subscription bases of many providers could offer the scale to attract both developers and CE manufacturers to their platforms without requiring them to join forces with Internet upstarts. Witness, for example, the deals US operators Comcast, Time Warner and Verizon (one of the world’s more successful IPTV players) struck for placements of their TV Anywhere services on Samsung’s Internet at TV devices. There are also signs that momentum is growing behind a select few platforms favored by traditional pay-TV operators, such as NDS’ Snowflake and Tivo (see fig. 5). Informa understands that NDS will be making announcements related to thirdparty developer ecosystems within the next few months.

Fig. 3: Global, major operators' next-generation TV platform commitments and TV subscriptions, 3Q10

That said, offering interactivity hasn’t proved terribly successful in helping IPTV operators win pay TV subscribers. As a Verizon executive remarked last year, “Interactivity will not win you customers; it just won’t.” The operator’s comprehensive sports and movie packages were responsible for that, adding that at best, interactivity might help reduce the number of pay TV customers churning to other suppliers.

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But that’s not the problem that most telecoms operators – which have few pay TV customers to lose – need to solve. They should be more concerned about losing customers of their core product: fixed broadband. But how can they use TV to retain subscribers if customers aren’t willing to pay for it in the first place? The simple answer is to offer it for less or even free, a strategy that worked for a number of today’s successful operators in the early days of IPTV. Telecoms operators and the free-to-air OTT opportunity The slightly tarnished silver lining of this cloud for telecoms operators is that fixed broadband will continue to outpace pay TV, leading to a substantial proportion of homes in many markets that will have fixed broadband but not pay TV (see fig. 6). And these millions of homes could be amenable to taking some kind of broadband and TV bundle that sits in between the two, in terms of both price and interactive features.

Fig. 4: Global, top fixed-broadband-dominated markets, 2015

The interesting thing about these markets is that content firms have little to lose from going OTT, since they will be earning less in revenues from traditional pay TV. This approach has been tried before. BT Vision, the IPTV service of the UK incumbent, is aimed at people who don’t want to take out a pay TV subscription but would be willing to pay for movies on-demand. Unfortunately, the service has repeatedly failed to meet its subscription targets, a problem compounded by the exorbitant cost of its content rights and Microsoftbased IPTV platform. But BT hasn’t given up on the idea. The operator plans to introduce bundles of fixed broadband and YouView settop boxes, which will be based on a platform developed largely by the BBC and the UK’s other public-service broadcasters to provide catch-up TV over the top of any fixedbroadband network. The operator is likely to subsidize YouView boxes in order to drive takeup of its broadband services. It remains to be seen whether the new offers will prove any more successful than Vision, but the strategy might at least allow BT to effectively outsource some of the content and platform costs to its broadcaster partners. Of course, the circumstances BT finds itself in are unique. In few markets have the publicservice broadcasters teamed up to execute such a comprehensive OTT strategy. In addition, as their traditional markets have matured, many content providers have earmarked lowwww.informatm.com © 2011 Informa Telecoms & Media 4

penetrated pay TV markets as their next major growth areas and therefore might continue to tread carefully when it comes to OTT. But other operators struggling to make a dent in the TV market would do well to consider following BT’s example by teaming up with an OTT player, such as continental Europe’s YouView-alike HbbTV or, dare I say it, Google TV. Google TV: A quid pro quo for telcos? Google’s global ambitions for Google TV could lend operators the scale to attract content providers, device makers and app developers that traditional IPTV platforms are likely to lack. Telecoms operators, meanwhile, could offer solutions to some of the problems Google TV is likely to encounter, such as distribution, customer service and a billing relationship with subscribers. There is a precedent: Android. Google’s mobile OS and developer ecosystem have proved to be the only viable alternative to Apple’s iPhone model for telecoms operators, allowing operators to set up and at least try to make money from their own Android app stores. Even Google is considering using operators to charge users of its global app market via their phone bills as well as via its Checkout payment mechanism. Nokia, for example, reports that this “carrier billing” method has resulted in a twelvefold increase in paid downloads from its Ovi download store. Android is also highly customizable, offering operators the opportunity to play content providers off each other for virtual real estate on their phones and app stores. Google, for example, pays Apple about US$100 million a year in a revenue-share deal to be the default search engine on the iPhone, according to one report. A recent deal between Verizon and Microsoft to make the software giant’s Bing the default search engine on certain Motorolamade Android handsets suggests that telecoms operators can use this bargaining chip too. In addition, one of the key selling points of Google’s TV strategy is integration with pay-TV services, such as the ability to search DVR results. Probably the main reason the search giant hasn’t made much progress in winning over the TV industry with this point lies with the fact that operators and broadcasters are hardly fond of Google. The creation of Hulu, for example, was in part driven by its broadcaster owners’ annoyance at YouTube’s apparently “copyleft” attitude toward their content. That said, telecoms operators don’t exactly see eye-to-eye with Google on everything either. But as a consultant once remarked to me about the impact Skype has had on the traditional telephony market, “If you want to disrupt a market, destroy it.” And for telecoms operators struggling to compete against pay TV operators, their enemy’s enemy could very well be their best friend.

www.informatm.com

© 2011 Informa Telecoms & Media

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