THE WAY WE WATCH TV IS EVOLVING - AND SO MUST PAY TV OPERATORS
August 2010
Jacobo Garcia-Palencia, Partner
jgp@deltapartnersgroup.com
Luis Cirne, Principal
lci@deltapartnersgroup.com
It is 9am and you are waiting for your dentist appointment. The sound of the dental drill is already ringing in your head, although three walls separate your waiting room from the dentist’s office. You need an urgent and intense injection of serious entertainment. You pull out your smartphone and connect to ‘MyTV’, that shows you the TV series you were watching in your living-room TV the night before, exactly where you have paused as your partner fell asleep on the sofa. You put your headphones on and push ‘Play’. The drill noise is soon forgotten as you mind refocuses on the program you were watching since last night.
This is not the real world - not just yet. TV content providers have not reached this level of cross-platform integration, but they probably must if they want to adequately adapt to the changes in consumer behaviour and to the trends in the TV content provision business.
Ubiquitous connectivity is here, an explosion of connected devices is taking place: laptops, smartphones and tablets are becoming commonplace, leading to intense competition for our ‘screen time’. Surprisingly, the amount of time we spend staring at the biggest and brightest screen in our homes, actually continues to increase. Based on Nielsen’s global survey, time spent on watching TV has increased 1.3% from Q1 2009 to Q1 2010. Accordingly, Pay TV subscriptions have grown consistently to reach almost 600 million households globally in 2009 (source: iDate), representing a total of US$150 billion dollars in subscription revenues, according to PWC’s latest findings.
So it seems Pay TV operators are set to reap the benefits of an increased consumption of TV entertainment. Or are they?
We believe three major trends are threatening to redefine the current TV landscape, and this may not favour traditional TV operators. In this assessment, we look in particular as to how UAE’s IPTV operators (du and Etisalat) can react positively as to (1) grab a share of the media growth pie and (2) maintain client control. Etisalat is currently investing strongly in a national fiber-to-the-home rollout across the UAE while du has just celebrated its first anniversary on its new IPTV platform. How will the rapidly changing TV landscape impact their IPTV business?
Trend 1: TV is unlocked – Pay TV provider’s screen has become a window to the web
In what seems to be an unavoidable trend, the TV screen is opening up to the web. For years now, multiple players have been trying to merge TV and Internet into a single screen and experience. Names such as Vudu, Roku and Boxee might ring a bell as first attempts. More recently, key industry players have partnered to take over the TV interface space and unlock the TV for good. Global brands such as Google, Sony, Intel and Logitech have established partnerships to develop and support a TV interface that allows users to enhance the overall entertainment browsing experience, content that are (i) provided by the Pay TV operator, (ii) available on the web, or (iii) stored on personal devices. What this means is that you can watch your favourite TV show as broadcast by devices. What this means is that you can watch your favourite TV show as broadcast by your Pay TV provider (as you do today with Etisalat or du), or you can use the friendly Google TV interface to easily select one of many online content providers (such as Amazon, Netflix or Hulu) to stream it directly to your TV. Suddenly, competition for content provision on your TV screen has just increased many folds.
Not surprisingly, with an unlocked TV, Pay TV subscribers are ‘cutting the cord’, cancelling subscription-based TV services while opting for on-demand services provided by online operators. According to the Convergence Consulting Group, an estimated 1.6 million American households are expected to have switched to online TV by end of this year.
Although this is not an immediate threat for du and Etisalat, they will need to strategise on competing with the vast content libraries, the on-demand convenience and the relatively low priced offers by online providers.
The first differentiator is infrastructure ownership – IPTV providers actually own the cable through which you get both your TV and the Broadband services. So if du or Etisalat decide to discard net neutrality, you may find that the TV content you are trying to access online is not performing as you would expect from your 50Mbps connection. How long IPTV operators can suppress the bandwidth on content provisioning competitors will be determined by the maturity of the competitive landscape (e.g. the existence of an ambitious alternative broadband provider willing to offer net neutrality) and the regulator.
The second differentiator for IPTV operators is content. Content such as live sports continues to dominate viewership and can be the killer retention factor for operators. In the US, the Super Bowl (the championship game of the National Football League) holds 17 of the top 20 most watched shows in US TV history (source: Nielsen). du and Etisalat were forced to negotiate with Al Jazeera for the broadcasting rights to the recently concluded FIFA World Cup. While several industry experts believe the deal was loss-making for both IPTV operators, it was an important inclusion in their IPTV content portfolio/offerings. Not surprisingly, TV content providers are picking up on the premium content strategy and as a result of increased demand of such content, the price premium has risen substantially in recent years. For example, the seasonal revenues derived from telecast rights of the English Premier League have more than quadrupled between 2002 and 2010.
Several TV operators have also balanced premium content with highly targeted value propositions focusing on specific segments (e.g. DSTV in South Africa offers a ‘Portuguese package’ for the million plus Portuguese Diaspora), beyond the ‘India – North’ and ‘India – South’ packages. Etisalat and du could adopt a similar strategy and provide tailored content packages to multiple expat segments in the country. For example, packaging UK-specific content such as the British FTA channels and key British programs could be pursued. The reality in the UAE is that the underserved minorities will resort to the satellite option to watch local channels of their countries, thus potentially hurting Etisalat and du. The challenge for UAE’s IPTV operators is to structure the right type of deals with content providers to ensure the benefits outweigh the costs, something that online content providers have become very effective. The third differentiator is the viewing experience. Pay TV operators have consistently been first to adopt technological upgrades to TV technology, as evident from the evolution to HD and even more recently, with the introduction of 3DTV. For example, Al Jazeera Sports, broadcasted the World Cup in HD and 3D through satellite and Pay TV platforms. Pay TV operators have been instrumental in pushing penetration of HDTV. In particular, the US penetration has grown from 16.6% in Q1 2008 to a staggering 47.9% in Q1 2010 (source: Nielsen). 3DTV is indeed the next wave. Most IPTV operators have stepped up to offer 3D channels while reference online providers such as Apple TV still have no 3DTV content in their libraries. So chances are that if you just bought a brand new 3DTV, you will stick with your IPTV subscription for awhile so that you can show off your new 3D goggles.
Trend 2: TV content watching will be ubiquitous: anywhere, anytime, on-demand and available on any device
While we spend more time watching TV, our approach on watching TV programs is changing drastically. In the past five years, time-shifted TV viewing (as opposed to ‘live’ TV) increased from 20% to 41% amongst the 8-18 year olds, predicting a significant change in TV watching behaviour of tomorrow’s adult population. In addition, half of the timeshifted TV viewing youngsters are doing it on devices other than the TV (source: Kaiser Family Foundation).
This is boosted by an explosion of video supporting devices. Mobile phones with video players have doubled from 1.3 billion to 2.7 billion units between 2005 and 2010 and new range of devices such as tablets have proven to be a success – one iPad is sold every 3 seconds.
The implication for IPTV operators is simple: they will have to compete with online players not only for the TV, but also for other connected devices. Otherwise, online operators will come out as the only integrated TV content service providers that enable seamless broadcasting across multiple devices, televisions, laptops, tablets and other handheld devices.
The ramifications are complex. IPTV operators will need to offer their own multiplatform services with a competitive value proposition including vast on-demand TV content libraries at very affordable prices. For example, Al Jazeera could offer a variety of content on its own online portal and through iPhone and Android apps to provide seamless access to its TV content.. Comcast and Time Warner Cable, the largest US Cable TV operators, have done just that; they have partnered and launched their own online service that provides universal access to their content library, accessible only to their TV subscription-paying clients. Du and Etisalat are ideally poised for this, as they are already integrated providers of TV, fixed and mobile telecommunications services - if du or Etisalat were to offer the possibility of watching their subscribed TV content on their mobile devices, their TV subscribers would be less inclined to subscribe to a competitor's mobile plan.
Trend 3: TV advertising will become highly targeted
Everybody knows Google is a clear leader in Internet advertising. And if you have a website for your business, chances are you use Google Ads. What you might not know is that Google has already taken significant steps to play the same role for TV advertising.
On the one hand, Google has created a platform for companies who want to advertise on TV to easily select the profile they want to target, upload their TV ads and input how much they are willing to pay to have their ads broadcast (very much like Google Ads).
On the other, Google has partnered with DISH Network (a US satellite Pay TV operator with over 14 million subscribers) and 100 network channels to manage part of their advertising inventory. Google collects comprehensive information about viewing habits of DISH Network’s subscribers and, armed with that information, offers TV advertisers the opportunity to target specific user profiles. Better targeting means higher returns for advertisers, which allow content providers to charge higher prices for the inventory space they are selling. As a result, you will watch ads that are probably more relevant to you. So everybody wins. And naturally Google gets their share for increasing the value of advertising.
This poses a significant threat for subscription-based Pay TV operators in general - more valuable advertising means that advertising-based models (i.e. subscription-free models) have better chances to succeed. You may not mind watching a couple of ads tailored to your profile instead of paying US$2.99 to watch the latest episode of your favorite TV show. You might even consider cancelling your TV subscription and watch only advertising-based content providers.
IPTV operators should see this as an opportunity. If an operator is able to be in the forefront of this trend and take its advertising management to the next level, it can generate additional revenue it can pocket or transfer to its subscribers in the form of lower subscription fees.
Whether this strategic move is driven by a defensive or growth agenda, IPTV operators have much to gain from managing their advertising inventory space as effectively as online players.
In summary
IPTV operators must carefully use premium content exclusivity (e.g. live sports), unique service features (e.g. 3D) and net neutrality to get ready to compete with all range of content providers, including online players – and across all sorts of devices: TV, laptop, tablet or handheld. At the same time, they must become experts at managing advertising inventory space to grow their advertising revenues and strengthen their positioning. TV watching is evolving – and so must Pay TV operators.