PROSPECTS FOR IPTV AND MULTI-PLAY BUNDLING IN THE MIDDLE EAST
September 2008
There is no disputing that broadband, and now IPTV and multi-play services have given new life to what once was an uneventful and steadily declining fixed-line PSTN business. What drove operators in advanced markets to rely on broadband and eventually IPTV and multi-play was the increasing pressure on the fixed-line's voice cash cow-due to fixed-mobile substitution, VoIP, and regulatory requirements to open the access networks to competition. But with broadband penetration rates now reaching maturity levels in these advanced markets, broadband itself is becoming a commodity, and its ARPU is now facing downward pressure as well. Enter IPTV and multi-play.
Is the MEA Region Ready for IPTV and Multi-play?
As has been the case in markets where IPTV and multi-play packages have taken off, the main prerequisite for uptake of IPTV is broadband adoption. In our recently published White Paper, Identifying today's key industry dynamics in the Middle East and Africa (available for download from www.deltapartnersgroup.com) we identified three main country groupings in MEA in terms of broadband adoption and its growth prospects, namely, sub-Saharan Africa (excluding South Africa); GCC states (excluding Saudi Arabia); and the rest of MENA (including South Africa and Saudi Arabia).
The level of development in these three country groups is not uniform. The GCC grouping has achieved significant strides in broadband adoption, while the rest of MENA is only now on the cusp of broadband growth. Sub-Saharan Africa is still lagging behind and, while growth will be impressive, it will be from a very low current base and its penetration levels will remain modest at best. The fixed-line operators and ISPs in sub-Saharan Africa and rest of MENA groupings are expected to strive to increase basic broadband connectivity through improved network coverage in the coming years. Their focus, therefore, will remain on basic connectivity rather than increasing broadband ARPU through IPTV, bundling, or value added services.
Where IPTV and multi-play will take a center stage role in fixed-line strategy of operators is in the smaller GCC states. In these countries, broadband adoption is already the highest in the MEA region, and is set to reach maturity soon. IPTV and multi-play is not just a nice-to-have offering to deploy to niche communities and high end new real estate developments, it is a value proposition targeting the mass broadband customer base. In fact the whole fixed-line customer base will be the target of multi-play, in order to drive ARPU and help reduce potential churn in the face of increasing fixed-line competition.
Driven by the same industry dynamics as advanced markets, incumbent fixed-line operators in the smaller GCC states are seeing their traditional fixed-line voice ARPU decline in the face of fixed-mobile substitution and international VoIP. What is sustaining some growth in fixed-line is the net inward migration due to booming economies, but not any increase in usage by existing customers. Incumbents are increasingly relying on their mobile and broadband offerings for growth. Take Etisalat, where its PSTN ARPU declined from $69 to $55 between 2003 and 2007, while its Internet (and broadband) ARPU increased from $37 to $42 in the same period (Source: Etisalat Annual Reports).
How will competition play out in shaping the future of IPN and multi-play?
While incumbents and new entrants in the fixed-line market are both gearing up for the launch of multi-play bundles, it is important to distinguish between drivers and strategies of incumbents versus alternative fixed-line operators in launching multi-play, in order to understand how the market will evolve.
From the network perspective, incumbents have legacy networks, and the first challenge is to upgrade their backbone and, more importantly, access networks to be able to handle IPTV with a quality that is comparable to satellite TV or CaTV. New entrants, on the other hand, have little or no legacy networks and thus, depending on their market demand assessment, can build FTTx from day one to customers they believe are prime targets.
From a value proposition perspective, incumbents view multi-play bundling mostly as a churn prevention, i.e., defensive strategy, rather than a major boost to their fixed-line or broadband ARPUs. In fact, incumbents will tend to engineer and reengineer their bundled offering in order to avoid cannibalization of their existing PSTN and CAN offerings.
New entrants view multi-play as a differentiator that can help churn customers from incumbents and avoid price wars on basic broadband connectivity with the incumbents, since these markets are highly penetrated with broadband and price wars will result if differentiation is not pursued. Specifically, new entrants are likely to launch services first as a double play of voice and broadband, and quickly follow that with a triple play of voice, broadband and IPTV once they have prepared their network and marketing efforts for the IPTV launch.
It is important, however, not to forget about the other major competitor to both incumbents and new entrants, namely free-to-air satellite TV and premium satellite TV providers. A very high satellite TV penetration in the GCC (as high as 80% of households in some GCC countries) means that the value proposition brought forward by telecom operators to customers in a basic set of channels over their IPTV platform will not be a major differentiator in the eyes of customers.
Other than these, however, there are in fact services that telecom operators can offer that can be delivered only through IP, which can further differentiate their IPTV offering from satellite TV. Such services include video on demand (VoD), gaming or music on demand, personal video recording, bundled voice and broadband into the offer, as well as home networking, among other features.
Implications for the operators in the GCC
In order to navigate through the challenges and present the customers with a winning value proposition, operators in the GCC need to focus on the key success factors for IPTV and multi-play, based on global experience to-date and local competitive challenges such as the prevalence of satellite TV in the region.
First, it is paramount to get the technical and operational aspects right from day one, since a superior user experience (read: picture quality) is needed from day one. Otherwise the offering will face negative word of mouth and, given the prevalence of satellite TV, this could be a major inhibitor for future adoption.
Second, operators need to focus their product development efforts and marketing efforts on developing key areas of differentiation. IPTV cannot be a me-too offering, as satellite TV is already at high penetration levels. To succeed, IPTV needs to convince households to churn from satellite TV and give up the investments they have made in satellite dishes and set-top boxes. This means to be able to play to the strength of IPTV over other non-IP platforms, as well as focusing on the service and not the technology being offered.
Third, and on a strategic level, operators need to realize that IPTV is not merely an ARPU booster, but also a churn prevention tool through bundled multi-play packages. As such, and with growing fixed-line liberalization in the GCC, the relevance of IPTV and multi-play becomes even more pronounced. To use IPTV in churn prevention, it needs to be an integral part of a multi-play offer rather than being offered as stand-alone. We have seen European operators that started off with standalone IPTV offerings, fearing that bundling could cannibalize their traditional voice and broadband services. Eventually, the most successful of these incumbent operators such as Orange in France have come full circle and are now offering bundled voice, Internet, and IPTV offerings.
The prospects for IPTV and multi-play in the GCC, particularly the smaller of the GCC states, is very good, given the high broadband adoption in these countries, high rate of new real estate developments where FTTx infrastructure is being deployed, high media consumption and very high disposable income. The trick will be for operators to get the technical and operational challenges right upon launch, while clearly understanding the role of IPTV and bundling in the overall fixed-line strategy they are pursuing in an increasingly competitive domestic fixed-line market, and being able to offer differentiated and segmented offers to the market that cannot easily be matched by satellite TV.