 | Issue: | EMEA 2012 |
| Article no.: | 2 | |
| Topic: | Can IPTV continue to drive Internet demand? | |
| Author: | Oliver Johnson | |
| Title: | CEO | |
| Organisation: | Point Topic | |
| PDF size: | 424KB |
About author
Oliver Johnson is the CEO of Point Topic. Mr Johnson joined global broadband analyst firm, Point Topic, in 2003 and is today responsible for driving the company forward. Since joining the organisation, he has spearheaded the development of the content of Point Topic’s web services into an internationally recognised information source for broadband. The company’s mission is to provide focused information on broadband communication services and as CEO, Mr Johnson is responsible for providing subscribers with updated online resources for worldwide broadband statistics.
After leaving the University of London with a BSc in Maths and Economics and prior to joining Point Topic, Mr Johnson worked with a range of organisations in senior marketing and multimedia roles. This included the role of Online Marketing Manager at image100, Senior Producer at Clever Media, Producer at Redwood New Media and Webmaster for Ovum. With over twenty years’ experience in marketing and developing online environments and being involved in ground-breaking internet implementations, Oliver Johnson has a wealth of knowledge in this industry.
Article abstract
IPTV on the Internet is enjoying patchy success. It is not easy to deploy, it is met with legal resistance, it suffers from fierce competition and the margins are not sufficient. Before it reaches the mass market, several hurdles must be overcome: the bandwidth is often not high enough, coverage is incomplete and legislation may not enforce ‘net neutrality’. However, the non-internet pay-TV market is perceptively losing ground to Internet TV and must find new business models that can persist. Turning Internet-TV into a mass-market proposition can still bring revenues, as is the case for online Music, but the reliance on advertising may not be sustainable, as seen with the transformation of magazines into online versions.
Full Article
Video in one form or another has been a driver for internet development since the 1970’s and it is still the current star driver for higher bandwidth. Today, when most consultants and analysts are asked ‘What application will drive the need for a 100Mbps broadband subscription’, there might be some careful, thoughtful consideration but the first words will be something to do with video. It won’t be the only factor but today it is the primary reason consumers will elect to upgrade their connection and subscribe to (or watch for free) one or more variants of the multitude of video delivery services on offer. This means, in this phase of the world internet market where revenue growth from plain access subscriptions is slowing, that IPTV offers perhaps the greatest potential in the next few years.
This is not news to suppliers and as a result, there is a fiercely competitive market almost wherever you look. Not only online suppliers compete against each other, but also against the existing, well established video suppliers throughout the world. There are cable TV companies in the US, satellite broadcasters across Europe, MEA and Asia and local broadcasters, often operating analogue services in valuable spectrum space, VHS (Video Home System) and DVD (Digital Video Disc) players are almost everywhere – in short, there’s no lack of choice. So how is IPTV faring in the face of these odds and what hope does it have for the future?
The picture so far, on a global basis, looks fairly smooth although in broadband terms growth is best described as ‘stately’ bordering on slow. The relatively straight upward line masks a rougher ride in many markets, with good quarters and bad for IPTV suppliers, but the fact that subscribers continue to move to IPTV is significant.
[Colin] Insert Graphic [fig1]:
IPTV Subscribers and net additions
Paid service/s from ISPs
Although growth stalled to an extent in 2011 against what we might typically expect to see, the uptake in revenue has been significant. Taking a close look at the regions at either end of the scale allows us to ‘bookend’ the IPTV ecosystem. There are three primary obstacles to IPTV growth:
• Bandwidth – the majority of Europe has access to enough broadband bandwidth to allow access to IPTV
• Price – cost is a major obstacle to take-up. In Europe, ISPs have offered tempting prices to gain a customer base and competition has kept the tariffs down
• Legal issues – regulatory aims have the consumers’ interest as a top priority and there are moves to liberalise the markets further.
These factors mean Europe has the most IPTV subscribers of any world region, the highest penetration and some of the best pricing. They also indicate that the future is only going to be more competitive.
Although South America currently reports a lower number of IPTV subscribers, it is the Middle East and Africa that suffers from the highest entry barriers. Higher bandwidth is coming, but not everywhere. It will not benefit all consumers and here we see a major distinction between much of Africa and countries in the Middle East. Qatar, Bahrain, Dubai and much of the Emirates have high penetration of high-speed internet services, but it tails off at the ‘Near East’ (Jordan, Lebanon for example), with Israel as the exception. Therefore, the bandwidth barrier in the Middle East is largely far less of an issue than in Africa.
Many African nations are only just starting to launch higher speed services. However, the lack of infrastructure and the high pricing that is beyond the reach of much of the population mean that delivery of IPTV over fixed connections will only address a small percentage of the potential market. Mobile services, over satellite or 3G and even LTE, offer some relief to the infrastructure challenges but at a high cost. Deployment is relatively inexpensive. Subscriptions, customer equipment and the cost of data however, are not.
Price is likely to be the hardest to overcome. The income disparities can be significant and what may be accessible for a small percentage of the population shows no sign of being available to the masses. In Mauritania, for example, a low speed entry-level fixed service can easily cost 25 per cent of the average annual wage and that is without any services on top.
[Colin] Insert Graphic [fig2]:
% Change in IPTV Subscription Revenue
We estimate that the global run rate for IPTV subscription revenue was equivalent to US$25 billion per annum at the end of 2011, up over 30 per cent in the year. This compares, for example, with the total pay TV market in North America of around US$70 billion in 2011.
While the total revenues are considerable, the chart above does throw one of the core problems for IPTV into sharp focus. In Latin America even with an overall growth in subscribers and new markets opening up, there has been a fall in IPTV revenues!
Margins are the answer. Not only is it expensive to install and deploy a fully functioning IPTV system, complete with head ends, content agreements, marketing and changes in bandwidth demand, it’s difficult to make much net profit per user once up and running.
Entrenched alternative providers fight tooth and nail to preserve their market share and the availability of free content online. This poses significant barriers to pay-IPTV adoption and is exactly what we are seeing in some South American markets. In order to attract any consumers at all, the initial bundles (IPTV almost always comes as part of a bundle) are priced very competitively. Sometimes it is cheaper to take a video bundle than a standalone broadband service, with the ISP gambling that they have a consumer for an extended period, once the consumers start using their IPTV services.
So, at the moment, IPTV is growing in fits and starts. It is expensive to deploy, the competition is fierce and the margins are tight. How bright can the future be?
If it’s online, offline or broadcast, video will win no matter what
Recent data growth path may be bumpy and inconsistent but it is generally upwards. Throughout the world and within particular markets there are pockets of resistance. Bandwidths are not high enough, coverage is incomplete, local services are too cheap and so on. This will continue for some time. As we have noted above, the North American pay-TV market is worth fighting for. Even in the USA, where war chests are biggest, penetration is high and where legislation can be shaped by special interest groups, the walls are crumbling.
Estimates based on a study from Deloitte indicate that up to 20 per cent of current pay-TV customers in the US are thinking of ‘cutting the cord’ and getting their video from the internet in 2012. Tending to support this, Report/Nielsen has released research early this year suggesting that broadband-only households were increasing relative to those taking offline TV (non-Internet) services. They stop short of rounding off the conclusions, at least in public, perhaps waiting for further concrete information before calling it a ‘trend’.
This pattern, at least using an unscientific trawl of various bulletin boards and methodologically dubious surveys, does seem to be common throughout the IPTV deployed world. Consumers like the price, like the choice and the convenience of getting a single bill. These advantages, when put together, have convinced many that they don’t need to sign up for additional video delivery systems.
It is not going to get any easier either. Increasing innovation in the business models, better content availability coupled with ever improving consumer understanding and plain old word of mouth all add to the momentum. In light of this, and factoring in the resistance in each market the forecasts make promising reading, at least if you’re delivering video online. Our estimates put the global pay IPTV market at 250 million households in 2020. To put that in context, that is still less than a quarter of what we expect the fixed broadband subscriptions to be. Quarter of a billion users worldwide will generate, at today’s rates, annual revenues of US$110 billion for the IPTV suppliers.
The markets and the woolly mammoths
Offline (non-Internet) suppliers continue to wrestle with their response to the online threat. Adopting varying strategies depends on where they are in the value chain, how much vertical integration they are allowed or are able to indulge in. It also depends on which market they are addressing and what regulations govern this territory. The only way to protect an existing business model completely from an incursion of Internet-TV is to operate in a closed market with a closed network and a monopoly on supply, as can be seen in some areas of the US. Regulators continue to try to limit these cases and open the markets out to other suppliers but can often be frustrated by local conditions.
Previously, network owners were able to choose what was delivered over their network. The internet has changed that. The acceptance and enforcement of net-neutrality policies is exposing consumers to alternate sources and while suppliers are not pleased at losing a competitive advantage, they have not had much success in opposing the overarching philosophy. Instead, we’re seeing some alternate strategies emerging. For example, Comcast in the US will allow individuals to access video from other suppliers, but the bandwidth consumed comes out of a monthly allowance, currently 300GB. Video from sources that they sanction (or rather over what is said to be a separate private network) does not. According to many, this directly breaches the spirit, letter and intent of current US federal legislation. Comcast argues that it does not.
This approach is being watched carefully by others in the market. It could easily set a precedent. Much of the rest of the world however, currently seems keener on enforcing net-neutrality to the extent of enshrining it in law. In theory, this is a more consumer friendly approach. More competition and more information should lead to better pricing and choice. Exactly how this will shape out is difficult to see in detail, but if we look at other content sectors, newspapers/magazines and music for example, there are some common threads.
Advertising revenue is down across the board (it is cheaper online). The number of large suppliers has reduced (or consolidated) but the number of small suppliers is increasing. Yet revenues are definitely lower per provider. When the ecosystem changes, its inhabitants adapt or die. The number of magazines and newspapers that lost advertising revenue and subsequently tried to launch an online version is almost uncountable. The number of them that succeeded to survive is a tiny subset, and they are often outcompeted by those more established online.
The picture is mixed for organisations that depend on content for revenue. For instance, the music industry has been battling against online service providers since the first file was shared. There is much talk of piracy and varying attempts to restrict usage from rootkits installed by Sony to DRM from Apple, none of which have been met with open arms by consumers. Amidst this, profits and revenues seem to be increasing. The consuming public does, by and large, behave within most boundaries, money is paid, music is bought and not copied and incomes for content creators and distributors are still going up.
Video falls somewhere between these two camps. On the one hand, content does generate revenue and if exposed to a larger consumer base, will generate much more of it. On the other, advertising is an important but diminishing revenue stream. Extrapolating, we can see that continued dependence on advertising revenue has to change or the risk of a downward spiral taking hold is very real. The generation and delivery of content and associated licensing and subscription revenues will continue to be the growth area of online video but the non-internet pay-TV market will struggle to maintain their market share, margins and incomes as global warming comes to the internet.
