|Issue:||Asia-Pacific II 2007|
|Topic:||Digital content – a future in contention|
|Author:||Lawrence Kenny and Nick Gurney|
|Title:||(Lawrence Kenny) General Manager of the Global Telecommunications Industry and (Nick Gurney) Telecommunications Industry Leader|
|Organisation:||IBM Global Business Services Asia-Pacific|
Lawrence Kenny is the General Manager of the Global Telecommunications Industry for IBM Global Business Services (GBS). Mr Kenny is responsible for the definition and execution of IBM’s strategy for the Global Telecommunications Industry, especially with regard to professional services. Mr Kenny has 25 years of experience consulting to the industry. Mr Kenny joined IBM through IBM’s acquisition of PricewaterhouseCoopers Consulting, where he was also the Global Telecoms Leader. Mr Kenny’s experience includes strategic planning, merger and acquisition planning, analysis and execution, privatization advisory services and organizational design and productivity improvement services. Mr Kenny has recently led projects to assess the impact of global industry changes on industry structure, customer management and the future bases for competition in the industry. Mr Kenny joined PricewaterhouseCoopers’ audit practice in Edinburgh, Scotland immediately after graduating from college. Mr Kenny holds an HND in Finance and Accounting from Napier College, Edinburgh and is a member of the Scottish Institute of Chartered Accountants.
Nick Gurney is the leader of IBM’s Telecommunications Industry services business in Asia-Pacific, responsible for IBM’s telecommunications industry service offerings in this market including consulting and SI for Transformation, Business Support Systems, Operational Support Systems, Service Delivery Platforms, Next Generation Networks and Enterprise solutions. His specific areas of expertise are in business and market strategy, transformation and major change management for telecommunications and information industry organisations. Mr Gurney has more than 18 years of experience in the Telecommunications Industry in Asia-Pacific, Europe and the United States and has undertaken significant projects for global and local clients spanning most aspects of their operations. Prior to IBM Mr Gurney held leadership positions in two major international consulting firms, Andersen Consulting (Accenture) and PA Consulting Group.
High growth in digital content offers significant opportunities for telecommunications service providers (telcos). Nevertheless, the telcos’ ability to capitalize on this potential is a point of contention and debate. A new study shows that telcos clearly need costly upgraded networks and technology platforms to handle more sophisticated content and to extend their addressable market. Equally important, though, to recapture their investment they must begin delivering value beyond just access – providing new consumer experiences and grabbing their share of advertising revenue.
Rise of the digital content market The market for digital content is growing rapidly and is forecast to reach US$135 billion by 2010. The telecommunications (telecom) industry is focused on gaining a sizeable share of this market, as voice telephony revenues decline. With digital convergence blurring industry boundaries, telcos can now expand their market to include areas of media and advertising that were once beyond their reach. Even in regions with low cable penetration, many operators are investing in digital content in the hope of offsetting the fall in fixed-voice revenues from increasing use of mobile phones and new technologies such as Voice over Internet Protocol, VoIP. The most promising areas are television and video. Many telcos worldwide have already launched IPTV and VoD, and the number is growing fast. However, it is here that the battle is likely to be keenest as cable providers increasingly offer triple-play bundles and traditional barriers among media and telecom collapse. Delivering all but the most basic digital content services over networks that were originally designed for voice communications and Web browsing is challenging, and telecom operators will therefore have to upgrade their networks to compete. As demand for high-definition television, HDTV, realtime video on demand, VoD, and other such next-generation services increases, telcos will need to make major investments – with returns that are highly uncertain and likely to be positive only in the long term. The investment case Our analysis shows that, with the appropriate scale and average revenue per user levels, telcos can achieve payback on their network investment for basic Internet Protocol television, IPTV, services over Asymmetric Digital Subscriber Line, ADSL, in a three- to five-year period. Such services, however, will not be enough to compete with next-generation services from cable, satellite and terrestrial broadcasters. HDTV, VoD and the like will require far more bandwidth than the current ADSL technology can deliver. Several leading telecom operators have already been investing heavily in new optical fibre networks. Deutsche Telecom plans to spend €3.6 billion rolling out a fibre-to-the-cabinet, FTTCab, and VDSL2 network to 10.5 million homes. AT&T is spending about US$4 billion on a plan to connect 17 million subscribers via fibre-to-the-node, FTTN, and one million subscribers via fibre-to-the-home, FTTH. Verizon has launched an even bigger (US$18 billion) fibre deployment programme to cover 18 million households by the end of 2010. Our model of the economic implications of investing in the two main alternatives to ADSL – FTTCab and FTTH – demonstrates that revenue from content is critical to the business case. Furthermore, the investment case for upgrading existing networks is critically dependent on achieving high penetration rates – in the range of 30 to 50 per cent, depending on the option chosen. Given the maturity of the TV market and the existence of strong competition from the entrenched cable and satellite broadcasters, achieving such high penetration rates will be a considerable challenge. The most successful operators will thus be those that can simultaneously control their costs and drive penetration, by differentiating themselves from their rivals with high-value offerings to content owners, advertisers, consumers and third-party service providers. Opportunities for telcos Opportunities in digital content fall into two broad categories: production and distribution. A few companies have made modest forays into content production. In November 2006, for example, France Telecom created a new unit to invest in French and European movie rights and produce between 10 and 15 films per year. However, the vast majority of telecom operators have no experience with commissioning, producing and licensing films and records, negotiating and managing artists’ contracts or judging consumer media tastes. Most operators will do better by partnering with content providers than by attempting to produce content themselves. However, they can also play a role in facilitating the trend toward user-generated content by enabling consumers to enhance their own content with a range of telecom capabilities, including location, presence and interactive services. In distribution, operators already provide network and transport services, but if they are to protect their broadband revenues they will have to move up the content distribution value chain and bundle their traditional offerings with advanced digital content services and possibly move into aggregation. This should extend, in our view, to offering wholesale content distribution services to other content providers. Trend towards choice, flexibility and control With the move to IP and the proliferation of content distribution platforms (terrestrial, cable, satellite, Internet, wireless and so forth), power is shifting to those companies that focus on the consumer experience. The popularity of new platform aggregators such as YouTube and MySpace is evidence of this shift, as is the growing use of personal video recorders, PVRs. Flexibility, choice and control are therefore becoming critical ingredients for success. Fortunately, the telecom industry has some unique capabilities on which to call in making the customer experience more attractive. They are well placed both to extend the scope and scale of the services that are available, and to delight consumers through the power of ‘4A’: making content accessible anywhere, anytime to anyone via any device (Figure 3). Telcos can give users tools to control the digital content experience themselves, allowing them to determine what they consume and when they consume it. The young and technologically savvy, in particular, do not want to be passive consumers; they want to control their own schedules, produce their own content and share it with their peers. Operators can empower such users by giving them a self-publishing platform. They can also use their location, presence and authentication capabilities to provide enhanced social networking. Operators can harness the collective intelligence of consumers to create innovative services and applications – ‘crowd-sourcing’, as it is called – and apply their unique insights into the behaviour and preferences of individual customers, and knowledge of where they are located, to deliver content and advertising that is highly personalized and relevant to the moment. The role of advertising Advertising represents yet another important source of revenues – one that telecom executives may be underestimating. In a survey conducted by the Economist Intelligence Unit, only 17.5 per cent of telecom executives believed that consumer advertising skills would be critical in capturing value from emerging content services, compared with 60.5 per cent of media executives. Nevertheless, revenues from in-game, mobile, online and interactive TV promotions are forecast to reach US$60 billion a year – or 45 per cent of the entire digital content market – by 2010 (Figure 4). Moreover, both IPTV and mobile advertising represent great opportunities for telcos to make advertising an important source of revenue. IPTV provides the means with which to deliver highly targeted, localized, differentiated and interactive advertising. It is possible to place advertisements during a programme schedule and tailor them to the viewing habits of specific consumer segments. By providing interactive ‘red-button’ functionality anyone who is interested in an offer can respond immediately and it becomes simple to measure precisely how many people have seen a particular advertisement. As experience with the Internet shows, personalization and localization are becoming the norm in the advertising world. Search engines such as Google already deliver language and location-specific content and advertising based on a user’s location. Mobile advertising is still an unexploited opportunity for telecom operators. It is one that telcos are particularly well positioned to capture since they have control over what is delivered to the device. Several mobile phone companies have recently announced plans to enter the advertising space. In September 2006, EMI Music and T-Mobile joined forces to pilot ad-supported mobile videos in Britain. Customers will be given a wide choice of free content from which to choose. Once a user has selected a video, the video will be packaged and streamed with specifically targeted advertisements. Vodafone and Yahoo! also aim to launch a mobile advertising business in the first half of 2007. Customers who agree to accept carefully targeted display advertisements can expect to enjoy savings on certain Vodafone services, including the Vodafone Live! portal, games, television and picture messaging services. Virgin Mobile USA even goes one step further by rewarding customers who view ads by lowering their cell phone bills. The digital content market offers the traditional telecom operators some significant opportunities for adding value, but it also carries perils – not least of which is the scale of the capital expenditure required to deliver advanced video services. Operators will need to manage their network investments wisely, given that the business rationale for implementing optical fibre depends on achieving extremely ambitious penetration levels and content sales. It is critical, however, that telecom operators defend and grow their share of broadband revenues and, given the competition from other providers, they will have little option but to move up the tele-media value chain into content distribution. They should also join forces with other players in the value chain to enhance the consumer experience. Lastly, they should focus on realizing the 4A vision, exploiting the potential of mobile advertising and building a tele-media organization that centres on delivering what consumers really want: a vibrant and exciting digital lifestyle. Creating an easy and convenient digital lifestyle that goes far beyond the confines of voice telephony is crucial to earning telecom’s share of the rapidly growing market.