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Telco TV is gaining steam in the US, but significant challenges still remain for providers
October 20, 2009
After a relatively slow start, telco TV in the U.S. is growing steadily. We estimate that approximately 5 million households subscribe to a facilities-based telco-TV service today, and it is available to more than one in every four U.S. homes. Verizon Communications Inc. (NYSE: VZ) and AT&T Inc. (NYSE: T) are now among the top five telco TV providers in the world, according to Heavy Reading estimates.
However, significant challenges still remain for providers in this space, including:
The current economic climate: While pay-TV services are generally less affected by recessionary economies, consumers do tend to get more focused on prices and discounts. Increasing market share becomes more of a challenge in this climate, since discounting strategies affect margins. This will be more of a challenge for newer pay-TV entrants such as telcos than for the incumbent cable and satellite operators.
Delivering the promise of IPTV: Telcos have certainly rolled out new and innovative applications, but the overall pay-TV experience is still largely similar to cable or satellite. In order to achieve the growth forecast for them, telcos will need to keep deploying new services and innovate constantly. For a major incumbent with scale, that's a little easier. But the capital expenditure required for new service deployment can be a major barrier for some smaller players, particularly in an economic climate where subscribers are extremely cost-conscious.
Advertising: Advertising contributes about 5 percent of most major cable operators' revenues, and with the new advanced advertising consortium Canoe Ventures LLC , they are looking to increase that percentage substantially. How can telco-TV providers also get a piece of the advertising pie, especially since communication services' share of consumer wallets is getting tapped out?
Programming costs: The cost of obtaining content continues to be a major issue, as carriage fees for the most popular channels keep rising. For a small provider, this can dramatically skew the economics of a pay TV service.
Over-the-top content: The success of OTT video is helping drive a small but growing amount of PC viewing. Leisure time is limited, and even with media multitasking becoming increasingly common, at some point OTT video will directly compete with pay-TV services. Telco TV providers are faced with the challenge of balancing their need to satisfy consumer demand (by facilitating OTT video) while simultaneously limiting the impact on their own subscription pay-TV revenue. This also applies to other online services, such as social networking and photo sharing.
Seamless multiplatform video: Consumers have gone from time-shifting to place-shifting and viewing video on mobile devices. How can telco-TV providers distribute video services to multiple platforms while maintaining consistency in user interfaces, navigation, and overall experience? They also need to identify a viable business model to justify deployment.
Personalization: With the number of content offerings multiplying, telco TV operators need to create new, innovative interfaces that allow consumers to navigate the options available to them. Recommendation engines, adaptive interfaces, and other personalization tools will be important to allow consumers to really find the benefits of all the new capabilities the provider is enabling.
Enabling third-party applications: The success of the Apple Inc. (Nasdaq: AAPL) App Store has inspired several others to create similar application storefronts. Service providers are also looking at ways to create a consistent platform that enables the rapid deployment of new third-party applications.
Many discussions will center on these issues at TelcoTV 2009, as service providers across North America try to find solutions in a perfect storm of constrained consumer spending, coupled with a highly competitive market that constantly demands innovation.
Heavy Reading will be doing its bit to contribute to these discussions. We will present findings from an exclusive study of U.S. consumer attitudes toward pay-TV providers; satisfaction levels with various pay-TV applications; interest in emerging applications; and interest and usage trends for OTT video. The time and location will be posted closer to the event.
— Aditya Kishore, Senior Analyst, Heavy Reading
Practice Leader, Video Transformation, Telco Transformation
Aditya Kishore is the Principal Analyst at Diametric Analysis, a consultancy focused on analysing the disruptive impact of Internet distribution on the video and telecom sectors, and developing the necessary strategies and technology solutions required to drive profitability. He can be reached at [email protected]
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