Who’s going to make some serious cash in the IPTV market?

According to a new Light Reading Insider report, “IPTV: Where the Money Is,” technology vendors, and especially the likes of Alcatel (NYSE: ALA; Paris: CGEP:PA), stand to make a killing.

”We believe that technology vendors stand to gain the most from IPTV,” reckons the report's author, James Crawshaw, “given the demands for new capital investment it requires.” Carriers, though, "are unlikely to be the main winners from IPTV [in direct financial terms]. We see it more as a defensive strategy aimed at reducing customer churn than as a significant new source of profits." (See IPTV's Economic Realities.)

There are significant drivers forcing telecom operators to adopt those defensive strategies, most notably the increasingly intense competition they're facing from ISPs and cable and satellite operators. As a result, the IPTV market is set to explode in the coming five years and beyond, finds the report.

By 2010, IPTV will have captured 65 million subscribers worldwide, predominantly in North America, Europe, and Asia. To deploy the systems needed to deliver those services, carriers will spend a total $21 billion in the 2005 to 2010 timeframe.

It's that capex pot vendors such as Alcatel and Siemens AG (NYSE: SI; Frankfurt: SIE) are eying. Alcatel looks particularly well placed, according to the report: It has strong positions in many of the key IPTV-related system sectors, including broadband, optical transmission, systems integration, and overall project management for IPTV implementations, where it is already gaining critical experience. (See Mais Alors! Alcatel Bags $1.7B SBC Deal .)

“Alcatel stands out as the dominant supplier of access infrastructure for IPTV rollouts,” finds Crawshaw. “We expect Alcatel to retain a 30-plus percent share in broadband access, with other vendors fighting over the remaining share.”

That strong position in the IP DSLAM market, its additional IP capabilities built around technology from its Timetra acquisition, the vendor's optical equipment portfolio, and its strategic relationship with Microsoft Corp. (Nasdaq: MSFT), all make it a very attractive IPTV systems supplier for major telecom operators, according to the report. (See Alcatel Eyes Video Market, Alcatel, Microsoft Confirm IPTV Deal, IP DSLAM Revenues Jump 20%, Optical Hardware Up, and Alcatel Serges on Triple Play .)

But there are other options. Siemens beefed up its IPTV capabilities with the acquisition of Myrio, and Crawshaw believes Lucent Technologies Inc. (NYSE: LU) may make a similar move on its IPTV middleware partner, Orca Interactive Ltd., now that its previous relationship with Microsoft has dissolved following Alcatel's intervention. (See Siemens Snaps Up Myrio, Siemens Boasts IPTV Success, and Lucent Sees IPTV Opening.)

But while vendors battle to land their share of some potentially lucrative spoils, the service providers must “compete on features and content” just to hold on to their customers. And IPTV won't have a great impact on operator ARPU (average revenue per user) or margin levels, finds the report, especially when compared with other services.

Table 1: ARPU for Triple Play Services

Whereas voice and broadband services incur no additional content costs, telecom operators will have to pay for the content at the heart of their IPTV service offerings, and that will cut deep into profit margins.

For the service providers to make any headway at all, finds the report, they will need to develop unique and compelling applications and invest in exclusive content. The report notes that telecom operators are best placed to combine TV services with broadband data applications, such as instant messaging, and mobile phone features, such as caller ID. This unique kind of integration, in turn, will help retain customers and attract new ones, according to the report's findings.

Sourcing attractive and, if possible, unique content will also help the IPTV brigade, which is good news for content producers, as the introduction of telco TV services broadens their potential market significantly. But carriers should avoid the trap of believing they can create their own unique content, warns the report.

— Joe Tuzzo, special to Light Reading

The report, IPTV: Where the Money Is, is available as part of an annual subscription (12 monthly issues) to Light Reading Insider, priced at $1,350. Individual reports are available for $900. For more information, or to subscribe, please visit: www.lightreading.com/insider.

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