Telcos Face Limited TV Options – HR Analyst

PRAGUE -- 2020 Vision Executive Summit -- Amid soaring content and network costs, as well as growing competition from the likes of Netflix and Amazon, telcos are staring at a limited menu of options when it comes to the TV and video business, according to Adi Kishore, an analyst with Heavy Reading.

Despite the phenomenon of "cord cutting," whereby consumers ditch their traditional pay-TV services and switch entirely to over-the-top (OTT) offerings, many operators have continued to ramp up spending on content and supporting network infrastructure in the hope that pay-TV revenues will follow.

That approach could prove attractive in less competitive markets, and if it opens up new revenue opportunities in related areas such as virtual reality, but it also carries major risks, said Kishore during a presentation at today's Vision 2020 Executive Summit in Prague.

On the network side, the costs of building higher-speed and more capable networks have been known to work out at approximately $2,000 per home passed, according to Kishore's research, while some telcos have also spent heavily on their content offerings, including exclusive rights to screen popular sports events.

One example is the UK's BT Group plc (NYSE: BT; London: BTA), which was this week revealed to have spent as much as $5.1 billion since 2012 on rights to show soccer matches from the English Premier League, a top-flight domestic competition. (See BT's Bogeyman: A Soccer-Mad Amazon.)

While those costs have risen, operators would struggle to match the spending might of the very largest OTT players. Netflix Inc. (Nasdaq: NFLX) invests about $7 billion annually in original content, says Kishore, while Amazon.com Inc. (Nasdaq: AMZN) has now ventured into the sports market, recently outbidding UK broadcaster Sky for rights to screen professional tennis matches starting in 2019.

A strategic alternative for operators is to forego the video business entirely, focusing on lower-bandwidth applications and offering "capped access at a low price," said Kishore.

This could help to reduce spending on network infrastructure, and even boost profitability, but it would also come with risks, according to the Heavy Reading analyst. A telco pursuing this approach would probably have fewer subscribers and lower revenues than one providing TV and video services, for a start. The move could also jeopardize efforts to sell other advanced network services.

Want to know more about the impact of Web services on the pay-TV sector? Check out our dedicated OTT services content channel here on Light Reading.

For a service provider determined to provide TV services but desperate to minimize the infrastructure bill, the use of IP multicast and LTE broadcasting technologies could prove attractive. With LTE broadcast, an operator would essentially use LTE spectrum to support point-to-multipoint services.

However, while in theory this should be a more economical means of delivering content to end users, LTE broadcast has failed to generate much interest in the operator community. There appears to be some concern about the technical shortcomings of the technology and the "scalablity" of IP multicast. And although it could help operators screening live sports or similar high-profile events, it may have little relevance when it comes to video-on-demand and social media TV services.

Despite the various challenges, the popularity of TV and video services has driven much of the telco investment in network infrastructure in recent years, says Kishore.

Heavy Reading canvassed 14 key video stakeholders on their views about the importance of TV and video services to operators. Some 12 of those stakeholders agreed that having a video offering was critical for telcos, even if the return on investment was not substantial.

"One of the main drivers is that video anchors the triple-play bundle," said Kishore. "Operators also need to find ways to monetize traffic."

— Iain Morris, News Editor, Light Reading