Tuning In to Telco TV

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The industry continues to buzz about telco TV as some pioneering IOCs charge forward with video strategies, Verizon Communications Inc. reports good early results for FiOS TV and AT&T Inc. promises to deliver facilities-based IPTV in short order. But while telco investment in video equipment and fiber infrastructure to support those video services has brought a lot of excitement to an industry in need of “the next big thing,” there’s still a lot of uncertainty about how telcos best can attack a video market that already is saturated by the cablecos and DBS providers. On top of that, telcos — like the more seasoned players in the video world — are trying to figure out how their TV-based video strategies square with what’s happening in Internet and mobile video.

The industry hailed as good news Verizon’s recent report that it expected to have more than 100,000 FiOS TV customers by the end of the third quarter and 175,000 customers by the end of the year — a market penetration rate of approximately 10 percent.

As it released that information in late September, Verizon (whose service is not IPTV but rather is RF-based) added that its long-term goal is to reach 20 to 25 percent penetration for this service by 2010.

But reaching that goal could be tricky, if you believe what Forrester Research Inc. is saying. A study released by the firm this August reports that telcos expect to get 20 to 30 percent of the TV market “just by showing up,” but says telcos as a group will struggle to gain 10 percent share over the next five years and won’t reach 10 million subscribers before 2011.

Only one in eight consumers Forrester interviewed are interested in switching TV providers. And most that want to switch currently are not paying for TV or subscribe only to analog cable, Forrester reports. That’s not great news for the telcos, considering these subscribers don’t appear to be strong candidates for add-on services — like DVR and caller ID — that could drive carrier ARPU.

So, as Accenture notes in its IPTV Monitor report, telcos moving into video services are caught in a dilemma — they have to keep prices low to attract subscribers while at the same time trying to recoup their investment in infrastructure and content.

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That’s a toughie, which is probably why, as Accenture reports, “confidence is not high among industry executives that IPTV will deliver significant revenue over the next year.” The firm notes that the service providers that already have launched IPTV services are not disclosing revenue details and are focusing primarily on the customer retention and broadband penetration benefits of adding IPTV to their service bundles as opposed to the increased revenue of the service itself. Indeed, Accenture gives an example of how Hong Kong’s PCCW Ltd. stemmed the loss of tens of thousands of landline customers to an alternative provider by adding IPTV to its bundle. “But even if IPTV is a useful arm in the battle for subscribers, PCCW does not claim that it generates huge revenues,” according to the Accenture report.

Still, many remain bullish on telco TV despite what looks like iffy odds.

Without a doubt, the big telcos have the deep pockets to market the heck out of their new video services as well as the political clout to expedite video market entry by removing franchise barriers. The telcos already have been successful at getting legislation passed allowing them to get statewide video franchises — as opposed to having to apply for franchises on a municipality-by-municipality basis — in California, Indiana, Kansas, New Jersey, North Carolina, South Carolina, Texas and Virginia. The big telcos have indicated their alignment with the big cellular providers could give them an edge in video as well.

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That may be why the long-term telco TV picture gets a lot better, at least according to Accenture’s survey. Accenture says that 34 percent of the telecom executives it surveyed believe IPTV will generate significant revenue in three years and another 57 percent are somewhat confident that will be the case.

Of course, what happens with online video could have a serious impact on TV viewership and cable TV subscription. But just what the impact might be remains to be seen.

By 2011, there will be an estimated 140 million online music users, 180 million mobile music users and 200 million mobile TV users, according to Analysys Research, which sees this as a great “threat” to fixed and mobile operators. The network operators are at risk of being cut out of the content value chain completely as a result of this trend, according to the research firm.

Indeed, the Internet is beginning to live up to its much-hyped ability to deliver new content to users, according to Parks Associates. The firm says a small but growing number of users now are paying for these experiences, still household spending on this remains quite small. While revenue for DVD rentals and sales and movie theater receipts total $23 billion each year in the United States, annual revenue among all online rental or download-to-own sites is estimated to be no more than $50 million, says Kurt Scherf, vice president and principal analyst at Parks Associates, so there’s still plenty of room for business model experimentation. Still, he says, it’s important to consider “the boldness with which the major media actors are embracing the Internet.”

In a recent Webinar hosted by Parks Associates, Scherf gave a variety of examples on how companies like Apple, the major networks and cable companies are experimenting in the realm of online video. For example, CBS inked early deals with Comcast to provide some content as an on-demand service. “Major media companies are the current and long-term winners, in our opinion, and we expect consolidation here,” says Scherf.

Notably, telcos were not mentioned in those examples.

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