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Reviving the fixed line
 Triple-play slows mobile substitution and pushes broadband market consolidation
    light content
 A “light content” strategy can boost growth and create value for telcos
 Telcos have the opportunity to the TV of the future, in partnership with media and
 software companies as well as equipment manufacturers
 H          individual      t        i    h
 However, i di id l country scenarios show h        differences
                                              huge diff

March 2009
0   Introduction

    8th edition


                                         Arthur D. Little – Exane BNP Paribas study


         2002             2003            2004            2005              2006              2007              2008                 2009




      «Slowly but     « Back on the    « Leaders hit   « More efforts   « Facing off on    « Caution -   « In the eye of the   «Telecom-Internet-
        surely :     road but who’s       back»          required »     convergence »     work ahead »     telecom-media       Media : Reviving the
    No ARPU growth   got the map ? »                                                                           storm »             fixed line”
     before 2005 »


      40 companies    40 companies     40 companies    50 companies     70 companies      80 companies     90 companies          95 interviews
       interviewed     interviewed      interviewed     interviewed      interviewed       interviewed      interviewed           in more than
        in Europe       in Europe        in Europe       in Europe        in Europe         in Europe        in Europe           80 companies
                                                                                                                                    in Europe
0   Introduction

    Arthur D. Little study 2009 vs. 2008: what has changed?




       2008: “In the eye of the Telecom-Media storm”              2009: “Reviving the fixed line”


       50% of European will have mobile broadband            Triple-play limits fixed-mobile broadband
       by 2012 and operator’s efforts will lead to a fixed   substitution and increases consolidation. Telcos
       and mobile network convergence                        are also threatened by cable and satellite
                                                             competition


       Telecom and media players will move towards
                             p y                             Content is a promising lead with a 4 Bn€ revenue
       content distribution thanks to the all-IP                   t it b        for European i
                                                             opportunity by 2015 f E                 b t
                                                                                               incumbents. It
       development                                           remains however insufficient and highly
                                                             challenged by internet, cable and system players


       Telecom operators will sustain a growing              The current economic context is a window of
       pressure on the value chain, mainly from              opportunity for telecom operators to develop
       Internet and system players                           content related services mainly through
                                                             partnerships
Agenda




1        Triple-play: a success story in a “gloomy” telecom media ecosystem

2        Content: promising niches but content alone is insufficient and challenged

3        Operators’ response: content related services namely through partnerships facilitated by the crisis
1   Triple-play: a success story in a “gloomy” telecom media ecosystem

    Fixed revenues are increasingly under pressure due to the threat of mobile broadband
    substitution and mounting competition from alternative players (cable or satellite TV / ISP)

                     Mobile broadband market share                                       Pay TV operators broadband market share

     15% % pop                        2006     2007    2008e
                                                                                   70%
                    12,4%
                    12 4%
                                                                                          60%
                                                                                   60%
     10%
                                                                                   50%
                7 5%
                7,5%
                                                                                                    40%
                                   6,0%                                            40%
                                                                                                               33%       33%
      5%
                                                3,4%                               30%
             2 7%
             2,7%
                               1,8%                            1,7%
                                             1,4%
                                                                                   20%
                            0,8%                                         0,4%                                                       14%
      0%
                                                                                   10%                                                         7%           6%
               Austria       Norway          Spain         UK         France

                                                                                   0%
    Offers                                                                                US      Belgium      UK       Austria    Spain    Germany France
              Unlimited      Unlimited       Unlimited       5GB       1GB
              7,2Mbit/s       7,2Mbit/s       3Mbit/s      7,2Mbit/s 7,2Mbit/s            Broadband market share of Pay TV operators (cable or satellite)
             15€/month       61€/month       45€/month    26€/month 50€/month

    Source: Exane BNP Paribas, Arthur D Little analysis
    Note: Offer benchmark Nov. 2008; Fair use policy applies to unlimited offers
1   Triple-play: a success story in a “gloomy” telecom media ecosystem

    Triple-play offers have helped incumbent players to reduce fixed lines loss


                          Austria: Telekom Austria                                                Sweden: TeliaSonera

       100                                                                      150

         80                                                                     100

         60
                                                                                 50
         40
                                                                                  0
         20
                                                                                 -50
                                                                                  50
          0
                                                                                -100
        -20
                                                                                -150
        -40

        -60                                                                     -200

        -80                                                                     -250
               Q1   Q2     Q3   Q4      Q1   Q2   Q3   Q4   Q1   Q2   Q3   Q4          Q1   Q2   Q3   Q4    Q1   Q2     Q3   Q4        Q1   Q2   Q3
               06   06     06   06      07   07   07   07   08   08   08   08          06   06   06   06    07   07     07   07        08   08   08

                         Access lines         ADSL          TV                               Access lines        ADSL             TV


              Halving the rate of line losses over the 2008–15 period would increase an incumbent operator’s
                l ti b 27%
              valuation by 27%.
    Source: Exane BNP Paribas, Arthur D Little analysis
    Note: net adds in K clients
1   Triple-play: a success story in a “gloomy” telecom media ecosystem

    In France, telecom operators managed to protect fixed revenues thanks to triple-play offers,
    through ARPU stabilization and lower competitive pressure on the fixed-broadband market

                                  Broadband ARPU                                                                     Consolidation

     € / month                                                                                 Competitive pressure (fixed lines)

         55                                                                                     4 000

         50
                                                                                                3 700
         45
                                                                                                3 400
         40

         35                                                                                     3 100

         30
                                                                                                2 800
         25
                                                                                                2 500
         20
               Q1 04

                       Q3 04

                               Q1 05

                                       Q3 05

                                               Q1 06

                                                       Q3 06

                                                               Q1 07

                                                                       Q3 07

                                                                               Q1 08

                                                                                       Q3 08




                                                                                                2 200
                                                                                                            2005         2006       2 007      2 008

                                                                                                                     HHI France       HHI Europe
    Source: Exane BNP Paribas, Arthur D Little analysis
Agenda




1        Triple-play: a success story in a “gloomy” telecom media ecosystem

2        Content: promising niches but content alone is insufficient and challenged

3        Operators’ response: content related services namely through partnerships facilitated by the crisis
2   Content: promising niches but content alone is insufficient & challenged

    With media usage shifting towards the internet and IP-based services, telcos can capture a
    significant part of this new audience and the value created

                                                                 Media usage evolution

                h/week/capita
                                                                                                       Internet
                                                                                                        Usage
                                                                                          Internet        2,1      54
         54                                                                              Penetration
                                                                          New TV             1,6
         52                              Radio /          Traditional
                                         Press               TV              3
         50
                                           1,3               -1,2
         48           47,2

         46
                                                                                     New usages :
                                             Traditional Media
         44                                                                          TV + Internet
                                                    +0,1
                                                                                         +6,7
         42

         40
                     Total                                                                                        Total
                     2004                                                                                         2007


    Source: Exane BNP Paribas, Arthur D Little analysis
2   Content: promising niches but content alone is insufficient & challenged

    Content and related-services represent an additional 40% to the European Telecom market


                                                     2008 TIME ecosystem across Europe1

                                                                        Recorded Music4
        Content & services                                                                                                                       Software
                                                       Video Games³          11,4 Bn€
            126 Mds€                                                                                                                             239 Mds€
                                                           12,3Bn€           -5,8%
              (+2%)                                                                                                                                (+6%)
                                           TV  services2      +20%

                                             79 Bn €
                                                                                                                Software &
                                               3,4%
                                                                                                             computer services
                                   Filmed entertainment5
                                                                       Telecom market                            239 Bn €
                                          23,4 Bn€
                                          -1,6%                            330 Bn €                                    +6 %

                                                                              +3,6%

                                         Consumer
                                         electronics
                                           69 Bn €
                                                              Telecom                         Computer
                                            5,4
                                           +5,4 %
                                                             equipment                        hardware
                                                                                              h d
                                                              57 Bn €                         108 Bn €
                                                                                                +3 %
                         Hardware                              +1,8 %
                         234 Mds€
                           (+3%)

    Source: Exane BNP Paribas, Arthur D Little analysis            3   includes Console, online, mobile, PC games & advertising
                       ¹ Europe includes Western Europe & Russia   4   includes physical & digital distribution (online & mobile)
                       ² includes Advertising, Pay Tv & licences   5   includes box office, home video sell through( physical & online), rentals (in store & online)
                                                                                                         Pay TV
                                                                                                           VoD
2   Content: promising niches but content alone is insufficient & challenged                           Advertising


    The « Light premium » strategy, which allows for differentiation and ARPU generation with low
    investment, seems to be the best approach for telcos
                                                                                                                                                illustrative
                                                                                                                             Direct               Impact
                                                       Description                                       Cost
                                                                                                                            benefits             NPV 2015


                                                                                                          ---                ARPU
                                Exhaustive offer of latest movies and exclusive                                               +++
     High premium               rights for most premium sports                                          600M€
                                                                                                                                                 - 176M€
                                                                                                       per year           30€/month




                                                                                                            -                ARPU
                                Exclusive selection of content with program
                                                                                                                              ++
     Light premium              costs representing15-25% of the average                                                                          +316M€
                                investment in hi h premium content
                                i    t    t i high     i       t t                                   100-150M€
                                                                                                      per year            10€/month



                                                                                                                             ARPU
                                                                                                                               +
                                Distribution of an offer which has been conceived
       Distribution             and packaged by a content player                                           =                                     +130M€
                                                                                                                         ~10% of the
                                                                                                                            pack

    Source: Source: Exane BNP Paribas, Arthur D Little analysis. Net present value (NPV) for an incumbent with +40% of broadband market share
                                                                                                      Pay TV
                                                                                                          VoD
2   Content: promising niches but content alone is insufficient & challenged                       Advertising


    New media consumption patterns have emerged leading to the growth of the VoD market


                     Fragmentation                                     Delinearization                           Interactivity



              A di        l ti i F
              Audience evolution in France                                t ti in Europe (% HH)
                                                                  DVR penetration i E

      100%                              1,1%2,3%5,9%      16%
              4,5%7,5% 8,5%9,5%    11,2%
                               10,9%    11,3%
                                            11,5%
                                                11,6%     14%
       80%
                                                          12%

       60%                                                10%

           96%93%92%91%                                   8%
                       89%89%88%86%
       40%                         83%
                                                          6%

                                                          4%
       20%
                                                          2%

        0%                                                0%
                                                                2000 2001 2002 2003 2004 2005 2006 2007
           99

                00

                     01

                          02

                               03

                                    04

                                         05

                                              06

                                                   07
         19

               20

                    20

                         20

                              20

                                   20

                                        20

                                             20

                                                  20




                                                                     France              Germany
                         DTT channels
                         Others                                      Italy               UK
                         Hertzien channels                           Average W. Eu.

    Source: Exane BNP Paribas, Arthur D Little analysis
                                                                                        Pay TV
                                                                                         VoD
2   Content: promising niches but content alone is insufficient & challenged          Advertising


    VOD, an attractive market for telecom operators, but with high competitive pressure


                                                                                  V D players in the USA & E
                                                                                  VoD l       i th         Europe
                        VOD revenues in Europe
                                                                            along their position in the media-telco value chain

          M€                                                                                                           Equipme
                                                                           Producti      Edition       Diffusion
                                                                                                                          nt
       2000                                                                   on
                                                                         USA

                                                                  1650
       1500                                                               200
                                                                          2007             2005
                                                                                           200          2003             2008
                                             CAGR 07-11
                                               +52%

                                                                          2007             2005         2008             2001
                                                           1150
       1000
                                                                          2007        2001 aux US        2005            2002

                                                     770

         500       CAGR 05-06                                            Europe
                     +89%                    470
                                                                                           2005          2006            2002

                                    215
            0     60       110                                                             2007          2007

                 2005     2006     2007 2008p 2009p 2010p 2011p                                                          2007

                                                                                           2007          2008

    Source: Exane BNP Paribas, Arthur D Little analysis
                                                                                                           Pay TV
                                                                                                            VoD
2   Content: promising niches but content alone is insufficient & challenged                            Advertising


    In terms of positioning along key success factors for the Pay TV and video market, telcos are
    at par with internet and media players but cable operators have some advantages



      TV / VoD key success factors                          Telco                  Cable *              Internet              Media        System



             Price & offer simplicity


      Depth & freshness of catalogues



                Visioning Quality


                              Directly on TV
      Ease of use
                          User friendly search




    Source: Financials reports, Nielsen Net Ratings, Interviews, Arthur D. Little analysis
    Note : *) Cable = similar to Comcast, i.e. strong BB market share (25%), & pay-TV core business, System = similar to Xbox or Samsung
2   Content: promising niches but content alone is insufficient & challenged

    Telecom operator to preserve the value of their triple-play customer base and to capture
    additional value from opportunities in content and related services

                                    Threats and opportunities for incumbents fixed revenues by 2015

       1,0

       0,5                                                                                              + 1.0                   +1.0
       0,0

      -0,5
                                                                              -1.0                      - 1.6
      -1,0

      -1,5                      -0.6

      -2,0
              Threats from internet and system players                  Threat from cable and               Opportunity from content and
                                                                        satellite actors                    related services
               • Threats from Internet players
                   • Their video offer could lead to a price pressure
                     on operators tripleplay                                                                    • Pay-TV
                                            (ex Google
                   • Investment in servers (ex. Google’ Openedge
                     projet)                                            • Cable and satellite players
                                                                          increaseing their fixed               • VoD
               • Threats from System players                              broadband market share
                   • User friendly gaming consoles with services
                     (VoD, games…)                                                                              • Local and targeted advertising
                   • Connected TV (ex. YouTube available on
                     Samsung TVs)

    Source: ARCEP, DigiWorld 2008, PWC, JPMorgan, Arthur D Little analysis
2   Content: promising niches but content alone is insufficient & challenged

    By 2015, content and related services will represent a revenue opportunity of 4Md€ for
    European incumbents, 65% of which are generated by Pay-TV

                            Revenue opportunity from content and services for a European incumbent

                                                          Adver-
                               Pay-TV         VoD                  Total
                                                          tising

         Revenue                                                           Incumbent’s content revenue potential in Europe is
      opportunity in                                                       estimated at ~4 Mds€ in 2015
      2015 in Europe
                                 2.6          0.9          0.5      4
         (in Bn €)                                                         A content strategy could result in an additional
                                                                           CAGR of 1% over the period of 2008-2015
     €/month per 2008
        fixed line
                                 1,8          0,6          0,3     2,7     The total value generated by content represents ~7%
                                                                           of an incumbent’s 2008 revenue

                                                                           Pay-TV alone represents 65% of the potential gain.
    Opportunity as a %
     of 2008e revenue                                                      This opportunity varies between countries
                                 4,8          1,6          0,8     7,2
            (%)
                                                                           Th rapidly growing but crowded VoD and
                                                                           The     idl     i b t       d dV D d
                                                                           advertising markets represent a smaller share of this
                                                                           opportunity
      Impact on 2008-
       2015 CAGR (%)
                                 0,7          0,2          0,1     1,0


    Source: Exane BNP Paribas, Arthur D Little analysis
Agenda




1        Triple-play: a success story in a “gloomy” telecom media ecosystem

2        Content: promising niches but content alone is insufficient and challenged

3        Operators’ response: content related services namely through partnerships facilitated by the crisis
3   Operators’ response: content related services namely through partnerships facilitated by the crisis

    The economical crisis: an opportunity for telcos ?


                      More time to react and forge partnerships as traditional competitors less aggressive

                                                                       Advertising evolution: - 10% in 2009e
        Telcos with and expected revenue decline of
        2 5% (fi d i      b t ) in
        2,5% (fixed incumbents) i 2009 are l less
        affected by the economic crisis than other
        sectors thanks to recurring revenues and
        leeway in terms of opex & capex
        management   t
        Advantages in relation to other sectors:
           •    Internet players, strongly affected by
                the drop in advertising revenues (-10%                     Handset sales evolution: - 15% in 2009e
                in 2009e) will have less money to invest
                in innovative services or engage in
                M&A
           •    Systems player, impacted by shortfall
                in demand (-15% in 2009e) are less
                likely to innovate


    Source: Exane BNP Paribas, Arthur D Little analysis
3   Operators’ response: content related services namely through partnerships facilitated by the crisis

    Operators to invest in content and related services and defend and leverage their key assets


                           High
                                                   Develop                                       Reinforce

                                                     Services
                                                    (Innovation /                                        Network
          ortance in terms of




                                                    Ease of use)
                     venue




                                                              Content
                                                           (Catalogue dept
                                                           (Cata ogue depth                           Control of the
         potential rev




                                                            and freshness)
                                                                                                       set-top box
                                                                                     Customer
                                                                                      relation
       Impo




                                Low                   Monitor                                      Leverage

                                      Low                                                                              High
                                                                        Relative performance

    Source: Exane BNP Paribas, Arthur D Little analysis
3   Operators’ response: content related services namely through partnerships facilitated by the crisis

    Partnerships - a potential solution for telecom operators to improve on content and related
    services as proven by examples of other players

      Vid improvement
      Video i                              E
                                           Expert
                                                                                           Examples
             levers                        partner
                                                                         Partnership with Hardware manufacturer
                                                           …with a gaming console manufacturer       …with TV screen manufacturers
                                           Internet &                                                  (Samsung/Apple/Sony/Panasonic)
         Simplicity / offer
                                            Systems
           innovation                                                    +                                        +
                                            players
                                                           « Offer an intense and innovative           « Propose new generation TV
                                                              entertainment experience»
                                                                               p                      sets connected to the Internet»



                                                                        Partnership with producers or TV channels
     Catalogue depth and               Cable / Satellite                                              +
                                                                        +
          freshness                     / Producers                                                   +

                                                           « Propose the richest VoD                 « Reach million music and movie
                                                               offer in the USA »                        fans with video content »

                                                                          Acquisition of Software companies
                                                             DishTV (3rd Pay-TV operator in the US) & Sling Media (Software)
            Ease of use                    Software
                                                                                               +
                                                                                 « Enhance the service and program
                                                                                  consumption software solution »

    Source: Exane BNP Paribas, Arthur D Little analysis
3   Operators’ response: content related services namely through partnerships facilitated by the crisis

    Content related services are multiplying on set-top boxes, mostly at the initiative of niche
    players coming from the systems world

                                       Innovative services developed on boxes by systems players




             The DVR that skips or adapts advertising                Your TV anywhere, on PC or on TV thanks to slingbox

      • Set-top box launched in 1999 in the US, allowing to record     • TV streaming device :
        and view content downloaded from the internet
                                                                                                      home's cable satellite
                                                                             • To remotely view their home s cable, satellite, or
      • Hard disk storage                                                      personal video recorder (PVR) programming
      • Pause, rewind live TV (up to 30min) & commercial skip                • From an Internet-enabled computer from anywhere
      • Recordings transfer to/from a home computer & access                   in the world
        third-party applications
              p y pp
      • As of November 2008, it is possible to buy a pizza via the     • In Oct 2008, Sling Media launched the SlingCatcher:
        video access, an example of adapted local advertising
                                                                             • Hardware device similar to a set top box
                                                                             • Enable users to watch their television remotely,
                                                                               without the need for a computer

    Source: Exane BNP Paribas, Arthur D Little analysis
3   Operators’ response: content related services namely through partnerships facilitated by the crisis

    Today, US operators are slightly more advanced than their European counterparts


                            Innovative services included in telcos and cable-operators in the USA & UK




                                                                                                                 Sky+HD 8% of clients launched in
                  HD features                               Available               1000 programs at one
                                                                                                                   2006, offers 31 HD channels

             Set-top box Storage                             150 Go                        250 Go                    Allows a 40h TV storage


                   Catch-up

                                                                                                                 VoD sky Anytime offered to Sky+
                      VOD                                 > 10 000 titles        10 000 titles of which 400 HD
                                                                                                                        in March in 2007

           Interactive advertising

                      EPG                            Advanced user interface              Advanced                         User friendly


             Internet navigation                      Yellow pages, widgets       Youtube, web navigation

                                                                                                                  • DVR Sky+ 50% of clients in
                Entertainment                      Simultaneous recording (x4)           Games,
                                                                                         Games chat                      vs.
                                                                                                                    2008 vs 35% in 2007
                                                                                                                  • Multi-room 19% of clients

    Source: Exane BNP Paribas, Arthur D Little analysis
                              Best in class
Presentation in a nutshell


                                       Operators’ fixed revenues are threatened by:
                                         • Mobile broadband substitution
 Triple play:
                                         • Competition from alternative players (cable or satellite TV / ISP)

 a success story in a “gloomy”         Triple play offers have helped incumbent to:
 telecom media ecosystem                  • Reduce fixed lines loss pace
                                          • Maintain ARPU
                                          • Lower competitive pressure

                                       New media usage behavior offers the new opportunity for telcos to capture a
                                       share of the additional audience and the value created
 Content:                              The light          i         t t t t              best f t l
                                       Th « li ht premium » content strategy seems b t for telcos
                                       Differentiating, ARPU generating but demanding a low investment only
 promising niches but content alone    Telecom operators’ priority: preserve their triple-play customer base by
 is insufficient and challenged        responding to threats from internet and cable companies
                                                         pp       y
                                       4Bn€ revenue opportunity in content and related services for Europeanp
                                       incumbents by 2015: 65% stemming from Pay-TV, 35% from VoD and
                                       advertising


                                       The economic crisis is an opportunity for telcos
 Operators’ response:                  Operators to invest in content and related services and to defend and
                                       leverage their key assets such as the network and the control of the box
                                       Partnerships as a potential way for telecom to improve in services and
 content related services namely       along key success factors: ease of use, offer innovation and depth and
 through partnerships facilitated by
       g p          p              y   freshness of catalogue
 the crisis                            Content-related services are multiplying on set-top boxes, US operators
                                       more advanced than European ones

				
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