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@. TV & Video over DSL Latest Perspective from the Battlefield. Brussels, May 17, 2004. KEY MESSAGES. European Telcos need to capture “new” broadband revenues to get back on the growth track In Europe, TV / Video-over DSL is moving from trial to commercial stage - PowerPoint PPT Presentation
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Brussels, May 17, 2004
TV & Video over DSLLatest Perspective from the Battlefield
@
2
KEY MESSAGES
European Telcos need to capture “new” broadband revenues to get back on the growth track
In Europe, TV / Video-over DSL is moving from trial to commercial stage
Profitability is challenging “stand-alone” but TV/VoDSL can create value for a Telco primarily through protection of core voice/internet
Local market dynamics will drive near term opportunities for telcos
3
Average European household telecom spending
As a % of GDP
MAKING A SUCCESS OUT OF BROADBAND IS A MUST FOR EUROPEAN TELCOS TO GET BACK ON THE GROWTH TRACK…
Early 90s(Fixed Telephony)
1.6%
3.1%
>3.1% ?
Late 90s(Fixed + Mobile Telephony)
Early XXI Century
Mobile revolution
BB revolution
?
Key challenges for incumbents:
• Secure market share in broadband (competition likely to intensify)
• Protect voice revenues (expected rise of VoIP)
• Manage fixed-to-mobile substitution (voice value increasingly migrating from fixed to mobile)
• Capture revenue from new services (through access and/or entering new industries)
1
2
3
4
43
21
4
Creating a home eco-system…
Enabling compelling content
and applications
ContentMusic, Video, Gaming, Education, SportsBusiness Information
CommunicationsEmail, Instant Messenger, Click2Call, VoIP, Call Management, SMS
PlatformsPayment Engine, Content Distribution/Management, Rights Management, Security, Authentication, Storage, QOS
Enabling thenetworked home/office
ComputingBroadband enabled PCs
NetworkingIntelligent Hubs, WiFi, Mobile to Fixed
MonitoringAlarm Monitoring
Digital EntertainmentStreamed Music, Video, Pictures, Games Consoles
Broadband access
Complete service assurance
GOING FORWARD, TELCOS SEEM TO BE CONVERGING ON A RICH VISION OF SERVICES TO THE HOME IN WHICH VIDEO WILL BE A CENTRAL PIECE
Source:Presentation by T. Breton and P. Danon to Idate, December 2003
12
Broadband at Home : A multi-services connexion
New broadband services
Steadily increasing bandwidth
Better performing CPEs with interopaerability
Wireless network at home
Services for the Home
HomegatewayHome
gatewayBroadband access
TV
Voice over IP
Interactive games
Internet
Visiophony
@
Security
Domotic
cv
A change of paradigm
5
KEY MESSAGES
European Telcos need to capture “new” broadband revenues to get back on the growth track
In Europe, TV / Video-over DSL is moving from trial to commercial stage
Profitability is challenging “stand-alone” but TV/VoDSL can create value for a Telco primarily through protection of core voice/internet
Local market dynamics will drive near term opportunities for telcos
6
TV OVER DSL IS NOW MOVING FROM TRIAL TO COMMERCIAL PHASE
Country Player
Services tested / offered
TV VoD Short description
• Launched "TPSL" in December 2003 in Lyon in a joint offer with satellite bouquet TPS
• Extension to Paris and other big cities in 2004
• Launched Free television offer in December 2003• Available in 175 cities, including Paris
• VoD streaming offer available since 2002/03 (PC based)
• Soft commercial launch of true VoD November 2003 (Fujitsu-Siemens set top box)
• Fastweb TV service launched in 2002, initially based on FTTH, now both FTTH and ADSL
• Coverage: Milan initially, extending to top 10 Italian cities
• Broadway project• Small in-house trials of video-over-DSL• Announced Fiber-to-the-Cabinet ("VDSL-ready") local
loop upgrade• Investigating hybrid model of satellite/ADSL for TV
• Offering Stream-it, PC-based VOD + thematics bundle, with goal of 10,000 subscribers by end 2003
• Announced wider TV-based roll-out in combination with 1 billion CHF network upgrade
Commercial offer
Trial
STATUS AS OF JANUARY 2004SELECTED EUROPEAN COUNTRIES
France
Germany
Italy
Belgium
Switzerland
7
IN FRANCE, THREE COMMERCIAL OFFERS ARE OUT SINCE APRIL 2003
2003 2004 2005Q4 Q1 Q4
2 video channels per line (MPEG4 deployment)
18/12 Q2/04 2005
Since December 2003, 2 TVoDSL commercial offers accessible to >20 million pop.Since December 2003, 2 TVoDSL commercial offers accessible to >20 million pop.
01/12
Extension to Paris
Q1/04 Q2/04
Q2 Q3 Q1
Phased deployment
Phased deployment
Phased deployment
TVoDSL commercial launch in Paris
TVoDSL commercial launch in Lyon
TVoDSL commercial launch
(175 towns)
Forecasted commercial launch
in Marseille
8
FT AND FREE HAVE RADICALLY DIFFERENT GO-TO-MARKET APPROACHES…
*Free national calls**e.g. 0,49 €/m: Weather Channel, MTV Base; 0,99 : Sailing channel; 2,99: TéléMelody; 5,99: pack Cine Box, pack AB (incl. adult movies)
ProductProduct• TV: 50 channels available
• VoD: catalog of films
• TV: 32 channels available - >100 channels announced
• VoD: not launched
PricePrice
• Basic TV– 37€/month excl. internet or telephony, i.e.
16€/ month for Ma ligne TV (DSL line) + 21€/month for TPS L (50 channels incl. TPS Cinéstar, RTL9, Eurosport, ESPN)
• Basic TV– 29,99€/month tax included, includes:
• Broadband internet (1 Mb)• Free telephony*• 23 Free channels (e.g. France 2, RTL9,
Fashion TV)
• Additional TV Options– Pay per channel for a monthly price of 0,49 /
0,99 / 2,99 / 5,99€ depending on the channel**
• VOD– VOD programs available for 0,5€ to 7€ / view
(VOD content from Movie System, TPS, TF1, …)
CoverageCoverage• In all zones where Free proposes unbundling
(175 cities, >20 millions pop. coverage claimed)• Lyon city and suburbs i.e. or approx. 450.000
households
DistributionDistribution• Direct ordering via the Internet• Available through FT agencies and
hypermarkets
AS OF JANUARY 1, 2004
9
FASTWEB PROPOSES A FULL-FLEDGED OFFER SINCE Q3 2003
2002 2003 2004Q4 Q1 Q4Q2 Q3 Q1
Gradual deployment of DSL service. Migration of DSL customer to fiber infrastructure when possible
Q3
Launch of video telephony over
DSL
Launch of TV over DSL and PVR service
Launch of VOD service over
DSL
(Launch of DSL service in Q3
2001)
10
FASTWEB CURRENT COMMERCIAL TV OVER DSL OFFER
ProductProduct• TV: 30 channels available today• Video on Demand: catalog of 3 500 films
PricePrice
• Basic TV– 30 €/month*, VAT included, includes :
• Pay-as-you-go 2Mb/s internet access• Pay-as-you-go voice line• 8 digital channels• Remote PVR service
• Options– RAI Click, access to RAI program on demand, pay per view of full
access subscription for 6,9€ per month– Various digital TV packages from 6 to 15€ per month (including
CALCIO, other sport, premium cinema)– VOD : 3 500 films
CoverageCoverage • Fastweb covers the 10 main Italian cities via its fiber and ADSL networks
DistributionDistribution • Available through their website and shops
AS OF JANUARY 1, 2004
*Currently promoted at 25€/month ; plus one-time installation fee of 95€
Source:Fastweb company website
11
IN ITALY, FASTWEB TV AND VIDEO OFFERS ARE A COMMERCIAL SUCCESS
Fastweb TV
• TV streaming of Sky and RaiClick
• E-mail and internet surfing in broadband
• Remote PVR
Mega Internet
• Access to internet up to– 10 Mbit/s (FTTH)– 4 Mbit/s (DSL)
330 600
~3,80040 300
176 100
2000 2001 2002
Videocomm.
• Videocommunications from TV (requires FTTH) or from PC (FTTH or DSL)
• Videomessaging
Residential clients EoY
Telephone
• Free phone calls among Fastweb clients
• Possibility to close Telecom Italia subscriber line
• Number portability
• 70% of new clients request TV/video services
• Average VoD ARPU 10 €• Average Pay-TV channels
ARPU 12.5 € in Sept. up to 17€ in Dec. 03
15% of clients requested video telephony
ARPU increased from 56 €/month in 2001 to 65 in 2002 to 72 in Q3 2003
2003
Source:Fastweb company website,e.Biscom analyst presentations
Of which 97,000 TV clients (incl. 35,000 on ADSL)
12
KEY FINDINGS FROM LATEST TVoDSL DEVELOPMENTS
• Wide variety of go-to-market approaches and no clear emergence of winning combinations (offer, price, bundling with other services...) ; still, more early positive signs on all-inclusive offers (Fastweb, Free) than on TV single play offers (France Telecom)
• DSL not yet as economically competitive as cable/satellite but cost going down very fast, and emerging strong case for core business protection
• Technology is sufficiently mature to move to commercial launch (it works and it works well) – however, it remains a limitation in terms of reach (distance to central office) and convenience (home configuration if PC/TV not in same room in house)
13
KEY MESSAGES
European Telcos need to capture “new” broadband revenues to get back on the growth track
In Europe, TV / Video-over DSL is moving from trial to commercial stage
Profitability is challenging “stand-alone” but TV/VoDSL can create value for a Telco primarily through protection of core voice/internet
Local market dynamics will drive near term opportunities for telcos
14
THERE ARE 3 SOURCES OF VALUE FOR TELCOS BEHIND VIDEO
• Direct value from video services, i.e. present value of services direct cash flows– Cash in: subscription revenues, one-time revenues (pay-per-view, installation
fees)– Cash out: incremental investments, operational costs, content costs
• Value from protecting telcos’ core business– Gain in broadband acquisition market share– Reduction of churn (broadband and voice)– Gain in voice market share (video customers returning to telco’s voice)
• Economies of scope and scale– Shared broadband acquisition costs (economies of scope)– Improved broadband business case due to accelerated take-up (economies of
scale)
• Shifts of value due to unforeseen changes – Technology major improvements– Increase in advertising revenues– Much higher penetration than expected today
Definition
Direct ValueDirect Value
Indirect ValueIndirect Value
Option ValueOption Value
15
WE HAVE MODELED VIDEO OVER DSL ECONOMICS TO ASSESS DIRECT / INDIRECT / OPTION VALUES… IN FRANCE
• 24 million residential lines• Broadband coverage 79% of HH
by end 2003, 90% by end 2005• 10 million broadband HH by
2007
• TV enabled DSLAMs only in large towns, resulting in addressable TV market of 60% of DSL subscribers by end 2007 - ~6 million HH
• Pay-TV penetration already high at 34% of HH end of 2003
• Expected pay-TV penetration of 9 million HH by end 2006 (37% of HH) without DSL
• Growth boosted with DSL (reaching 40% of HH in 2007)
Key assumptions
AddressableBB market
AddressableBB market
Addressable TV market for DSL
Addressable TV market for DSL
TV market specifics
TV market specifics
Source:Company website, analysts reports, McKinsey analysis
16
VIDEO (OVER DSL) CAN BE PROFITABLE AS AN “INCREMENTAL OFFER”
Potential total value of video for telco and content aggregatorNPV; EUR Millions
*For combined offering; lower for thematics only (~100 EUR) and VOD only(~25 EUR)**Penetration of addressable TV households i.e. 10 million lines x 60% TVoDSL coverage x 40% pay-TV penetration x; no increase after 5 yearsSource:McKinsey video-over-DSL model
ILLUSTRATIVEREFERENCE CASE
• Combined offer of premium pay-TV, thematic pay-TV and VOD
• Monthly ARPU of 46 EUR for combined offering, 15 EUR for thematic only and 11 EUR for VOD only
• Gross margin on content of 50% for combined offering and VOD, and 60% for thematic only
• Acquisition cost of 130 EUR per gross add*; no set-top box subsidy
• Penetration by 2007**: 10 % for combined offering, 10% for thematic only and 10% for VOD only , i.e. around 720.000 users
• Churn of 11%
Direct value
Key assumptions
~250
PRELIMINARY
Equivalent to an NPV of 300 EUR per user but only 10 EUR per
residential line (on the basis of 24 million lines)
17
STILL INDIRECT VALUE IS THREE TIMES AS BIG AS DIRECT VALUE
Potential total value of video for telco and content aggregatorNPV; EUR Millions
Source:McKinsey video-over-DSL model
Upside on telco's
core businessDirect
value
Indirect value
Preservation of existing business• Broadband churn reduced
from 15 to ~6% amongst video subscribers
• Voice churn reduced from 3 to ~2% amongst video subscribers
Upside on existing business• 30% of video subscribers
would not have taken broadband from telco
• 50% reduction in broadband subscriber acquisition cost (at 115 EUR per gross add)
• 5% of video subscribers come back to telco for voice
Key assumptions
~400
~350~250
Preser-vation of telco's core
business
ILLUSTRATIVEREFERENCE CASE
PRELIMINARY
Equivalent to an NPV of 40 EUR per residential line (on the basis
of 24 million lines)
18
Preser-vation of telco's core
business
Upside on telco's
core business
Direct value
Indirect value
400
350250
VIDEO PROVIDES AN OPTION ON POTENTIAL ADDITIONAL UPSIDE
Potential total value of video for telco and content aggregatorNPV; EUR Millions
*Excluding positive interaction between the different sources of option valueSource:McKinsey video-over-DSL model
Unfore-seen
techno-logical
improve-ments
Unforeseen technological improvements• Addressability increases by 15
percentage points (over 5 years)
• Technological costs decrease faster than foreseen (additional 10% per year)
• Coverage increases by 50% (from 50% to 75%) as improved addressability makes it interesting
Advertising• Television advertising amounts
to 160 EUR per household• Video offering captures 25%
(over 5 years) of this amount for households subscribing to the service
Higher penetration• Penetration of addressable
households increase by 10 percentage points
Higher consumption• ARPU increases by 100%
0-600
Higher consum-
ption
Higher pene- tration
Adver-tising
revenues
Option value*
Key assumptions
0-300
0-700
0-100
0-1700
1000
ILLUSTRATIVEREFERENCE CASE
PRELIMINARY
Up to 100 EUR NPV or more per residential line (on the basis of
24 million lines)
19
KEY MESSAGES
European Telcos need to capture “new” broadband revenues to get back on the growth track
In Europe, TV / Video-over DSL is moving from trial to commercial stage
Profitability is challenging “stand-alone” but VoDSL can create value for a Telco primarily through protection of core voice/internet
Local market dynamics will drive near term opportunities for telcos
20
LOCAL MARKET DYNAMICS WILL LIKELY DRIVE TELCO STRATEGIES
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
0 20 40 60 80 100
Italy
Potential upside in broadband
Proportion between narrowband and broadband penetration (index)
Defensive value of video
Market share of competitors in broadband internet access (%)
U.K.
France
Germany
Belgium
Netherlands
Spain
Sweden
Switzerland
Source:McKinsey analysis
"Preemptive defense"• "me-too" offer at low price point, to
maximize penetration• pre-emptive roll-out
"Fight like a lion"• innovative offer at low price point, to
attract new video subs• pre-emptive roll-out
"Fast follower"• watch rivals and offer innovative
bundle at moderate price point• slower roll-out
"No hurry"• watch rivals and offer "me-too" bundle
at moderate price point• slower roll-out
21
AND TELCOS STILL HAVE PENDING QUESTIONS, FOR INSTANCE ON BUSINESS MODEL…
Range of options
Distributor: Telco only distributes
existing bouquets and co-brands (e.g., FT)
Mixed : Telco distributes
aggregated content + designs own bundles (e.g.,
Noos)
Content aggregator: Directly deals with channels
(e.g., Fastweb, Free)
Telco has no exclusivity
Telco is the exclusive distributor of Media-co channels on DSL platform
Telco is the exclusive distributor of Media-co channels
Media-co exclusive
provider of content to Telco for all content
One or several exclusive content
providers for specific categories
(e.g., sport)
Telco is not tied up to any
exclusive contract
Role vis a vis content partners
Role vis a vis content partners
Should telco seek exclusive deals?
Should telco seek exclusive deals?
• No clear winner• Gradual approach
possible (e.g., start with distribution to move to mixed)
• All models require new skills for telcos
• In-going position in pay-TV market will, in most cases, be detrimental to telco –
• A possible ambition, however, may be to get exclusivity on DSL platform
Early thoughtsQuestions
Today ?
Target ?
22
…OR ON CAPABILITIES
ValueValue
RevenuesRevenues
CostsCosts
Cost of contentCost of content
Other costs (distribution/co-
mmercialization)
Other costs (distribution/co-
mmercialization)
• Ability to attract customers:– Branding– Pricing– Distribution
• Ability to retain customers / up-sell– Time watching TV– Satisfaction with
program
Value drivers in Pay-TV Skills required
• Branding• Consumer marketing• Product marketing• Distribution sales
• CRM• Advanced consumer
marketing
• Ability to buy at best price
• Ability to manage cost of distribution
• Negotiation• Legal
• Sales & Distribution
The nature of the product and the
importance of buying require skills telcos do
not have
TV specific
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