The Thing About IPTV...
By Gary Kim
Editor in Chief, IP News
The fact that the whole U.S. cable and telephone industry agrees on the importance of Triple and
Quadruple Play strategies is probably a good thing. It suggests executives have learned the importance of economies of scope,
not simply economies of scale, in the hyper-competitive environment bearing down upon the whole industry.
Scale, you will recall, is about selling large quantities of something or producing large quantities
of a small number of things. It's a great strategy for mass markets.
Scope, by way of contrast, entails the selling of multiple products or services to a customer.
Think bundling. That's scope.
Scope is the right strategy for a competitive market, just as scale might have served both
the cable TV and telephone industries in the past. Consider the matter of stranded assets and potential market share,
for example.
In the old protected markets, cost per home and revenue per home were nearly identical,
since just about every single dwelling passed by the network actually bought services. In that sort of environment,
"cost per passing," "cost per home" or "cost per drop" was a pretty meaningful metric.
If nearly every household bought service, then the cost of the network really was just about identical to
"cost per customer".
In a competitive market, that assumption is wildly false. A "fiber to home" network in a really
competitive market has to pass every potential customer. But services might be purchased by only 30 to 60
percent of prospects. So where a third of customers buy something, the “cost per customer” for a network costing
$1,500 per home is actually "$4,500 per customer."
Service penetration, in other words, is a crucial element of the business plan and network
justification. Engineers used to build a network expecting revenue to flow from just about every dwelling or
business. Now they have to build a network knowing there will be huge stranded assets.
So now you begin to see why economies of scope are so important. If there is going to be a
finite limit on the total number of customers you can expect to get (20 to 60 percent penetration for any
particular service, even if wildly popular), you certainly can’t build your business plan on the sorts of volume
you once were expecting.
Instead, you have to sell lots of different things to a smaller base of customers.
It's just about that simple.
So what about IPTV? I must confess that I've never been a
big believer in entertainment
video services - either IPTV or analog television - as a solution for telco revenue
issues in a competitive
environment. And the reasons are pretty simple.
To deliver television - either digital or analog - ultimately means rebuilding the whole access
network, and adding a whole bunch of new capital expense inside the customer home. So here's the rub. The anchor
service a telco already has - voice - doesn't require a network upgrade. So the business case for the new network
hinges on incremental video and broadband Internet access.
So recall the basic business case: you are in a competitive market where you won't be able
to convert most prospects into actual customers for your video service. You'll get some prospects to buy your
broadband access service, but probably not most. And even for the customers you do get, how much gross monthly
revenue do you think those customers represent?
But it gets worse. When you sell voice, you create the service and you keep most of what
you make, after expenses, taxes, depreciation and amortization of debt. Video is quite a different matter. You
always have copyright holders involved. So no matter what your spreadsheets tell you about gross revenue, half
or more of the gross is given away, right off the top. And you'd be lucky to keep 40 percent of the gross
as your top line.
That's brutal. Your broadband access service, of course, will have higher margins. With
proper management and volume, you might hope to match the healthy margins you used to see with the legacy
voice product. Broadband access helps, make no mistake.
"Think of IPTV as table stakes for something else.
It's helpful, but won't get any local telco where it really has to go."
But that's not the problem with the business case. Right off, you have an unattractive
hurdle rate on the revenue side, if what you have is video entertainment of the sort cable TV companies now
offer.
The rub, however, is that no local telephone company has much a choice in this matter. One
must either make the investment, build on IPTV and other services we might be able to create, or get out of the
business. For to the extent a wireline network makes sense at all, it is only as a broadband network.
So let me restate my argument, to be completely clear. I don't think IPTV is such a great
revenue driver. I don't think it will ever justify the capital invested in the new fiber access network.
But that isn't the point. Despite that, it is one of many new services that, aggregated in
sufficient volume, will create a business case for building a fiber-rich access network. The key thing is to
soberly avoid becoming mesmerized by it.
IPTV, in its early stages, will represent revenue very similar to linear cable TV. Which
is to say, it's going to generate a relatively modest reward. Certainly not enough to justify the network
rebuild all by itself.
So think of IPTV as table stakes for something else. It's helpful, but won't get any
local telco where it really has to go. It does, however, create a revenue stream that helps you build a
network capable of delivering all sorts of other things - many of which we haven't dreamed up yet - that each
will contribute to generating a payback.
So don't get all caught up in the hype. You will need to do IPTV. But more importantly,
you're going to need to do all sorts of other things the same platform will support.
And that's where you really need to focus, because the ultimate winners in the future
markets will be creating all sorts of services way beyond Triple or Quadruple Plays. In 1998, when Google
was incorporated, it had no business model either. In fact, it didn't get a business model until early 2001.
The point is that we can't really identify every important service we will be selling in
10 years. All we can do is build the network as flexibly as we can, and then remain fleet of foot and
experimental about identifying new things people will pay us to deliver.
Back to the October 2006 newsletter.
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