iptv-a business model for iptv service -- a dynamic framework

7/27/2019 IPTV-A Business Model for IPTV Service -- A Dynamic Framework

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A business model for IPTV service:

a dynamic framework

Harry Bouwman, Meng Zhengjia, Patrick van der Duin and Sander Limonard

Abstract

Purpose The purpose of this paper is to investigate a possible business model for telecom operators

for entering the IPTV (digital television) market.

Design/methodology/approach The approach takes the form of a case study, literature search and

interviews.

Findings The IPTV business model always has to adjust to the change of external factors anduncertainties in the exploration and the exploitation phase. The four scenarios presented in this paper

explicitly address the demand, regulatory and competition-related uncertainties. The scenarios

represent the different future possibilities in terms of regulatory environment, industry structure and

consumer attitudes towards (IP)TV service. By choosing the right business model, telecom operators

can sustain the market competition and deliver customer value and economic benefits. In the light of

limited resources, when balancing the requirement of IPTV business model design, telecom operators

have to focus on the critical design issues in each of the scenarios.

Research limitations/implications This is a one-case study, so no cross-analysis with other cases

was possible.

Practical implications The research does not stop when the critical design issues have been

analysed, but takes them a step further to shed light on the viability of the business model in an

exploration phase. This is done by integrating the business model framework analysis with scenario

analysis. Scenario analysis indicates various future possibilities and provides a platform for analyzing

the decisions regarding critical design issues that have to be made in an uncertain future environment.

The competing views on futuredevelopments arehelpful in reducing thefuture uncertainties with regard

to viability and feasibility of business models for IPTV.

Originality/value This is one of the first studies that looks into the relationships between business

models and scenarios. Also, the application on IPTV is quite novel.

Keywords Business development, Telecommunications, Cable television

Paper type Case study

1. Introduction

These days it is both technically and commercially viable to sustain multicast digital

television systems using IP networks. Faced by fierce competition from cable companies

offering triple play bundling packages some 80% of all large European telecom operators

have decided to investigate the possibilities opened up by deploying IPTV (www.Alcatel.com/tripleplay/graphics/19320_iptvworld_600.jpg, retrieved March 17, 2007).

Telecom operators are entering the digital TV market but it is still not clear whether new

IPTV business models will be viable. Many analysts believe that the huge potential of the

IPTV market will give telecom operators the opportunity to develop this new market. There

are, however, experts who have their doubts about telecom operators capabilities when it

comes to competing with cable companies which, in many countries, have significant TV

market power. Since the days of telecommunication market deregulation cable companies

have been steadily filtering into the data service sector and recently also into the voice

PAGE 22 j info j VOL. 10 NO. 3 2008, pp. 22-38, Q Emerald Group Publishing Limited, ISSN 1463-6697 DOI 10.1108/14636690810874377

Harry Bouwman is based in

the Department of

Technology, Policy and

Management, Delft

University of Technology,

The Netherlands, andAbo Akademi, Turku,

Finland. Meng Zhengjia

and Patrick van der Duin

are based in the

Department of Technology,

Policy and Management,

Delft University of

Technology, The

Netherlands.

Sander Limonard is based

at TNO Information and

Communication

Technology, The

Netherlands.

Received 1 October 2007Revised 7 December 2007Accepted 6 February 2008


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service market thus making the communication industry landscape more complex and more

dynamic. Hence the reason that it is vitally important for telecom operators to have a clear

and comprehensive IPTV business model. The problem is that at the moment there is no

template for defining the IPTV business model. Different market players emphasize different

elements. Doherty et al. (2004), for example, focus on the right IPTV architecture and quality

of services, while Liu (2006) is more interested in the financial aspects of the new IPTV

model. As yet, there is no shared business model concept.

We define IPTV as a broadcast or on-demand video service that makes use of the Internet

Protocol (IP)and is streamed to a set-top box that can be connected to a PC or a television

set. This involves the use of point-to-point networking infrastructure and the support of

broadcast video using multicasting techniques. The TV services of cable and satellite

companies are not included in this definition because they do not use IP-based networks

and are not based on point-to-point architecture. We also excluded web-based television

because, due to its different nature in terms of services, organization, service platform and

revenue models, it had to be left out when the decision was taken to focus on telecom

operators even though it is IP delivered (see for an overview of business models for digital

television, Limonard and Tee, 2007). Of all the actors in the IPTV value chain, it is telecom

operators that have a particular interest in developing digital television service via IP in order

to compensate for falling revenues in their traditional markets. Leveraging their brand equity

may enable them to offer attractively bundled products and create renewed consumer

loyalty that is not solely subscription-based. Their assets can also be leveraged to turn

multiple specialized networks into cost efficient networks in the process of upgrading of theirnetworks in readiness for next generation networks. Telecom operators are the true digital TV

market newcomers and their aim is to capture a fair amount of the market share. Let us

therefore start by examining the pivotal role that telecom companies have in IPTV.

The STOF business model framework, which was developed in 2003 (Faber et al., 2003),

proved to be successful when it came to designing business models for mobile services

(Haaker et al., 2006), for insurance intermediaries (Bouwman et al., 2005), for the analyzing

of e-commerce business models (Bouwman et al., 2006) and in the describing of critical

design issues and success factors (de Reuver et al., 2006). The business model concept in

the STOF framework is defined as a blueprint of how a network of cooperating organizations

can create and capture value from new innovative services. The STOF model consists of four

domains, namely the service domain, the technology domain, the financial domain and the

organizational domain, each of which interacts with the others and is affected by marketdynamics, technological developments and regulation (see Figure 1). Based on this general

model we discuss in this study whether and quite how the IPTV service and business model

can be structured.

The four domains of the business model interact with each other and with external drivers

during the exploration and exploitation phases (He and Wong, 2004). Exploration implies

that the behavior of firms is characterized by search, discovery, experimentation, risk-taking

and innovation, while exploitation implies that such behavior is characterized by refinement,

implementation, efficiency, production and selection (Cheng and Van de Ven, 1996; March,

1991). In this paper the exploration and exploitation phases are used to describe the

development of the IPTV business model. In the first part we will consider the design issues

in the exploration phase. IPTV developers are currently engaged in experimental projects

and are exploring the new market. We will then go on to use scenario analysis to examine

issues that may be relevant to future exploration phases. IPTV developers will inevitably

focus on issues such as service (bundles) and the question of how to make marketing

strategies more efficient.

The objective of this paper is to identify the design issues that are critical when it comes to

developing viable and feasible IPTV business models for telecom operators that deliver

customer and network value and to, using scenario analysis, test the robustness of these

choices in the exploration and exploitation phases.

VOL. 10 NO. 3 2008 j infoj PAGE 23


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In this paper we discuss the IPTV market, we take a look at the origins of business models

and the STOF framework, and we address critical design issues and trade-offs between

design choices in the IPTV domain (Section 2). We use scenario analyses to describe future

developments in the field of digital television (Section 3) and to test the robustness of the

business models that will in future be characterized by a high level of uncertainty when

entering the exploitation phase (Section 4).

2. IPTV business models

Starting with the STOF model, we shall begin by discussing the external forces that influence

the choices involved in the business model. These include the technology drivers for IPTV,market dynamics and regulatory conditions. We will then examine the elements of the

business model in more detail.

2.1 Technological drivers

Katz (2002) described the four technological developments that are crucial to shaping the

new television industry. They are: an increase in effective distribution capacity, an increase in

the ability to process user feedback, an increase in the storage and processing power

controlled by viewers, and the separation of applications from transport.

Increase in effective distribution capacity: with regard to the developing of video services

one of the main obstacles for telecom operators is the last mile. ADSL capacity is insufficient

to deliver streaming video services with a certain quality. Unlike in the case of small band

services (e-mail, web-browsing, file-sharing, VPN), television end-users are sensitive to thequality of video services (Wang, 2001, Cisco, 2005). Recently, the capacity of the local loop

has increased dramatically with ADSL2, VDSL and VDSL2 making the best possible use of

the twisted line (Fijnvandraat and Bouwman, 2006).Meanwhile the maturity of fiber cable

technology has tremendously increased backbone capacity. Nowadays, a network that uses

at least ADSL2 can provide IPTV services of guaranteed quality to residential areas.

Increase in the ability to process user feedback: whereas watching a television program

used to be a predominantly passive activity recent technological developments have made

interaction in the digital home environment feasible. Return channels that carry messages

Figure 1 STOF model

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from viewers to service providers make it possible to develop new, tailor-made and personal

services for end-users, and new revenue models like interactive advertisements.

Increase in storage and processing power controlled by viewers. In traditional networks,

most of the intelligence is located at the center of the network. Todays network intelligence

is increasingly being transferred to the edge of the network. Equipment installed in the

end-users living room has increasingly large processing power and storage capacity. The

introduction of the PVR (Personal Video Recorder) is just one example of such development.

The separation of application and transport: the Internet layer model allows for the

development of applications that are oblivious to the underlying transport infrastructure. Thisarchitecture allows innovation to occur separately in the application and transport layers.

This means that technological innovations in the application layer are no longer affected by

transmission bottlenecks. The development of IPTV gives telecom operators the opportunity

to channel multiple specialized networks into a cost-efficient network.

2.2 Market drivers and conditions

It is various demand and supply factors, such as competition and industrial structure, that

determine the design perimeters of IPTV services and business models.

2.2.1 Market demand. Up until now Western Europe has been one of the worlds most vibrant

markets of IPTV. France (MalIgne TV, Free and Neuf Cegetel), Italy (FASTWEB) and Spain

(Telefonicas Imagenio, Jazztel and Grupalia) are leading the way, each with a considerable

subscriber base in excess of 200,000 subscribers. IPTV is less visible in the remaining twomajor Western European markets the UK and Germany. Although there are many initiatives

the impression is that most of them are still small scale. Other market forces include the rising

popularity of on-line web TV. It would appear that time spent watching on-line video

cannibalizes time spent in front of the television in broadband forerunner countries such as

the Netherlands.

2.2.2 Convergence of the information, telecommunication and TV industries. Although the

telecommunication and TV industries are converging, the television market is still dominated

by traditional broadcasters and by cable, IPTV borrows the IP-based transmission

technology from the IT industry and uses it to broadcast television content. IPTV Operators

are neither traditional television providers nor IP technology providers, they are telecom

operators. The decision by the telecom operators to provide video services has to do with

revenue stagnation in the traditional business, i.e. telephony. Video program special offers

are expected to generate new revenue sources that will more than compensate for anyrevenue losses from voice.

2.2.3 Competition. The provision of IPTV services is also an important way of matching the

triple play capability of cable companies while holding on to traditional customers who

may want to switch. It can be an effective business strategy, which is positively correlated to

customer loyalty (McAfee et al., 1989, Ahn et al., 2005). On the basis of an expert and

consumer survey, Wirtz et al. (2006) confirmed the importance of providing triple play. Most

experts estimated that the penetration rate of triple play would surpass 50 per cent by 2010

and 70 per cent by 2015. According to the same survey the bundling of video, voice and

broadband services benefits consumers from the point of view that pricing becomes

reasonable, configuration convenient and invoicing easy.

2.3 RegulationThe regulatory climate in the telecommunication sector has switched from old rules to new

policy. Technological developments have gradually transformed the world of spectrum

scarcity, dumb terminals and natural monopoly by turning it into a world of abundant

channels, intelligent terminals and unnatural monopoly (Galperin, 2004). Digitization means

that spectrum scarcity is not an issue in the television industry. Instead, thanks to the

inefficient spectrum use of analog TV (Peha, 2006), many regulators choose to eliminate

analog TV. Owing to digitization, the distinction between the various service platforms is to a

large extent blurred. As a result the distinctive regulations regarding the different sectors of



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telecommunications, cable and television are gradually disappearing. Already, the EU has

made a distinction between regulations regarding distribution and audiovisual content in its

recently approved directive on audiovisual media. Precisely what the impact of this directive

will be once it has been implemented in each of the individual member states remains to be

seen.

2.4 The IPTV business model

Technological, market-related and regulatory developments dictate the conditions under

which IPTV business models have to be developed. In this section we will discuss the IPTVbusiness model in the exploration phase on the basis of the STOF model. We shall analyze

the critical design choices in each of the four STOF domains, and specifically the trade-offs

and relationships between the relevant design options.

2.4.1 Service domain. Service domain design is defined as a description of a firms service

provision for specific customers in particular market segments. A service design should at

least match the requirement of the market segment, without exceeding the firms

technological and financial capability. The potential interest that users have in IPTV is

defined as the expected value for customers. In connection with technical and financial

restrictions and the lack of market information, telecom operators are not always capable of

delivering the expected value.

Telecom operators have to clearly state their value proposition and furthermore indicate how

they will realize that value proposition technically and financially. It is important to conductmarket analysis so that sufficient information about the market segment on which the firm has

decided to focus can be collected as well as about the requirements and preferences of the

consumers in that market. The firm should also leverage the design choices and resources

to minimize the mismatch between the intended value and the value that will be delivered.

The service components can then be designed in great detail in accordance with the match

established during the above-mentioned process, for example, by adding more channels,

adjusting tariffs, redesigning service quality level and improving user-friendliness.

Many telecom operators position IPTV as a mass-market service that competes directly with

cable and satellite companies. Telecom operators expect that they will be able to take

advantage of their expertise and the consumer loyalty in the telephone and broadband

markets, which they hope will give them a competitive edge. They have to leverage their

resources which means to say that they will need deep pockets to increase thecompetitiveness of IPTV. The three possible types of leverage that can be distinguished are:

the bundling of video services with broadband and telephone services, offering more

value-added services (e.g. interactive services, Video on Demand VoD, and Personal

Video Recorder PVR) or having an attractive service portfolio by focusing either on

exclusivity or on a wide range of probably long tail niche channels.

2.4.2 Technical domain. The technical domain has to do with the choices that are made on

the three different levels of transport, middleware and content. Transport layer design must

make sure that the infrastructures meet the transmission requirements involved in providing

video services. The infrastructures not only refer to the backbone or local loop network but

also to the sophisticated network equipment. In addition to transport layer design,

middleware and content design have to be given careful consideration because the service

design requirements are vital in deciding what capability is required if specific service types(e.g. VoD) and value-added interactive services are to be offered. The middleware and

conditional access components manage the CRM (Customer Relation Management),

encrypt the video program and control the access authorization. The set-top box is used to

decode the program on the end-users side. Different IPTV providers choose different video

application components depending on service design demands and financial

considerations (see Figure 2).

Since the transport, middleware and content layer solutions have been well developed by

many equipment providers and software companies the technical issues are less critical.



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The real issue is how technical design is related to the other domains. Technology places

certain constraints on service design, and vice versa.

The main issues are bandwidth limit, quality of service and level of middleware capability. In

the short term, bandwidth remains the major obstacle in IPTV development. Most local loops

cannot provide for IPTV, which requires about 3.5 Mbps, without upgrading. Even the

ADSL2 equipped local loop, which is sufficient for current video stream demand

compressed under MPEG 2, falls far short of the capacity needed for HDTV (High Definition

TV) video stream (16-18 Mbps). The telecom operators can choose different design

approaches, either by adding large capacity immediately before launching IPTV or by

gradually increasing the capacity. The former approach usually leads to an upgrading of a

large portion of the infrastructure in readiness for fiber optic cables while with the latter

approach most of the distribution network will first be updated to the ADSL2 standard.

The trade-offs telecom operators have to make lie between choosing more advanced

technology platforms and making a larger investment on the one hand, and adopting a more

evolutionary approach on the other hand (Fijnvandraat and Bouwman, 2006). Quality of

service is the second issue at stake here because video content is sensitive to signal quality.

Although some loss of quality does not bother many when it comes to audio transmissions

people do tend to be more demanding when the content is of a visual nature. To make sure

that degradation in video quality resulting from the IP transport network is negligible from a

subscribers point of view, IPTV providers only tolerate about one visible degradation every

two hours (Cisco, 2005). Ways in which the quality of service can be improved include

having better transmission infrastructure and encoding/decoding equipment, all of which

requires higher investments. An alternative design choice is to offer different service levels todifferent customers. For example, the packages delivered to gold members may be placed

at the front of the queue, which can partly satisfy some demand for high QoS. Middleware

capabilities represent the third issue, particularly for the telecom operators that offer

broadcasting, VOD (Video-on-Demand) and value-added services. Middleware is crucial

when it comes to integrating platforms, enabling interactivity, conditional access and

customer relationship management. Future interaction modes in particular are very

uncertain, and telecom operators have to strike a balance between advanced STBs

middleware enabling a wide range of interaction, and cost effective technology which is

Figure 2 Technical domain designs



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more stable and offers consumers easier interaction. Advanced middleware would also

open the door to a larger number of revenue models, but whether or not the consumer is

ready for this kind of lean-forward behavior and new revenue models remains to be seen.

The choice also depends to a large extent on the QoS, since higher levels of interactivity

involve higher risk of dissatisfaction. Subscribers who experience an outage cannot come

back and continue watching from the same point when the outage is over. At the moment,

part of the request for video contents at peak times would be rejected without spare video

servers. Such experiences are certainly not attractive to most consumers.

2.4.3 Organizational domain. The organizational domain essentially describes the value

network that is needed to realize IPTV service provision. A value network consists of actorswho possess certain resources and capabilities and who interact to perform value activities

to create value for customers while realizing their own goals (Faber et al., 2003). Typical

actors in the IPTV value network are telecom operators, content providers, telecom

equipment providers, middleware providers, advertisers and consumers. Telecom

operators participate in the entire value delivery process. First they decide to either

produce or purchase the video contents. They have to maintain the physical network as well

as the hardware and software components of the video application together with equipment

manufacturers. The telecom operators core responsibility is to distribute the video contents

to customers. The middleware is of key importance to telecom operators, because it

determines whether or not they can provide seamless service to the end-users. Telecom

operators may try to work together with system integrators to establish a more efficient

middleware solution. Furthermore, telecom operators can be involved in negotiations with

advertisers to obtain revenue from advertising. Content creators and providers are locatedat the upper end of IPTV value network (see Figure 3). The content aggregator combines

information such as news, sports, weather forecasts and reference materials from smaller

content creators and sells that on to content providers. Big content providers often focus on

content production and content aggregation. The advertising revenue from the IPTV value

network is relatively small compared to that of cable and internet advertising. Telecom

operators can, however, decide to add advertising to their services thus turning that into a

source of revenue.

An important issue in the organizational domain is the level of vertical integration or, in other

words, the level of ownership and control over successive stages of the value chain. The

telecom operators who develop IPTV usually have to decide to what degree integration with

content production is appropriate. They may want to control or own the production and

Figure 3 Value network of IPTV



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content rights or produce content themselves. As far as telecom operators are concerned,

the benefits of vertical integration lie in the reduced transaction costs, in being able to

broadcast their own contents, in the externalities and in being able to raise the cost for

competitors. The disadvantages attached to entering content production are also apparent

and mainly dwell in the likelihood of failure due to a lack of resources, knowledge of and

expertise in the new market. Careful cost-benefit analyses thus need to be made before any

decisions can be taken.

2.4.4 The financial domain. Financial performance is essentially what emerge when costs

and revenues are combined. The fixed cost level of IPTV projects is determined by the

technical and service design choices that are made. For example, high availability servicerequires substantial investment in the setting up of redundant servers to secure abundant

video sources at peak times. Interactive services require financial support so that network

equipment can be upgraded and technical problems solved. Revenue models depend on

revenue sources like, for instance, advertisement or flat rate models and the relevant pricing

model. In that way revenues can than be calculated by estimating the size of the market and

the anticipated market share (see Figure 4).

In the current IPTV market most telecom operators are adhering to the subscription model

(flat rate) and are slowly adopting pay-per-view and advertising models by providing VoD

(Video on Demand). However, if more customized and personal services become available

a flexible pricing model will be more desirable and realistic in the future. Pricing results from

the evaluation of many different factors including market competition, operational costs and

company strategies. The pricing models and revenues of IPTV operators depend on allkinds of risks regarding technology, the availability of resources, competition, supplier and

consumer behavior and political factors. Telecom operators must use a variety of methods to

reduce uncertainties and risks. The critical design issues in the financial domain are the

revenue/cost sharing and the revenue model. Revenue/cost sharing agreements can be

reached on the basis of tangible value objects (e.g. money, contents and services) as well as

through intangible value objects (e.g. branding, scheduling and customer information

rights). The advantages inherent in revenue/cost sharing are reduced investments and

reduced risk levels. The disadvantages are coordination costs, abuse of market power and

the risk of damaging a carefully conceived brand.

What emerges from these analyses is the fact that designing business models for IPTV

services is a complex undertaking which is technically complicated and requires multiple

Figure 4 Finance domain design method template



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actors to balance different design requirements. There are critical interdependencies

between service design, technical architectures, organizational arrangements and financial

performance. The critical design issues and trade-offs involved in the various design

choices during the exploration phase of IPTV development are presented in Table I. Telecom

operators have to balance the requirement in these domains and take the external factors

Table I Summary of critical design issues and tradeoffs

TradeoffsService design issues Service domain Other domains Critical design choice

Service bundling Tr iple play, quartet play Complex organization

arrangement

Choice at discount bundling level

Choice of different products

portfolioValue-added services

(e.g. interactive)

New and unique service Extra investment

Risk of failure

EPG

PVR

Other interactive componentsContent portfolio Content only available through

the platform

Requires cost-effective network

and advanced middleware

Complex organization

arrangement

Platform exclusivity

Channel exclusivity and distributor

customer ownership

TradeoffsTechnical design issues Technical domain Other domains Critical design choices

Bandwidth High bandwidth Large investment on

infrastructure

Adding large capacity (FTTx) with

high investment

Gradually expanding bandwidth

capacityQuality of service High QoS Large investment or extra

customization

Deploying FTTx and advanced

quality guarantee equipment

Gold, silver membershipMiddleware capability Extensive capabilities for

interacting, conditional access,

security, CRM

Large investment or lowrevenue

generation

Prioritizing the preparation for

advanced Electronic Program

Guide functionality, revenue

models based on customer

information such as advertising

Prioritizing lower CAPEX and quick

time-to-market in order to acquire

installed customer bases

TradeoffsOrganization design issues Organization domain Other domains Critical design choices

Vertical integration Vertical integrated firm Bundling service Whether or not to become content

provider

How to enter the content

production marketHorizontal integration Horizontal integrated firm Cost revenue sharing Choice regarding the level of

discount of bundling

Choice regarding different product

portfolios

Tradeoffs

Financial design issues Finance domain Other domains Critical design choices

Revenue/cost sharing Horizontal integration

Content portfolio

Middleware capability

How to arrange revenue/cost

sharing with other players

Revenue model Value-added services

Content portfolio

Vertical/horizontal integration

Flat rate or more flexible pricing

model

Price the service at an appropriate

rate level



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and strategic interests into account when making if they are to make the appropriate

decisions regarding the design of an IPTV business model. Furthermore, these decisions

have to be sustainable when entering the exploration phase. When assessing the

sustainability of IPTV business models scenario analysis can be used to gain an

understanding of the trade-offs involved in the exploitation phase.

3. Scenario analysis

Scenario analysis is an effective way of reducing uncertainties and helping firms to formulate

flexible and sustainable strategies and policies. When employed as a tool designed to

reduce future risks scenario analysis is fundamentally different from the more quantitative

prediction methods. Instead of predicting, scenario analysis explores future directions from

a diverging perspective. Scenarios reveal various possible developments and show a

keener awareness of the uncertainty of trends (Bouwman and Van der Duin, 2003). The point

of scenario analysis is to understand, capture and describe possible future development

rather than to predict the future on the basis of a few selected variables. In the case of the

IPTV business model, scenario analysis will be used as a tool to pinpoint the uncertainties

that have a potentially high impact on the viability and feasibility of IPTV business models

during the exploitation phase (Limonard, 2006). Uncertainties often include elements that

are hard to quantify and model (Fijnvandraat and Bouwman, 2006). The results of scenario

analysis help IPTV operators to develop a clearer view of the sustainability and feasibility of

their business model. To construct the scenarios we used existing scenarios involving future

digital telecommunication and digital television. There are three reasons for selecting these

scenarios as reference scenarios. First, they have been created by institutes and experts

specialized in futures study, which means that the quality of the scenarios is guaranteed.

Secondly, each of the three studies was conducted in the telecommunications and television

industry. Thirdly, the time horizon of each scenario is the same (2010).

The scenarios used as a reference are:

1. The scenarios as published in 2005 by the European Monitoring Centre on Change

(http://eurofound.europa.eu/emcc/publications/2005/ef0567en.pdf, retrieved in August

2006). This scenario analysis was designed to look at the future of the

telecommunication services sector and take into account the rapid evolution of

telecommunications and the technologies involved five years from (2005). The study first

identified the three key dimensions of demand and usage, regulation and public policy,

and technology and industrial strategy. On the basis of these dimensions, four scenarios

were determined.

2. The scenarios created by the Bournemouth Media School and ITC (the former

Independent Television Commission in UK), see (http://media.bournemouth.ac.uk/

research/documents/fullreport.pdf). Here, scenario analysis was used to assist

electronic communication industries, especially television, to define and deal with

common future issues 10 years from 2002. The three dimensions constituting the scenario

were the way consumers use media, economic developments and the characteristics of

industry structure and competition. On the basis of these three dimensions four scenarios

for British television industry in 2012 were then presented.

3. Drop et al. (2000) developed a set of scenarios at the KPN research center. The aim was

to determine what ICTuse in the Netherlands will look like in 2005. Although the scenarios

originally had a time horizon extending up until 2005, experiences with other scenarios inall kinds of KPN projects showed that the basic assumptions and scenario axis could be

extended to 2010 (Bouwman and Van der Duin, 2003). The two axes (dimensions) of KPN

scenarios are individual vs. collective (the degree to which consumers let their own

interests prevail above those of the group to which they belong), and active vs. passive

(the degree to which consumers explore and change their environment rather than

conforming to external influences). Four scenarios were identified and validated.

We identified, on the basis of these scenarios, consumer attitudes and regulation related

to industry structure as the most important uncertainties. A distinction could consequently



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be drawn between sophisticated and standard consumers. Sophisticated consumers are

those who are fully aware of the advantages of new media products and services. They are

the ones who want to pay a reasonable price for customized and personalized services.

Standard consumers are conservative when it comes to using new products. They are

satisfied with conventional TV, they prefer an easy service configuration and they are

price-sensitive. This means that this is a group of customers for whom bundling services with

a discount is very popular. At one end of this spectrum the regulator and industry structure

dimension discusses the hands-off approach of regulators and the domination of the market

by telecom operators in the voice and broadband market. At the other end of the spectrum

regulators fulfill the interventionist role and restrict the dominant players in the market. Thereare therefore many players in the voice, broadband and television market. The two

dimensions identified by us resulted in the four scenarios presented in the following section

(see Figure 5).

4. The four IPTV business model scenarios

We shall now take a closer look at the four scenarios and we shall illustrate the kinds of

critical design issues that become relevant in the exploitation phase of an IPTV business

model.

4.1 Scenario 1: Telecom operators Mammoth

Economic growth is modest. Competition between incumbent telecom operators, new

entrants and cable and satellite companies continues to grow. The regulator has little doubt

about market efficiency and adopts a light regulation regime. Telecom operators are not

bounded by tariff regulations and are free to affiliate themselves to content providers. The

younger generations of consumers quickly accept the affordable new services. Most of them

like easily configurable digital TV, telephone and broadband services. Consumers show an

interest in bundling. The most popular packages are the discount offers from the

multi-service providers. Given the fact that consumers will value bundled services more than

the total separated value, the bundling of complementary products will be an attractive

strategy. Such bundles will not even require a discount. Telecom operators should avoid

offering substitute bundling without justifiable economic return. As a result, bundling

services becomes the priority for telecom operators. Telecom operators are the only players

Figure 5 Scenario dimensions, scenarios and critical issues



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capable of providing quad-play. Cable companies are triple-play veterans but find it difficult

to catch up with telecom operators. However, success does not come easily in a market

where several cable competitors are capable of offering comparable services. The success

of triple play is determined by factors like bundling type, pricing and content (Forrester

Research, 2006). Telecom operators should make use of the preference on the part of

simple users for easy and quick configuration and entice more consumers by introducing

bundled products. They can decide to bundle the IPTV and broadband services. In most

cases, these are independent products which can be made cheaper by bundling them but

in some cases they become complementary and thus add value to end-users (see Table II).

Just because service bundling is the key critical design issue in this scenario that should notdiminish the importance of other design issues. However, in the light of limited resources,

telecom operators have to focus on service bundling and the associated critical issues when

they weigh up the requirements of IPTV business model designs. In the technical domain,

bandwidth is closely related to the offering of service bundles. The combination of

broadband and video services requires high bandwidth capacity (e.g. video service

requires at least 2-3Mbps and broadband requires around 1 Mbps. The total is about

minimum 3-4Mbps). This technical design issue regarding bandwidth will be the key

enabler of bundling services. It therefore becomes necessary to upgrade such networks to

fiber or hybrid types. In the organizational domain, horizontal integration is important if

service bundles are to be offered. One of the challenges facing telecom operators is that of

how to coordinate the newly established video business unit and the traditional broadband

voice business units in the back office if they want to be able to provide seamless bundles

and an efficient billing system to end users. In the financial domain, because of consumerdemand for affordable services, it is vitally important to choose the right pricing and discount

rate. Telecom operators have to balance technical and financial design to control the cost

level and to be able to offer a modest monthly rate to most consumers. This pricing strategy

can be converted to a more aggressive approach by offering larger discount rates than

those offered by cable operators and by taking advantage of economies of scale and scope.

This can create a competitive edge and entice more consumers to enter into the convenient

triple play configuration.

The key phrases in this scenario are bundling services, the aggressive discount rate of

bundles, horizontal organization integration and sufficient bandwidth.

4.2 Scenario 2: Head-to-head competition

Economic growth is high. The regulators relax constraints on telecom operators andsucceed in abolishing the regulatory differences between telecom operators and cable

companies. The regulatory framework leads to fair competition between equally strong

players creating an expanding digital TV market. Different players compete at national level

and thus gain fair access to the content market. Competition facilitates innovation and

strengthens the balance sheet of the digital TV industry as a whole. The market value of

digital TV companies keeps increasing. A virtuous circle is created. Consumers become

more sophisticated, which means they are more aware of the benefits of digitalization and

more experienced in selecting digital TV offers and programs. They prefer new services at

affordable prices, are less interested in choosing from a whole range of options and like to

create and share content. The victorious digital TV provider is the one that caters to the

personal tastes of consumers and enables them to create, publish and share their personal

stories. In this scenario telecom operators have several strong market competitors including

Table II Bundling option

Nature of products Bundling strategy Synergy effect

IPTV and DVB-T Substitute No bundling NoIPTV and telephone Independent Bundling NoIPTV and broadband Independent/complementary Mix bundling YesIPTV/broadband/telephone/mobile Independent(?)/complementary Mix bundling Yes



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cable, satellite and content providers. End-users have at least two options between which

they can choose. Most service providers offer mixed-bundling services at comparable

prices. Bundling is hardly a winning strategy.

On the other hand, sophisticated consumers search for the programs they prefer. Owing to

the growing prevalence of personal choice, the content market is becoming fragmented. In a

fragmented market, the most popular programs do not attract much attention. Most

consumers pick their own content regardless of the preferences of other viewers. This leads

to a large number of programs with small audiences, emulating a long tail for television

(Limonard and Tee, 2007). The success of any business model depends on whether or not

operators are able to satisfy peoples individual choices and tap into the value located in thelong tail. In order to do that television operators have to establish extensive cooperation

with various content producers, which also includes content generated by viewers and

aggregators, so as to obtain as many diverse programs as possible while pursuing their own

capacity to produce exclusive content. The key critical design issue in this scenario is the

ability to create content diversity.

In the technical domain, IP-based distribution technology provides a competitive

advantage, as such technology meets the requirements of the long tail to become

economically interesting. As the IP infrastructure makes it possible to interact and collect

detailed information on user behavior a powerful asset is created giving telecom operators

the opportunity to become an indispensable interface between the customer and content

producers and advertisers To make this possible telecom operators should make full use of

the advantages of IP-based transmission. The delivering of customized services requiresadditional investment in content production and distribution. According to Noam (2002),

cable and internet TV operators face similar costs with regard to content production,

although distribution costs through the IP platform are much higher. Individualization

requires significantly larger transmission resources and consequently larger investments.

The business model key phrases in this scenario are content diversity, broad cooperation

with various content producers, balance cost issue, full use of IP-based transmission and

user-generated contents.

4.3 Scenario 3: Market deadlock

Several large merger deals create natural monopolies. Regulators propose bringing back

strict anti-trust policies. Telecom operators challenge the harsh regulations in court. Judges

agree with regulators and rule in favor of cable and satellite companies. Telecom operatorssubsequently have to endure numerous procedures before they can receive TV franchise

permits and they are actually blocked from content integration. Cable and satellite

companies take advantage of the regulatory environment. They consolidate their businesses

and become dominant and vertically integrated national players. In this scenario,

consumers are already quite experienced with digital TV and they are interested in new

services.

It is hard to generate profit for telecom operators in a stagnating market. The key critical

design issue has to do with providing new value-added services. To achieve satisfying

penetration rates for IPTV services, telecom operators need to create a competitive edge by

differentiating their services not by opening up the long tail to content, but by opening it up

to value-added services, independent of content producers and aggregators using, for

instance, PVR (Personal Video Recorder) and interactive services (TV email, TV internet and

games). However, simply offering PVR or interactivity will not safeguard market success.Choosing this strategy inevitably involves conflict with content-oriented firms. Service

providers may decide to implement various forms of copy protection but history indicates

that these measures will be defeated and consumers will be able to copy programs (Katz,

2002). Some value-added services give consumers the opportunity to schedule and edit the

programs. This may threaten the ability of content packagers to rely on the sales of

advertising (Loebbecke and Radtke, 2005). A notable choice example people have is that of

being able to push the forward button to avoid advertisements when watching recorded

programs.



14/17

The key resources for television distributors revenues reside in the relationships that exist

between content packagers and advertisements. The implication for value-added service is

certainly not insignificant. Understating the attractiveness of value-added service and the

possible loss of revenues helps telecom operators to select measures that are aimed at

reducing the disadvantages of offering value-added service. One such measure is to

embed advertisements in programs that consumers are willing to watch. The second

strategy is to provide entertaining or informative advertising that consumers do not want to

miss. Another strategy is to reward consumers who watch advertisements. In an IP-based

network the time consumers spend watching commercials is monitored. Telecom operators

can use the monitoring results to reward their customers financially or to give themconditional access to premium contents (Katz, 2002).

Telecom operators can also agree to tolerate consumers copying contents and avoiding

advertisements if the value-added services manage to attract enough new subscribers.

According to Myers (2002) and Mogg (2004) these two features are actually the biggest

selling points for PVR. Telecom operators should allow the decision to be based on the

balance between customer value and economic benefits and they should ask themselves

whether or not the value added service can attract new customers enough to offset the loss

from advertisement and program reproduction and redistribution.

Business model key phrases in this scenario are offering value-added services, weighing up

service attractiveness and potential revenue losses, and flexible pricing.

4.4 Scenario 4: Back to basicsIn this scenario, regulators adopt strict anti-trust policies toward the big telecom operators in

the market. Cable and satellite companies take advantage of the regulatory environment

and consolidate their business. Several vertically integrated and global companies

dominate the television market. Most consumers are satisfied with the television services

currently provided by cable and satellite companies. They are extremely hesitant to adopt

new services. A wait-and-see attitude prevails. There is little demand for interactive

services and internet TV. Consumers have decided to use bundling services for reasons of

convenience and to facilitate easier configuration.

In this scenario, regulatory barriers and consumer indifference make it hard for telecom

operators to offer IPTV services. There are few new opportunities for them to develop the

IPTV as defined in the exploration phase to become a successful service. Although bundling

may still be an effective strategy, it will be difficult to persuade consumers to switch fromcable companies to telecom operators. The potential market is limited. The content supply

side is dominated by several vertically integrated global companies. It is difficult for telecom

operators to enter the content market and compete with content providers.

The more realistic option for telecom operators is to make better use of the existing

technologies, services and resources that are there to support IPTV development. Firstly,

they can create a fresh image as new entrants, which will provide a high level of QoS and

service availability together with excellent customer service. Better program quality and

customer service are compelling reasons for consumers to switch from cable and satellite

providers. Secondly, telecom operators should leverage their customer base in the

broadband and telephony market. Thirdly, they can create complementary programs and

content on the television and broadband platforms. Ultimately though there is no dominant

strategy encouraging telecom operators to select within this scenario.

Business model key phrases in this scenario are QoS, leverage experiences and expertise

from broadband to television, and synergy effect.

5. Conclusion

The IPTV business model always has to adjust to changes in external factors and

uncertainties in the exploration and exploitation phases. The four scenarios presented in this

paper explicitly address demand, regulatory matters and competition-related uncertainties.

The scenarios represent the different future possibilities in terms of regulatory environment,



15/17

industry structure and consumer attitudes towards (IP)TV services. By choosing the right

business model, telecom operators can sustain market competition and provide customer

value and economic benefits. In the light of limited resources when weighing up the

requirements of IPTV business model design, telecom operators have to focus on the critical

design issues in each of the scenarios. The critical design issues are of eminent importance

to the viability and sustainability of the business model under study (Faber et al., 2003).

The analysis has revealed the critical design issues telecom operators have to focus on

when faced with changing external factors. In the telecom operators mammoth scenario it

is asserted that telecom operators should take advantage of the economies of scale and

scope and offer more competitive bundling possibilities. The critical design choice to offerbundling is the key to satisfying the demand of standard consumers for convenient

configuration and to helping telecom operators to establish a leading position in the

television market. In the head-to-head competition scenario, the ability on the part of telecom

operators to offer content diversity is important when it comes to matching increasing and

fragmented consumer demand. In addition to possible integration into content production

and into signing deals with multiple content providers, providing a platform for

user-generated content is also an effective way of creating content diversity at a low cost.

In the market deadlock scenario, telecom operators should focus on the critical design

choice of providing value-added services. The interactive and versatile nature of IP-based

networks suitable for carrying multimedia and interactive services should be fully explored.

This will possibly give telecom operators a way of differentiating their IPTV from cable and

satellites companies so that they can gain a competitive edge. In the back to basics

scenario, it is relatively difficult to implement the IPTV business model due to the indifference

of consumers and the presence of dominant cable companies in the market. The analysis

emphasizes the synergy between the telecom operators broadband and television

services. Telecom operators can leverage their advantage in the broadband market (e.g.

through branding, a large customer basis and sufficient cash flow) to include the television

market and increase value for both (see Table III).

The design issues we found to be critical in each of the scenarios do not necessarily diminish

the importance of other design issues. The fact is that telecom operators always have to

balance design choices if they are to generate both customer value and economic benefit

for their shareholders. For example, content diversity design is closely related to the finance

domain because the costs of producing tailor-made personal services are not minor. It is

important to find ways to control cost at a certain level (e.g. broadcasting user-generated

content is one way of reducing cost). Providing value-added services brings with it the risk oflosing subscriber and advertising revenue thus making the business model vulnerable if not

enough new customers are attracted. Telecom operators have to decide to what extent they

want to offer new services on the basis of market demand and cost forecasts.

Table III Summary of the critical design choices in different scenarios

Scenarios

Telecom operators

mammoth

Head-to-head

competition Market deadlock Back to basics

DomainsService Bundling Content diversity Value-added service BundlingTechnical Sufficient bandwidth Middleware capability Middleware capability QoSOrganization Horizontal integration Partial vertical integration

to enable cooperation

with content producers

(professionals and

amateurs)

Partnering/partial

integration with ASPs and

OEMs

Consolidate

Finance Aggressive discount rate

offers

Balance increased costs

(CAPEX and OPEX) with

increased revenues

Balance content related

loss with revenues and

extra revenue from

advertisers and price

differentiation

Consolidate, focus on

internal synergy effect in

network



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The existing fund of IPTV business model literature is limited. There is an extensive body of

research on IPTV technological development (Pfeffer, 2006 and Cisco, 2005) and there has

been much discussion on revenue/profit generation capabilities (e.g. Liu, 2006). A

systematic and balanced perspective on the various components of the IPTV business

model has, up until now, been lacking. The only previous investigation in this area has been a

working paper by Carney et al. (2006) who used Porters five forces to assess the IPTV

business models, and Limonard and Tee (2007), who focused on long tail business

models using the STOF model.

It would appear that the STOF model and, in particular, the critical design issues lend

themselves to IPTV business model analysis. This confirms the initial findings of Limonardand Tee (2007) to the effect that such results are conducive to the decision-making process

involved in designing an IPTV business model. This research does not stop at critical design

issue analysis but takes matters a step further so that light can be shed on the viability of the

business model in an exploration phase. This was effected by integrating the business

model framework analysis into the scenario analysis. Scenario analysis highlights various

future possibilities and provides a platform for the analysis of decisions linked to the critical

design issues that have to be made in an uncertain future environment. The competing views

on future developments can aid the reduction of future uncertainties with regard to the

viability and feasibility of the business models available for IPTV.

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Corresponding author

Harry Bouwman can be contacted at: [email protected]


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