Close to five million households

worldwide subscribed to IPTV

services by the end of 2006,

with the Western European markets

accounting for more than half of them.

IPTV has emerged as a key defensive

strategy and a compelling part

of a multiple play service package,

promising to reenergise the telco

business model and disrupt the traditional

TV business. For the past decade,

the proliferation of mobile services,

intense competition in local and long-

distance markets, and more recently

VoIP technologies have had a combined

adverse effect on telco voice revenue

in competitive, mature markets. In Western

Europe, for example, fixed voice revenues

declined by 3% in 2006 and, by our

estimates, will amount to $43bn in 2012,

down from $62bn in 2006. Consequently,

telcos have placed their bets on

broadband-based services. Within this

context, IPTV is an important part of the

grand telco plan to monetise the broadband

network and become more competitive

in a market characterised by triple

- and quadruple-play providers.

Video-on-demand (VoD) is a critical

component of the IPTV value proposition.

As the latest entrants to the pay-TV

market, IPTV operators are looking

for a strong differentiator that can help

them steal market share from existing

players or simply drive pay-TV adoption

in markets where demand has not

materialised to date. Merely a "me too"

strategy of offering linear channels will

do little against entrenched TV players,

and hence we expect IPTV operators

to increasingly differentiate themselves

with on-demand, interactive services.

IPTV platforms are arguably more

optimised for the delivery of such

services than other TV platforms.

Moreover, in most markets

including those in Europe, VoD

services are not widespread

and IPTV operators have

the opportunity to steal a march

on competition. However,

what has kept the VoD

adoption at low levels

to date has largely

been the business

challenges related to

content copyright and

licensing matters and

IPTV operators will face

the same set of issues.

If they can work out

these issues, the holy

grail for IPTV operators

is to allow end-users

control their own video

consumption in a largely

unicast model, wherein all

programming flows through

an on-demand pipe and customers have

the flexibility to access any content at any

time and on any device. This would

differentiate any TV provider.

TelcoTV bets on VoDFrance's Orange is a good example.

The company sources its content for linear

programming from leading pay-TV

providers (primarily satellite DTH

operators) and looks to set its video

service apart by offering a diverse

catalogue of VoD content. France has

a limited pay-per-view culture; to drive

uptake, the operator has signed a

distribution deal with Canal+ for soccer

content and plans to co-produce ten

to 15 movies a year to be provided

exclusively on its VoD platform.

Similarly in the UK, Tiscali and

BT offer Freeview's DTT service

with their respective broadband

services at no additional charge,

from which the subscribers can access

page five

www.cable-satellite.comSupplementIPTV

VoD

SUPPLEMENT SPONSORS

Ozgur Aytar, research manager at Pyramid Research,analyses the challenges facing IPTV video-on-demand, and expects subscription-VoD to drive overall IPTV VoDrevenues

Will VoD come to therescue for IPTVoperators?

2006 North America11%

Western Europe51%

Asia Pacific34%

Rest of the world4%

Regional breakdown of IPTV subscribers in 2006

Source: Pyramid Research, ‘Can VoD

Save IPTV?’

Leading IPTV solutions

page six

www.csimagazine.com Supplement IPTV

VoD

SUPPLEMENT SPONSORS

the operators' VoD portals. In a fairly

competitive pay-TV market, these

operators have to create a switch catalyst

for consumers; a "me too" play would

have limited appeal. Thus, they have both

positioned their TV services in the middle

of what has been available in the market,

providing more choice with VoD services

than Freeview does in programming,

but at lower prices and for shorter contract

periods than the pay-TV leaders, BSkyB

and Virgin Media.

In the US, the market environment

is a little different: cable companies

have been developing VoD services

for years to win back market share from

satellite DTH operators, and for IPTV

players VoD is a must-have enhancement

to TV programming. More importantly, IPTV

operators have to be much more innovative

to develop unique, rich VoD platforms.

Having launched its service less than two

years ago, Verizon Communications already

boasts the second largest VoD catalogue

in the country.

Not a promising business model for some time to comeWhile VoD goes towards service

differentiation, we don't believe that

it can be profitable over IPTV platforms

in the medium term due to the hefty

content costs. The most popular VoD

asset is new movies; in the US, for

instance, movies account for 80%

of all VoD transactions, and 75% of those

transactions are for new releases. And,

new movies come at a price with

Hollywood studios generally demanding

the bulk of the revenue, and sometimes

minimum guarantees. Because IPTV

operators have to pay almost all revenue

back to the studios, they will have a

difficult time achieving any profits from VoD

transactions from their rather small

customer bases.

We see the VoD business model

evolving in two stages over IPTV platforms.

The initial stage is one of customer

retention; while VoD will not generate

significant profits for IPTV operators

in the medium term, it can help

differentiate the TV service and sell

broadband and triple-play offerings.

The second stage of the IPTV VoD model

should be more lucrative. Shorter release

windows for content will play a significant

role in the evolution of the model,

but more importantly, IPTV operators,

by developing a multiplatform presence

for their VoD content, will build larger

audiences and grow profits. Developing

a multiplatform offering will take time,

however, largely because of copyright

and licensing issues. Content providers

are interested in extending their reach,

but they are also concerned about

disrupting established advertising models

as well as about piracy. When IPTV VoD

reaches an acceptable scale, we expect

that telcos will have more negotiating

power with the studios and more

opportunities with advertisers.

We believe that IPTV business models

built around VoD alone present a losing

proposition, at least in the medium

term. VoD is a complement to pay-TV,

not a stand-alone product, and IPTV

models built around just VoD have an

inherent vulnerability. There is a limited

pay-per-view culture across the world,

and few users will buy a monthly

subscription to have access to VoD

alone. Moreover, VoD thrives on compelling,

premium content, which will be difficult

to acquire for a VoD-only IPTV model.

VoD to spur IPTV revenuesBy our estimates, worldwide VoD unit sales

over IPTV platforms will grow from about

39m in 2006 to close to 1.48bn sales in

2012. Unsurprisingly, Western European

markets generated the majority of these

sales in 2006. Moving forward, we expect

the region to continue to hold on to its

lead, albeit with a lower share of the

market. The drivers for VoD sales include

rising awareness of VoD services,

subscriber base increases, and better,

richer content offerings as release windows

collapse and HD content is introduced.

Revenues from VoD transactions and

subscriptions will grow along with the unit

sales, from a global total of $121m

in 2006 to $4.7bn in 2012, 18% of

global IPTV revenues.

As VoD services evolve over time,

we expect operators to introduce

new packaging options to drive uptake.

Moreover, with more compelling content

available for VoD, operators should have

opportunities for higher price points.

Today, VoD is either offered on à la carte

basis or as part of a subscription.

We expect subscription-VoD (SVoD)

to account for more than 60% of IPTV

VoD revenue globally by 2012 because

it resonates best with consumers,

platform operators and content providers.

To make the per-use VoD model work,

IPTV operators have to continuously

invest substantially in compelling content

to convince end-users to make a purchase.

Moreover, consumers tend to control their

VoD purchases out of concern over how

piecemeal purchases affect what their bill

will look like at the end of the month.

Conversely, SVoD presents a very profitable

model for IPTV operators, promising

a guaranteed revenue stream. To get there,

they have to develop a deep understanding

of their customers' content preferences

and usage patterns and build SVoD

offerings that customers will pay for.

It will also be increasingly important

for content providers to build on-demand

strategies that are consistent with their

linear strategies in order to improve

customer loyalty and build audiences.

Ultimately, we expect the emergence

of an ad-funded model as well as

packages that incorporate multiplatform

access to VoD content. Hybrid models

will emerge, whereby consumers are given

the option to either pay a transactional

or subscription fee to access the VoD

platform or simply view advertising in

return for free access. IPTV operators

will likely offer similar subscription and

ad-funded options for accessing content

from PCs or mobile devices. CSI

“We believe thatIPTV businessmodels builtaround VoD alonepresent a losingproposition.”

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2006 2012

VoD

Rev

enue

s (U

S$m

)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

VoD revenue as %

of total IPTV revenue

VoD revenues over IPTV VoD revenues as % of IPTV revenues

IPTV VoD revenues grow by a CAGRof 84%

Source: Pyramid Research,

‘Can VoD Save IPTV?’

Leading IPTV solutions