What is the 10,000-foot view of the state of consumer telecom services?
In the developed world, you're seeing that broadband markets are starting to slow because they are reaching the saturation point. In other words, the people who want broadband already have it. That means revenues are starting to slow because the only thing driving broadband revenues is subscription growth.
The issue is that telecom companies have tried to slow declines in fixed voice services, and if broadband growth is now coming to a halt, the top-line fixed revenue that has remained relatively stable until now is starting to show a decline. The worry we face is that a recession will speed up fixed mobile substitution because if consumers need to cut back on entertainment and media costs -- if they have to cut something -- they are more likely to cut the fixed services than the mobile. If that happens, we will see a sharper decline in fixed voice, rather than a slow, gradual decline. Are incumbent providers affected the most by broadband saturation?
No, this isn't just an issue for incumbents. Many competitive broadband service providers have done well out of broadband, but their whole business is based on basic voice and basic broadband, so they face the same issue. They may be less equipped to get into multimedia, so they're facing a decision of whether to reinvent the business or close up shop. Are there any companies that you think are really getting the IPTV/ARPU equation right?
There are best-of-breed examples -- Iliad in France, for one. Its brand name is Free, and it's a competitive national player. From the start, it was set up as a broadband multimedia company, and it has been very, very aggressive around TV. You pay a flat 30 euros a month for voice, broadband and TV. The company doesn't care whether you take the TV or not; it's a flat fee. In Europe, most companies charge that just for broadband.
The company says 80% of customers take the TV service, and now 25% of the company's revenue comes from value-added services like video on demand. So for them, the broadband part of the business may be slowing, but revenues are accelerating because of value-added services. Does that example show that IPTV is the answer to declining revenues?
Many players believe that TV is the answer. In terms of devices in the home, the TV is most pervasive and is the best choice to future-proof ARPU. The whole idea is that you have TV in the home, and you can start to deliver other services that will help increase ARPU. That's why so many carriers are focused on TV.
TV is also a defensive play against cable for companies like Verizon in the U.S. But it all depends on the market. In countries like France and Italy, there was a big opportunity around 2000 to enter the pay-TV market. In Paris, for example, people weren't allowed to put satellite dishes on the roofs, and there wasn't any cable TV to speak of. In Italy, there was no strong cable play then, and the national broadcast company was owned by the government. The U.S. is completely different, where you have big cable heavyweight players and big satellite players in the market already. It's tougher. How hard is it for carriers to be successful in IPTV?
Being successful isn't easy, and it depends on what market or country you're in. In the U.S., Verizon and AT&T are in there, but they're spending a lot of money to compete because they have to. They have to have an extremely high-quality service, with hundreds of HD channels to get people to switch.
In the U.K., we have a very strong satellite player and a reasonably strong cable player. We also have 80 free broadcast TV channels. So we have a split market. The people who want to pay for TV probably already do, and the ones who don't, don't really have to. How does high-def content figure into IPTV technology decisions?
In developed markets, on the technology side, if you want to get into IPTV and remain competitive, you're going to have to tackle high-def content at some point. In the U.S. and Europe, a lot of the positioning is around who has the best range of high-def content. That raises the issue of next-gen access, because the DSL networks around the world aren't capable of delivering high-def channels to every home. So the providers then have to think about investing in fiber to the home (FTTH) or to the node (FTTN), and that's hugely expensive. There are no guarantees that the ARPU will increase, especially for fiber to the home. That's a double-bind, in that, if companies don't have a plan to increase ARPU, why would they go to the expense of building out fiber to the home?
They might go to the trouble because they don't have any choice. If Verizon didn't go down the FiOS route and make sure it was a best-of-breed TV service with high-def content, it could see a future where the cable companies completely destroyed its consumer fixed-line business. Do you see a move to build out FTTX as necessary for most providers?
If you get into TV, fiber becomes necessary. You can decide what type and when, but the answer seems to be yes, at some point. Video is the big game-changer that is driving bandwidth growth.
In Europe, there are political pressures to deploy fiber, and regulatory ones. In the U.S., the only reason Verizon committed to the money is that it got guarantees from regulators because it doesn't have to open the advanced network up to the competition. In Europe and the rest of the world, those guarantees aren't in place yet. How will the current economic problems affect consumer services?
Before this credit crunch, I didn't see Verizon's customers ever saying, "I have this mobile phone, it's 3G, so I'll turn off my broadband and my IPTV service." With the recession conditions, there may be some of that. A company that has both fixed and wireless services in its portfolio is in a stronger position for just one or the other. Even for companies with wireline and wireless networks, are there thorny internal issues?
Here are a couple of examples. If a company decides to put femtocells into broadband routers, who will pay for it and who gets the revenue, for example? And in that kind of convergence, we're in the early days of figuring out how you sell this to consumers. The fixed, the head of household used to buy it, but mobile is a much more personal decision because individuals, not households, generally buy that. How should carriers go about deciding how to address the IPTV market?
There's no right or wrong answer. You have to look at the specific situation that the player is in. And that's one of the big problems that we're just starting to realize. Without criticizing any player, you have to look at how services have traditionally been offered. Is TV owned by the government, for example? It would be hard for Deutsche Telekom (DT) to offer IPTV service in a market where everyone has cheap or free cable TV. Consumers would ask why they should spend money on a service they already get for nothing, because in Germany, people get something like 200 channels already.
So the answer that many players are now beginning to understand is that it has to be an individual market strategy. And if TV isn't a market that can work for some providers, they need to look at what else they can do to increase ARPU. Do you think the telecom industry will take the kind of hit in this year's economy that it took in 2001?
Our general feeling is that telecoms are protected a little bit more, and perhaps the biggest effect we might see is speeding up fixed mobile substitution. When it comes to things like pay TV, I can see people cutting down on monthly subscriptions but then spending more on one-off things like video. So I think that market in general will be OK.