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Questioning Telco VoD-Only IPTV Services

For telcos across the world, providing video services is increasingly becoming a necessary evil, according to Pyramid Research. Many have already invested billions of dollars to roll out IPTV services that are intended to be at parity with existing pay-TV services.

Network upgrades and content licensing take a significant amount of time as well. In the U.S., AT&T is investing $5.1 billion in infrastructure to extend its IPTV service to 19 million households by the end of 2008 -- which represents only 38 percent of leading cable company Comcast's household coverage today.

A number of operators have instead opted to build their business models around Video on Demand (VoD) services alone. Encouraged by the growing demand for VoD services, some of these operators look to replace or complement broadcast TV with VoD.

In March 2007, U.S. telco Qwest said it may go this route in order to introduce a video service sooner and lower the cost of network upgrades. However, Pyramid Research argues that a TV offering that does not at least match existing offerings and that requires the end-user to pay more for the privilege of accessing VoD is a losing proposition in the medium term.

Pyramid's assessment assumes that all consumers will seek a "me too" service that mimics the linear channel tier model of cable and satellite Pay-TV providers. Frankly, I question the validity of that assumption, given recent trends.

In contrast, I anticipate that a growing segment of consumers will seek a combination of advertiser-supported local broadcast digital TV channels, and combine that capability with either DVD rental/subscription services or online download/streaming services.

They're likely the early-adopters, and the same people who routinely go against conventional wisdom -- as an example, do you remember when analysts predicted that it was insignificant that a growing segment of consumers discarded landline telephone service and subscribed to mobile-only phone service?

Pyramid is highly skeptical of VoD-only models, for a number of legacy-centric reasons:

VoD is a complement to broadcast TV. 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. While VoD is fast becoming a must-have component of every digital TV service, it will not replace the TV component in a triple-play bundle.

It is not a core application like multichannel programming. Successful triple play models (Fastweb, Free Telecom, Imagenio, KPN TV) have focused on matching the competition, bundling free-to-air or digital terrestrial television with optional pay-TV channels and VoD.

This means that broadcast networks are vital to any triple play offering. To the extent that end users want exclusive content, pay TV and VoD options should be offered.

VoD thrives on compelling, premium content, which will be difficult to acquire for a VoD-only IPTV model. Consumers will pay for the best content. Almost 80 percent of today's VoD movie purchases are driven by new movie releases. The major studios -- producers of most such content -- require a mass of subscribers or minimum guarantees when cutting deals with distribution channels.

In Pyramid's view, VoD-only models will struggle to match these demands, given their limited appeal compared with full-fledged pay-TV offers. Providing broadcast TV on demand may be even more challenging, since it complicates the advertising model and rights have to be acquired from all those involved.

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