Telcos across the world aim to be serious players in the pay-TV business with Internet protocol television (IPTV) offerings. The technology provides both threats and opportunities to satellite pay-TV platforms already competing against cable and terrestrial alternatives.

The introduction of IPTV services by the telcos, along with other competing services, will make it more difficult for direct-to-home (DTH) satellite service providers to meet their subscriber targets, said Sarah Simon Morgan Stanley‘s leading media analyst.

Simon no longer believes that BSkyB of the United Kingdom would reach its target of 10 million subscribers by the end of 2010. BSkyB most likely will miss the target by about 600,000 subscribers, Simon said in a research note. “The commoditization of [asymmetric digital subscriber lines] has led to a price/speed war that is forcing BT and other Internet service providers to strike content deals and to offer both basic and premium content on an on-demand basis.”

Despite the threat, satellite pay-TV is still likely to remain a strong performing business even with the potential threat of telcos entering the television market.

Peter White, an analyst at Rethink Research Associates told Satellite News, “Satellite is the cheapest way of delivering your big bulk number of channels. I think there will be a requirement for a bulk number of channels for some time to come. Satellite is going to have a distinct footprint advantage in terms of price of anything that IPTV can put together.”

Each market is different and there are some in which satellite pay-TV operators are perhaps under more threat. Here, we take a snapshot of a number of markets and look at the potential implications for satellite pay-TV operators as telcos look to enter the television business.

United States

At the moment, SBC Communications is leading the way amongst major U.S. telcos looking to break into the television market. It is spending around $6 billion on “Project Lightspeed,” which will enable the company to offer television services alongside landline voice, wireless and broadband services. Lea Ann Champion, SBC’s, senior executive vice president and chief marketing officer, told sister publication Inside Digital TV that digital television was a huge opportunity for the company.

“We have between 25 to 30 million household customers today,” Champion said. “The point I want to make is that the cable companies have about 20 million subscribers in our footprint and the satellite companies have around 4 million subscribers. There is no future as a traditional telephone company. The opportunity for us to change the game is to expand into broader entertainment solutions and IPTV is the path we have chosen to do that. We are pretty excited about the potential that offers.”

SBC advantage will be in providing the service via landline telephone infrastructure, Champion said. This will allow SBC to offer premium services such as high-definition television (HDTV) and digital video recorders to all of its subscribers, something cable companies cannot do, due to the limitations of their infrastructure, she said. Others are looking to follow suit. Bellsouth is ramping up its trials in this area and has a goal of offering a “grand slam” of services – telephony, wireless, Internet, television – that would usurp the “triple plays” offered by satellite providers. Bellsouth also has a marketing alliance with DirecTV where Bellsouth consumers can gain these services as part of an integrated service bundle.

Don Granger, president of Bellsouth Entertainment believes the telco and satellite offers could be complementary rather than competitive. “We have a good relationship with them (DirecTV),” he said. “We will see how that evolves throughout time as we move forward our video business, but clearly right now, it is very complementary to what we do. We have a common challenge and that is the cable [companies] and their dominant position in the video and broadband space in the United States.”

Like a number of telcos, BellSouth is considering making a huge investment in the television business. “It will be closer to the end of this year and next year for a full commercial proposition to be rolled out if we decide on a commercial launch,” he said. “There are a number of independent telephone companies who have rolled out the first generation of IPTV in North America. What we are looking [for] is something that will leapfrog the competition.”

France

In Europe, one of the most innovative markets for digital television is France, where there are two strong satellite pay-TV platforms, TPS and Canalsat, and digital subscriber line (DSL) providers such as France Telecom (FT) with its MaLigneTV service and Neuf Telecom already making an impact in the market. Television over DSL has provided an opportunity for satellite pay-TV operators and FT to offer the best channels from both platforms.

Herve Payan, vice president of the content services division at FT, said, “Consumers can subscribe to both offers, MaLigneTV on one side, which gives you the set-top box, and the subscription-to-television access and then you can gain access to voice on demand. Then on the other side, you can subscribe to TPS or Canalsatellite.”

FT is seeing strong growth with this model, ending 2004 with around 100,000 subscribers and Payan believes the operator will end the year with 200,000 to 300,000 subscribers.

IPTV has been an opportunity,” Roland Montagne, an analyst with Idate, said. “In 2004, half of the new subscribers for TPS were acquired by the DSL channel. [The DTH providers] realize that this new distribution channel is really an opportunity for them.”

Neuf Telecom, another French telco, is an emerging player in the digital television market. It launched Neuf TV at the end of 2004 and is targeting to have 100,000 subscribers by the end of 2005.

Neuf Telecom CEO Michel Paulin believes there is a niche market for telcos in the television space providing a la carte services rather than one-size-fits all channel packages. “Our perception of the market is that people are happy to have 120 channels on their package, but that they only look at three or four channels,” he said. “The value is concentrated on less than 10 percent of the channels. I clearly believe this market is going to be much more segmented in the future. We want to change the rules of the game of the TV market.”

Italy

A discussion of telcos and television in Europe inevitably comes to Fastweb, one of the most innovative pay-TV operators in Europe. The Sky Italia competitor offers customers an integrated voice, video and data service over fiber optic lines and DSL.

Operating in a market where there is relatively little competition from cable, Fastweb ended 2004 with 150,000 television subscribers. Fastweb CTO Guido Garrone believes the company offers a viable alternative to Sky Italia, which outpaced all European-based satellite pay-TV operators in terms of subscriber growth in 2004.

“We really have a competitive advantage over any satellite operator,” Garrone said. “Today, we simply leverage the Sky wholesale offer to improve the offer to our customers. We obviously can’t offer services (as satellite operators do) in mountains and seaside areas where we are not present. But, we are present in the richest areas of Italy and there are very good business opportunities for us here.”

Spain

With DTH provider Digital+ not performing strongly in recent years, an opportunity has developed for Telefonica, the country’s leading telco. Telefonica already offers its Imagenio TV over DSL, which it expects to grow strongly in 2005. The operator covers around 60 percent of Spain but will soon have full nationwide coverage.

Carlos Morales, marketing director for Telefonica’s residential business said, “So far, the TV market in Spain has been concentrated in expensive, complete offers, but these are not attractive to many consumers. Nowadays, many families are looking to control costs. In this context, in order to have any TV service to increase penetration significantly, you need to offer services for which consumers are willing to pay: at a competitive price.”

Hong Kong

Hong Kong telco PCCW has seen extraordinary growth in television business. The company is hoping to break through the 500,000-subscriber barrier in 2005. PCCW is now the second largest pay-TV operator in the market behind cable operator i-Cable Communications. The strong performance of PCCW could also have arguably been a factor in the lack of success of Galaxy Satellite Broadcasting, a pay-TV joint venture that Intelsat helped set-up and then exited last year when subscriber numbers were lower than anticipated.

Acquiring premium content contributed to the growth of PCCW’s subscriber numbers. The company gained the exclusive content rights in Hong Kong for ESPN and Star Sports, two major sports channels in the region. The impact of winning these rights seems to have taken even PCCW executives by surprise.

“Winning exclusive rights to ESPN and Star Sports opened up new markets to us and was a large part of turning our business from a push business to a pull business,” Paul Berriman, head of strategic market development at PCCW, said. “We had a lot of people demanding the service because of those two channels. This has enabled us to perform strongly in terms of commercial space with hotels, restaurants and bars, and offices.”

This model is already being looked at by other telcos, which could mean increased competition among all television providers for rights to exclusive content. In May, Belgacom, the Belgian telco, acquired the broadcasting rights to Belgian soccer (the Jupiler League) for the next three seasons. Belgacom wants to include the league in its package of up to 100 television channels.

–Mark Holmes

(Jeff Battcher, BellSouth, Jeff.battcher@bellsouth.com; Guido Garrone, FastWeb, 00 39 02 4545 1; Emmanuelle Pierga, France Telecom, e.pierga@francetelecom.com; Roland Montagne, IDATE, Rmontagne@Idate.fr; Sarah Simon, Morgan Stanley, Sarah.simon@morganstanley.com; Chantal Villeneuve, neuf telecom, chantal.villeneuve@neuf.com; Joan Wagner, PCCW, joan.wagner@pccw.com; Peter White, Rethink Research Associates, peter@rethinkresearch.biz; Denise Koenig, SBC Communications, dkoenig@sbcnews.us; Marta Villar, Telefonica, marta.villaralvarezdemon@telefonica.es)