R E S E A R C H E X C E R P T From Triple-play to Quadplay Strategies, Business Models, and Best Practices 2007 Pyramid Research, While every effort has been taken to verify the accuracy of this information, Pyramid Research cannot accept any responsibility or liability for reliance by any person on this information.
Overview Multi-play business models continue to gain in popularity across the telecom and media space. At the end of 2006, more than 40% of Canada s households subscribed to a triple-play package, and nearly 40% of British households subscribe to some form of packaged bundle. The trend has shattered traditional service lines and compelled players with gaps in their portfolios to scramble to offer their own competitive bundles. Telcos have become strong players in the content space, with some starting pay-tv operations from scratch. Satellite players are beginning to offer VoIP; even steadfast pure-play mobile operators like Vodafone have felt compelled to get into the broadband business. Is this all worth it? Pyramid Research s new report, From Triple-play to Quad-play: Strategies, Business Models, and Best Practices, provides an in-depth examination of the evolution of multi-play models. Building on case studies and examples from dozens of telco, cable, satellite, and other multi-play providers around the world, the report analyzes multi-play positioning (it s about protecting the core), pricing (discounts dominate), and the bottom-line performance of triple play (mixed). The report also reviews the emergence of multi-play models driven by a new breed of players (mobile, satellite, WiMAX), and proposes a rethinking of the concept of quad play. Target audience Fixed operators Assess the financial implications of long-term positioning strategies to develop a successful multi-play offering. The detailed analysis of content acquisition models, from partnerships to IPTV build-outs, includes assessments of feasibility, technology, and content. The in-depth case studies will help you assess competition and identify telco triple-play best practices and profitability. Use the included market forecasts to quantify the market opportunity. Cable companies Through case study analysis and market forecasts, identify best practices to drive penetration of triple-play subscribers and mitigate competitive risk from fixed telcos and other multi-play providers. Use the included market forecasts to quantify the market opportunity. Vendors Position your offerings to triple-play service providers through a clear assessment of the impact of triple-play solutions on their operational performance. Financial services, investment firms This report will help you assess the short- and long-term financial prospects for multi-play providers through a review of the initial margin patterns of multi-play providers and Pyramid Research s forecast of the evolution of those margins. Mobile operators Assess the threat of future quadruple-play providers on pure-play mobile operations. Develop your strategy now to minimize the risk of churn to telcos and cable companies offering mobile voice as a key component of their strategies. Content providers, aggregators Assess the implications of bundled strategies on content acquisition, positioning, and cost. Satellite DTH players Assess possible responses to the evolution toward bundles, including the advantages and pitfalls of partnerships and outright acquisitions to fill gaps in service portfolios.
Key questions answered Is triple play indispensable? Is quad play worth it? What multi-play value propositions have proven most successful? What is the current proportion of customers with bundled packages, and what is the expected evolution over the next five years? Is triple play profitable? What type of impact does the evolution to bundles have on margin What is the optimal approach for service providers to filling the gaps in their portfolios? Acquire, partner, or build? How can pure-play satellite and mobile operators compete in a multi-play environment? Which players derive the most benefit from bundling? Executive summary Multi-play business models continue to gain in popularity across the telecom and media space. At the end of 2006, more than 40% of Canada s households subscribed to a triple-play package, according to data from Pyramid Research s Convergence Service. Similarly, British regulator Ofcom recently reported that nearly 40% of British households subscribe to some form of packaged bundle. The trend has been fairly sweeping, shattering traditional service lines and compelling players with gaps in their portfolios to scramble to offer their own competitive bundles. Satellite players are starting to offer VoIP, and steadfast pure-play mobile operators like Vodafone have felt compelled to get into the broadband business. Multi-play hardly solves all service provider problems: it is costly and complicated, and for telcos at least, will not help margins in the short term. Yet it is also positive for revenue growth and a major step toward applications-blending and inevitable for any player with any pretension to market leadership. Building on an in-depth review of service provider multi-play marketing and performance, our analysis makes the following salient points: As traditional barriers to entry are shattered and revenue mainstays commoditized, multi-play has become indis pensable to service providers in the telecom and media space. The pure play isn t dead, but it will find the road ahead substantially tougher. At worst, service bundling appears to slow subscriber churn, and at best allows the provider to drive revenue through market share gains and increases in average revenue per customer. To fill the gaps in their portfolios and offer multi-play, service providers have three major options: build, partner, or acquire. Building is costly, but arguably the best option; acquisitions are similarly costly, but for many inevitable; and we see service bundling partnerships as useful, but mere stop-gaps. We believe there should be a rethinking of the concept of quad-play toward a more flexible approach to bundling. More than a single-bill value proposition, quadruple play in our view promises operators the ability to build a more powerful multi-play offering. Multi-play offers are generally positioned to enhance the competitiveness of operators core services and preserve core revenues. While this has worked for broadband and cable providers, we doubt the effectiveness of bundles in pushing PSTN voice. Protecting the PSTN, as many carriers continue to do, has slowed multi-play uptake.
Executive summary continued More players are pushing free services within bundled packages, accelerating service commoditization; the economics of free offers are not attractive, but their impact is unmistakable. For telcos getting into the TV business, the role of VoD in pay-tv adoption can be significant, particularly in markets where uptake has been slow. However, we are highly skeptical of VoD-only content models. Service bundling is merely a step toward applications convergence. Multi-play bundling thus become platform-agnostic accessible from any device and focused on the applications. Regulation has emerged as one of the key challenges to multi-play in mature and developing markets. The regulation challenge usually boils down to a number of key issues: technology moving faster than regulation, regulatory turf wars, and concerns around market power and competition. The impact of multi-play on the bottom line has been mixed. Cable providers generally see improved bottom-line performance; for fixed-line incumbent telcos, bundled services do not slow the deterioration of fixed margins, and in some cases exacerbate it. Pure players limited by their technologies to providing fixed-line services face rising Capex and Opex, whereas alternative carriers are better positioned, owing to networks configured from the start to offer multi-play. By our estimates, the number of triple-play subscribers worldwide grew 65% in 2006, to nearly 22.7m; we are fore casting the global triple-play subscriber base to grow to nearly 95m by 2011, or around 17% of the global broadband subscriber base. Western Europe and North America will drive this growth, with Asia following closely behind. Companies mentioned in this report Advance/Newhouse Alice Arcor AT&T Belgacom Bell Canada Brasil Telecom BSkyB BT China Netcom China Telecom Cinemax Claro Clearwire Comcast Cox DirecTV DTHi Easynet EchoStar Embarq Embratel Entel E-plus Express Vu FastWeb France Telecom Free Telecom Freeview Globo Google GTD Manquehue H3G HBO Joost Kabel Deutschland KPN NET Serviços Neuf Cegetel NTL NTT O2 Orange PCCW Qwest Communications Rogers Communications Showtime Skype Sprint Nextel T-Com T-Mobile Telecom Italia Telefónica Telefónica Chile Telekom Austria Telemar Telewest Telmex Telstra Telsur Telus TIM TIM Brasil Time Warner T-Mobile TVA Unity Media Verizon Communications Video Networks Ltd Videotron Virgin Media Virgin Mobile Vivax Vivo Vodafone Vodafone Germany Vodafone Italy VTR Way Brasil Wind
Table of contents Table of contents Table of exhibits Acronyms and abbreviations Companies mentioned in this report Executive summary Section 1: The demise of pure play and the necessity of triple play 1.1 Options to fill the gap in the portfolio: build, acquire, or partner 1.2 The irrelevance of the subscriber and the advent of the RGU Section 2: Multi-play positioning and pricing strategies 2.1 Discounts reign supreme 2.2 More than a single-bill proposal, quad play is about richer service combinations Country snapshot Why Canada is one of the world s leading triple-play markets 2.3 The flip side of discounts: potentially declining revenue 2.4 Revenue preservation through multi-play works better for some than others 2.5 Using free services to drive growth 2.6 Providing value beyond price 2.7 Can operators charge a premium for VoIP? 2.8 Multi-play offerings lacking TV will be a difficult sell in medium term 2.9 A segmented approach can extend the reach of triple play 2.10 The future of multi-play: from bundled services to blended services Section 3: Service bundling and the challenge of regulations Country snapshot Brazil: service providers adjust to the challenge of regulating multi-plays Country snapshot Mexico: a convergence agreement and asymmetric regulations Section 4: Measuring the bottom line: triple play will drive margins for some players only 4.1 Bundles are good for cable 4.2 Multi-play not as good for telcos, but they still need it 4.3 For satellite and mobile players, multi-play will hurt margins 4.4 Pure integrated players (FastWeb/Free Telecom) see high margins Section 5: Bundled services forecasts Section 6: Carrier multi-play profiles: positioning, pricing, performance BSkyB: Using triple play to protect core TV business A mix of technologies enables triple play Triple play with free voice and broadband Responding to competitive pressures Triple play helps ARPU Clearwire: Looking to partnerships to push WiMAX-based triple play Triple play enabled by partnerships in the works Discounts in exchange for customer agreements Competitive prices but less value An increase in ARPU Quad play on the horizon with additional partnerships
Table of contents continued Comcast: Pushing large bundled discounts, seeing top-line and bottom-line success All-cable triple play More aggressive on discounts Triple play driving broadband growth? Number one in triple-play market share Comcast quad play: beyond the bundle NET Serviços: Using triple play to drive broadband share in Brazil The first Brazilian player to offer triple play Pricing: 20 package combinations Competitive against telco/dth bundles Using triple play to drive broadband market share Verizon Communications (US) Triple play to protect voice, pushing fiber A PSTN-inspired triple-play package No major discounts here Priced at the same level as cable, but not as discounted Triple-play market share could be better Virgin Media: Facing a challenging triple-play environment, and quad-play uptake is still slow Early to the quad-play game Insistent on discounting Protecting the landline business An increasingly competitive market for multi-play Rising triple-play penetration but flat revenue More mobile customers under contract Vodafone Arcor: A mobile operator gets into DSL to maintain revenue share Bundled service offers led by substitution Mobile quad play opportunities: mobile TV and femtocells VTR: A tiered approach to service bundles one size doesn t fit all Three tiers of triple play Competitive pricing Number one in triple play Quad-play opportunities? Additional resources
List of exhibits Exhibit 1: Service providers strategic options for filling gaps Exhibit 2: Impact of multi-play approach on Capex, Opex, revenue, and control Exhibit 3: Sample approaches to building bundles Exhibit 4: Triple-play bundle discounts Exhibit 5: Triple-play penetration of households in selected markets Exhibit 6: Canada key player presence by segment Exhibit 7: Canada: Bell Canada and Rogers triple-play packaging Exhibit 8: Subscriber market shares of Vodafone Italy and its competitors Exhibit 9: Revenue market shares of Vodafone Italy and its competitors Exhibit 10: Belgacom s multi-play combinations provide a glimpse of PSTN s inevitable demise Exhibit 11: Service bundle regulation in sample markets Exhibit 12: How Brazilian telcos do TV Exhibit 13: Multi-play providers EBITDA margins Exhibit 14: Telenet s monthly ARPU and RGU per subscriber Exhibit 15: Rogers EBITDA margin for consolidated business and for wireless and cable/telecom segments Exhibit 16: The triple-play effect on Belgacom s and Telefónica Chile s fixed-line EBITDA margins Exhibit 17: Triple-play provider Opex-to-revenue ratios Exhibit 18: Global triple-play subscribers by region Exhibit 19: Breakdown of Sky s subscriptions at the end of June 2007 Exhibit 20: Prices of Sky s bundles Exhibit 21: Sky s baseline triple play compared with most similar packages of BT and Virgin Media Exhibit 22: Sky s highest-tiered triple play compared with Virgin Media s most similar package Exhibit 23: Sky s share of UK pay-tv market vs. its share of UK TV market including free satellite services Exhibit 24: Net additions to Sky s TV subscriber base Exhibit 25: Evolution of Sky s triple-play base and RGU per subscriber Exhibit 26: Sky s monthly ARPU Exhibit 27: Triple-play market shares in the UK Exhibit 28: Sources of Clearwire s customer base as of March 2007 Exhibit 29: Clearwire s broadband and bundle pricing Exhibit 30: US broadband prices per download speed (US$ per Mbps) Exhibit 31: Breakdown of Comcast s subscription base, 2Q2007 Exhibit 32: Comcast bundle price vs. sum of parts Exhibit 33: Comcast and AT&T pricing and discounts on bundles Exhibit 34: Comcast s video, Internet, and phone revenues Exhibit 35: Comcast s Internet, phone, video, and total ARPS Exhibit 36: Comcast s total RGUs, customer relationships, and RGUs per customer Exhibit 37: Comcast s triple-play subscribers and market share Exhibit 38: Breakdown of NET Serviços 3.8m subscriptions as of 2Q2007 Exhibit 39: Price of NET Combo bundles vs. the sum of the services stand-alone prices, with percent savings Exhibit 40: Price comparison of NET bundles vs. the stand-alone services Exhibit 41: Savings from bundling with NET and Telefónica Exhibit 42: RGUs increase since the launch of triple-play services Exhibit 43: Subscriber growth since triple-play launch Exhibit 44: NET s financial results, same-quarter comparisons (1Q2006 vs. 1Q2007, 2Q2006 vs. 2Q2007) Exhibit 45: Brazil s broadband market Exhibit 46: Brazil s pay-tv market Exhibit 47: Breakdown of Verizon s 112m subscriptions as of 1Q2007 Exhibit 48: Price of Verizon Freedom bundles vs. the sum of the services stand-alone prices, with percent savings Exhibit 49: Savings from bundling: Verizon vs. Comcast Exhibit 50: Verizon s residential PSTN lines in service Exhibit 51: Verizon s triple-play market share Exhibit 52: Breakdown of Virgin Media s 15.2m subscriptions at the end of June 2007
List of exhibits continued Exhibit 53: Price of Virgin Media s bundles vs. the sum of the services stand-alone prices, with percent savings Exhibit 54: Comparison of triple-play packages offered by Virgin Media, BT, and Sky Exhibit 55: Virgin Media s net additions for landline, television, and broadband Exhibit 56: Virgin Media s broadband and pay-tv market shares Exhibit 57: Virgin Media s unique customer relationships and RGU per customer Exhibit 58: Vodafone s bundles the mobile pure-play way Exhibit 59: Triple-play bundles in Germany Exhibit 60: Price of Arcor/Vodafone bundles vs. the sum of the services stand-alone prices, with percent savings Exhibit 61: Vodafone s market share continues to decline in Germany Exhibit 62: Vodafone retained the top spot in terms of revenue Exhibit 63: VTR s triple-play packages Exhibit 64: Pricing and savings from VTR s triple-play bundles Exhibit 65: Comparison of VTR and Telefónica Chile triple-play pricing Exhibit 66: VTR s number of customer relations and RGU per unique customer Exhibit 67: VTR s number of double- and triple-play subscribers About the authors Dan Locke, Analyst, CMT Research Dan Locke is an Analyst with Pyramid Research s Communications, Media and Technology team. He is based out of Pyramid s headquarters in Cambridge, Massachusetts. As a member of the CMT Research Group, Dan is responsible for conducting in-depth research about emerging technologies. Dan s work is focused on mobile broadband, and he tracks the US and Canadian mobile markets. Recently, Dan completed several internships and consulting engagements where he embraced roles as an Information Technology Research Analyst for BrassRing, a Financial Analyst for Eurovest Development and a project management intern for Blue Cross Blue Shield. He also has experience working as a Research Assistant on Psychological experiments conducted at the Veterans Administration Hospital as well as experience as a diamond salesman working for a start-up diamond wholesaling company. Ozgur Aytar, Manager, CMT Research Ozgur Aytar is a Manager in the Communications, Media and Technology Research Group at Pyramid Research. Ozgur s focus areas include emerging business models and technologies, mobile infrastructure and professional services and MVNOs. Ozgur also works on Pyramid s Mobile CAPEX service, tracking and forecasting operator spending in network components worldwide, and Vendor Services service, assessing the global opportunity for outsourcing network planning, management and maintenance, and applications hosting. Prior to Pyramid, Ozgur worked as Director of Wireless Research at FastTrack Wireless, Inc., where she developed and maintained the company s wireless research products, and tracked carrier operational metrics, handset sales, and vendor market share. She also performed consulting work for wireless carriers, application providers and equipment vendors, with a focus on business analysis, evolution of wireless data networks, application and pricing development, and market segmentation. Ozgur began her career in wireless at The Strategies Group in Washington, DC and has over 7 years of experience in the industry. She is regularly quoted in publications such as the Wall Street Journal. Contributing writers of this report include: Guy Zibi, Director, CMT Research; Svetlana Grant, Senior Manager, CMT Research; Cristiano Laux, Senior Analyst, Consulting.