IPTV VoD business models fall short

(c) Pyramid Research

The business model for VoD is different from and arguably more attractive than that of linear TV programming, particularly for introducing new content. VoD is generally based on a revenue-sharing agreement and can be provided profitably to smaller audiences, whereas the high programming costs of the linear TV model require wide distribution and aggregated audiences.

We don’t believe, however, that VoD services over IPTV networks offer an attractive business model in the medium term, for a number of reasons. The mostpopular 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. However, new movies come at a price. Hollywood studios generally demand the bulk of the revenue, and sometimes minimum guarantees. Because they have to pay almost all revenue back to the studios and generally have small customer bases, we don’t believe IPTV operators can achieve significant profits from VoD transactions.

Yet VoD is a necessary evil for IPTV operators. For some, it is a way to differentiate themselves from satellite DTH carriers; for others, it is about matching competitors’ pay-TV offerings. It is also a way to convince consumers to pay for TV. For VoD to become a more lucrative business, we see the model evolving in two stages.

• The initial stage is one of customer retention. Telcos have been looking into providing multi-play bundles of services to compensate for declining fixed voice revenues as well as to retain and win customers. TV is an essential component of a triple or a quadruple play, and VoD could help differentiate a telco’s IPTV service. There is little evidence, however, to suggest that TV carries more weight than the other services. Simply put, exclusive, premium VoD content cannot compensate for deficient voice and broadband offerings. As mentioned above, we expect VoD profit margins to be minimal at this stage.

• The second stage of the IPTV VoD model should be more lucrative, but it will take another 3-5 years for this model to come into its own. Shorter release windows for content will play a significant role in the evolution of the model, but more importantly, by developing a multiplatform presence for their VoD content, IPTV operators will build larger audiences and grow profits. When IPTV VoD reaches an acceptable scale, we expect that telcos will have more negotiating power with the studios and more opportunities with advertisers.

For telcos to reinvent themselves in order to cope with diminishing revenue from voice services, they need to develop their overall content business, and VoD is a key part of that. For example, France Telecom hopes to generate about €400m in 2008 from its content business, as much as 22% of which will come from VoD services. For some of its VoD content, the operator has already created ’mobisodes’ and special highlights for mobile devices as well as trailers, previews and exclusive interviews for the PC. With consumers increasingly demanding access to content anytime, anywhere, and on any device, telcos have an opportunity to build fully integrated multiplatform VoD services that can be accessed from TVs, PCs and mobile devices.

Indeed, this is a necessary move for all video providers to respond to the rapidly changing patterns of media distribution and consumption, so that they won’t be sidelined by broadband or over-the-top providers that bypass platform operators to reach consumers directly.

Developing a multiplatform offering will take time, largely because of copyright and licensing issues. While telcos such as Telefónica, Verizon and France Telecom are already pursuing the multiplatform opportunity, they still have to license content for each platform separately. Having content that’s licensed for an IPTV VoD platform does not mean that it can also be distributed over a mobile platform. Indeed, telcos have reportedly found the content sourcing process to be more complex and time-consuming than anticipated. Content providers are interested in extending their reach, but they are also concerned about disrupting established advertising models as well as about piracy.