Telco 2.0™ Research
The Future Of Telecoms And How To Get There
The Future Of Telecoms And How To Get There
Summary: telco assets and capabilities could be used much more to help Film, TV and Gaming companies optimize their beleaguered business model. An extract from our new 38 page Executive Briefing report examining the opportunities for ‘Hollywood’ and telcos. (August 2010, Foundation 2.0)
Opportunities in Digital Entertainment and Content will be a key theme at the Telco 2.0 Executive Brainstorms in Americas, EMEA, APAC, and online, and feature in our ongoing research stream here.
Context: A market worth fighting for
The online entertainment opportunity is often talked down by both telcos and media companies. It is, after all, just a small percentage of the current consumer and advertising spend. Examples are easily cited that diminish the value of the opportunity: global Mobile TV revenues don’t reach $1bn; on demand represents just 2% of total TV revenues; online film (rental and download) does slightly better but hasn’t yet reached 5% of filmed entertainment revenues.
Individually, these are not the sort of figures that are going to get telco execs bouncing with enthusiasm, however, collectively the annual digital entertainment market reached revenues of $55.4bn in 2009 and has a growth rate approaching 20% and that is appealing.
Digital entertainment is a growth opportunity for the next decade and when you look at the size of the physical products that currently serve the markets, the addressable market is in the region of $700bn a year.
Based on output from the Telco 2.0 Initiative’s 1st Hollywood-Telco International Executive Brainstorm held in Los Angeles in May 2010 and subsequent research and analysis, it shows that telco assets are, theoretically at least, ideally suited to enable content owners to secure a position of power in the ecosystem and that telcos in turn can take a share of the revenues from a major traffic source impacting on their networks.
Strategic collaboration between telcos and content owners could open up new markets for both parties but only if undertaken in new ways and within a tight window of opportunity. These new opportunities include:
To realise these opportunities both parties – telcos and content owners – need to re-appraise their understanding of the value that each can offer the other.
For telcos, rather than just creating bespoke ‘enterprise ICT solutions’ for the media industry – which tends to be the current approach – long term, strategic value will come from creating interoperable platforms that provide content owners with ‘plug and play’ telco capabilities and enabling services.
For content owners, telcos should be seen as much more than just alternative sales channels to cable.
There is a finite window of opportunity for content owners and telcos to establish places in the new content ecosystems that are developing fast before major Internet players – Apple, Google – and new players use their skills and market positions to dominate online markets. Speedy collaborative action between telcos and studios is required.
This report is part of an ongoing, integrated programme of research and events by the Telco 2.0 Initiative to foster productive collaboration on new business models in the global digital entertainment marketplace. It establishes a framework for telcos to develop effective strategies to monetise entertainment and lays out the challenges facing content owners.
In particular, we have we have identified four new business approaches that are being adopted by media services providers. These both undermine traditional value chains and stimulate the creation of new business models. We characterise them as:
All of these bring new challenges to the existing models of traditional media companies, which are both being challenged and pursuing new opportunities, as illustrated in the table below. The colour coding of the challengers reflects the severity of the challenge in the short to medium term (1-3 years).
Table 1: Assessing Challenges and Opportunities for Content Owners
|
Content Owner Category |
Upstream Business Model |
Downstream Business Model |
Upstream Business Challengers |
Downstream Business Challengers |
New Business Opportunities |
|
Film Studios |
None |
Revenue share from various sales windows - movie theatre, DVD sales, DVD rentals, Pay TV, Free-to-air TV - with the respective distributor/retailer |
None |
New online rental and sales channels eg Netflix, LoveFilm, iTunes, plus free and pirates |
Downstream - sell direct to consumer getting all revenue and expand service offering with merchandising upsell etc Upstream - create upstream advertising business |
|
Free to Air TV Broadcasters |
Selling advertising inventory
Public/government funding
Syndication
|
|
Fragmentation of peak audiences; Google TV and online player services which undermine/destroy the value of advertising. |
|
Upstream - greater distribution, lifespan delivering more ad value/opportunities; greater value to advertisers based on better measurement; greater targeting and personalisation; instant purchase opportunity. |
|
Pay TV Broadcasters |
Selling advertising inventory
Syndication |
Pay TV services to consumers |
Google TV and online player services which undermine/destroy the value of advertising. |
New sellers of TV content - Netflix, iTunes, New distributors of TV content - Hulu New Connected TV propositions - particularly Google TV |
Downstream - Maximise value of content with pre-broadcast promotion, post-broadcast access Upstream - greater distribution, lifespan delivering more ad value/opportunities; greater value to advertisers based on better measurement; greater targeting and personalisation; instant purchase opportunity. |
|
Games Publishers |
Licensing of IP to third parties eg films, TV, books, comics etc Ad-funded apps |
Largest share of product sales revenue. Total shared with distributor, retailer + licence fee payable to platforms In-play features |
Piracy |
Spiralling costs of production undermining profitability Online distribution potential to open the market and reduce the power and value of the publisher role; Piracy |
On line potential to break links between the platform and the game and gain larger share of ‘hit' game revenues; growth and monetisation of casual and mobile games |
|
Independent Games Developers |
Commissions from Publishers, platforms and studios Ad-funded apps |
Revenue from product sales revenue shared with distributor, retailer + licence fee payable to platforms |
Spiralling costs of production undermining profitability; Piracy |
Spiralling costs of production undermining profitability
|
On line potential to break links between the platform and the game and gain larger share of ‘hit' game revenues; growth and monetisation of casual and mobile games |
|
Newspaper/Magazine Publishers |
Sell advertising inventory |
Revenue share with distributors and retailers |
Proliferation of online publications hitting subs bases and diluting value to advertisers. Free is the dominant model
|
Online proliferation of publications; User-generated publications blogs etc;- readership dropping |
Online provides opportunity for instant access to news, views - faster turn over and more inventory. Potential to leverage back catalogue and increase life/value of old articles |
|
Book Publishers |
None |
Revenue share with distributors and retailers |
None |
Online cutting the price of the product and therefore revenue to be shared |
Potential to go direct to consumers and dramatically lower production costs |
|
Music Labels |
Licensing model to third party |
Revenue share with artists, distributors and retailers |
None |
Piracy; Free and low cost online models taking too much revenue out of the value chain to sustain it |
Have to reinvent business model as opportunity already missed |
Source: Telco 2.0 Initiative
For some entertainment sectors, especially the music labels, a major battle if not the entire war has been lost and the fear of following in their footsteps keeps the minds of TV and film studios, as well as publishers focused on the possible threats to their own revenue streams.
For other content owners, such as game developers, the opportunities look to outweigh the threats, as their position in the value chain is currently limited by the strength of the platforms and publishers. Indeed, by examining the games market we can see some of the opportunities that are developing for content owners to usurp failing business models and engage more directly with their customers in many more ways.
The options for telcos are many and the approach taken is dependent on the structure of the entertainment industry in their country and their own set up. Amongst the considerations they must assess are their willingness to collaborate, the assets and skills available to them and the regulatory environment. As we’ve already established, for some IPTV is a viable option, for others mobile as a mainline channel is also worth pursuing as it is the most ubiquitous option. In addition, a third downstream option is emerging for telcos to be an access provider to digital rights lockers.
On the upstream side, the opportunities are many but they are far less defined and their development seems to be stuck in an endless chicken and egg situation in which each side is waiting for the other to define the services required. To help move this discussion on and to define some near term opportunities we have honed down the list of possibilities by examining what media companies are looking for from telcos.
Surprisingly, combatting piracy which gains so many headlines is not uppermost in the list of priorities, according to our research.Instead the issues that dominate the thoughts of media executives are primarily those that we have outlined earlier, namely the ability to differentiate through delivering across any screen, enhancing the user experience and improving content discovery, as illustrated in the table below. Underlying that is the desire to re-define and build the value of the upstream side of the entertainment business ie advertising.
Table 6: Importance of addressing issues facing media companies rated 1-5*
*Where 1 is of no importance and 5 is critical Source: 1st Hollywood-Telco Executive Brainstorm, Santa Monica
However, along with piracy, the area in which telcos and entertainment distributors are most likely to interact is in conflict over the quality of the pipe they are receiving.
Video is all about the viewing experience so anything that influences that experience is of vital importance to content owners and to the retailer/distributor if this is done by a third party such as Hulu, NetFlix or LoveFilm. As these media service providers have no ability to control pipe, they use adaptive rate video technology to sense the bandwidth available and deliver the quality of video the connection is capable of dealing with effectively.
Adaptive rate technology works to a point as it means that they can deliver the best possible video for the bandwidth at any given time. However, the underlying transmission speed and quality is still beyond the control of the media service provider, so though better connectivity may be possible it is not being delivered. Furthermore, within the confines of the thorny net neutrality debate, the throttling of service types and in some instances specific services is happening to the detriment of online video services. For example, in the UK, LoveFilm has examples of customers with 20MBit/s connections unable to get a satisfactory service even though other video streaming services including the BBC iPlayer work perfectly well.
Telcos want a share of the video revenue that is being generated over their networks, and in throttling, deliberately reducing the speed of connections, they have a stick to beat media service providers with, should they wish to and be allowed to use it. However, just like DRM, throttling is a negative activity and will serve no positive purpose as consumers are just as likely to move ISPs if their services don’t work as they are media service providers. If they want certain content, they will find a way to do and don’t be surprised if such throttling activities pushes more consumers to Pirate Bay and its like where an additional wait will be tolerated to download rather than stream and content comes free.
So is there a better relationship to be had?
Charging for QoS/QoE SLAs to media service providers would be the first choice of telcos and while our research suggests that telcos believe this to be more of a possibility now than a year ago, our view is that it is still a service that requires consistent failures in the market in order to prove its value before it could become a capability media service providers will pay for en masse. Therefore if telcos can’t charge upstream players for a guaranteed pipe, at least in the short term, they need to look at other what other telco assets can offer media companies.
In our analyst note, ‘How to Out-Apple Apple’, we identified a series of telco assets that could be valuable to media companies that are or are intending to sell their content directly to customers through online outlets. These and how they add up against competitors are summarised in the table below.
Table 7: Telcos Offer Unrivalled Asset Combination
|
|
Payments |
Content Delivery |
User Experience - 3screen |
Interactive Marketing/ CRM |
Customer Care |
|
Apple |
Yes |
Yes |
No |
No* |
No |
|
Amazon |
Yes |
Yes |
No |
No* |
No |
|
Netflix |
Yes |
Yes |
No |
No |
No |
|
Cable Cos/Satellite |
Yes |
Yes |
Partially |
Partially |
Yes |
|
Other enablers |
Banks, Credit Cards, PayPal |
Eg Akamai, L3, Limelight |
- |
Marketing Ad Agencies |
Outsource |
|
Telcos |
Yes |
Yes |
Yes (Converged telcos) |
Yes |
Yes |
*Apple and Amazon have interactive marketing and CRM functions but do not pass data on to content owners.
Source: Telco 2.0 Initiative
At our first Telco-Hollywood Executive brainstorm the value of these telco assets and other capabilities were discussed and rated. All were recognised as offering possible value to studios in the development of their own services. As the graph below shows, it was the functions nearest to the consumer that rated the highest.
Table 8: Telco Capabilities Rated (1-5*) According to Their Perceived Value to Content Owners
*Where 1 is not valuable at all and 5 the most valuable Source: 1st Hollywood-Telco Executive Brainstorm, Santa Monica
Again, the value of owning the network infrastructure is recognised as hosting content locally and ensuring its effective delivery are natural roles for telcos to take on. Usage and access distribution is the next highest rated capability and the expectation from studios and media companies is that telcos should enter the market as media service providers in some form or another and the downstream market should not be ignored. That said, those assets that are a stage further removed from consumers were also rated as valuable.
Identification and authentication, payments, decision support and data mining (listed under the heading of Interactive Marketing /CRM in table 7) and content protection are all rated as useful. However, there is a caveat here in that what media companies want is complete solutions not raw data or APIs that they then have to build services around
Over the next 12 months, telcos need to develop complete solutions that can meet the needs of media companies. Simply saying that they have the assets and capabilities is not enough. Also the speed with which the market is changing means that solutions need to be developed fast as the window of opportunity for media companies to gain a more powerful position in the ecosystem will be relatively short. New and powerful players are entering the market and putting pressure of established price paradigms. Once changed these are difficult if not impossible to change back until serious failures in the market appear. The next 1-2 years are therefore vital.
From a telco point of view, this makes playing upstream difficult if they have not already begun to develop solutions that could be packaged for media companies. Downstream opportunities are in some ways less time sensitive but the current market flux offers up opportunities to establish a position that will be harder to reach when it is more stable.
Telcos therefore have a series of strategic decisions to make about how and where they play in the entertainment market. We have developed a structure of generic strategy choices based on the willingness and ability of telcos to move on and off their own network and whether they intend to offer and end-to-end solution to consumers or play a specific and limited role in the ecosystem. The overall strategies these choices create are illustrated in figure 3 below.
Figure 3: Generic Two-Sided Business Model Strategies
Source: Telco 2.0 Initiative
Taking this a stage further, we can map this general theory onto the specific choices facing telcos in the entertainment market to create a framework with four different approaches to telco involvement in the entertainment ecosystem. As the market is developing, on-net activities are providing the greatest opportunities, as illustrated in figure 4 below.
Figure 4: Entertainment-specific Business Model Strategy Choices
Source: Telco 2.0 Initiative
Entertainment is an increasingly complicated market with collapsing value chains, new entrants and new technologies that are allowing established players to compete in different ways. Having a clear idea of where telcos fit into this dynamic market structure is important and there are roles for telcos to both support media companies in their attempts to go directly to consumers and to go directly to consumers themselves. A second phase, supporting multiple third party platforms and media service providers may emerge but this is a stage further removed as these are currently competing with what telcos and media companies are trying to do themselves.
Taking a look at the bottom left quadrant – enabling media companies to develop a direct sales channel – in more detail, it is possible to identify a range of way in which to do this. There are firstly a range of activities and assets that can be undertaken, as we have already outlined above, and secondly there is a range of ways in which to utilise those assets.
Using Telco 2.0’s established gold analogy, we can see that telcos have the opportunity to be more or less involved; to offer what they have in raw data to media companies and let them do as they wish with it at one end of the scale, right through to offering a complete end-2-end service.
Examples of what type of entertainment-orientated services can be offered at each stage by telcos are illustrated below.
Figure 5: Possible Telco Roles in Entertainment Industry
Source: Telco 2.0 Initiative
Telco 2.0 research suggests media companies put greatest value on telco assets that are packaged to them as services. As illustrated above, this means a managed one click payment capability, not an API on top of which they have to build their own payment service. What is more, they want things that have been proven to work, either for other industries or for the telcos itself. Eating your own dog food is not just a sound bite to be trotted out at conferences, it’s an essential tactic if telcos are going to gain credibility as upstream suppliers to the entertainment industry.
Fortunately this is something the telecoms industry is recognising, as a vote at the recent Telco 2 Executive Brainstorm in London where delegates demonstrated that to take full advantage of the customer data they have, they must first find ways to use it effectively themselves. During the session focused on the use and monetisation of customer data, the 180-strong group of executives were asked to rank 1 to 4, the importance of different strategies for beginning to use the customer data they hold in the short terms (next 12 months), using it for their own purposes ranked the highest
There is little doubt that telcos have a strong strategic interest in the entertainment industry both for its opportunity to grow and its impact on their existing businesses. However, they are entering a market that is itself in flux and the opportunities are neither well defined nor static. The market is constantly changing and so are the possible roles and activities open to telcos. Under such circumstances a two-sided approach to the business makes even more sense, giving more choice and opportunity to build revenue as illustrated below.
Figure 6: Telco two-sided business model for entertainment
Source: Telco 2.0 Initiative
However, the extent to which a specific telco gets involved in the up and downstream opportunities will depend on the specific market conditions, together with the skills and assets of the telco. These must also be mapped onto the needs of media companies as telcos must be aware of what the market is looking for.
Over the coming months we will look at each of the downstream models in detail, examining the conditions that make each play viable, together with the tactics that make each downstream strategy effective.
In addition to these we will develop use cases and identify case studies that help define realistic opportunities for upstream services.
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