The State of the UK IPTV Market

| May 21, 2008 | Consumer Broadband Services - Europe | Advisory Report

Ben Tudor

| Analyst: Ben Tudor

Summary

Broadcasters, content providers, telcos, cable operators and ISPs are all changing their strategies. All of these entities are involved, to a greater or lesser extent, in IPTV, the delivery of TV services over Internet Protocol (IP) connections. These organizations interact in a variety of ways, and are also influenced by regulatory and technological climates in the various countries that make up Europe. The varying environments mean that IPTV rollouts are different in different parts of Europe.

New players in the TV market are cannibalizing traditional TV provider’s businesses – something TV providers are not taking lying down. Some are even edging into service provider’s territory by offering triple play services.

This report looks at the UK market for IPTV, one of the least mature in Europe. Most consumers are unaware of IPTV’s value propositions, helped in part by marketing of cable, satellite and video on demand (VoD) services. IPTV faces an uphill struggle in the UK, and a crowded marketplace, where it must differentiate itself from a variety of paid and free offerings.

Current Analysis Perspective

IPTV is high on the priority list of broadcasters and service providers for a few simple reasons. Service providers see TV as a revenue generating differentiator in service – it’s another string to their bow, and something to use to ameliorate the cost of DSL rollouts in a commodity market. . Broadcasters like IPTV because it gives them the ability to add extra channels without the limitations of a broadcast spectrum, and gives them access to far more detailed audience behavior data than before. All involved like the technology because it makes a huge difference to advertising. Content and OpEx can be subsidized by advertising revenue, and IPTV allows advertisers and broadcasters to study viewing habits like never before. BSkyB has been carefully analyzing viewing habits of its subscribers for years, using set top boxes that ‘dial home’ overnight and uploaded viewing statistics direct to Sky. IPTV gives even greater granularity and audience understanding.

Satellite TV and digital terrestrial television (DTT) has paved the way for IPTV in the UK. ONDigital, the original DTT broadcaster launched in 1998, failed, and so did its successor, ITV Digital. In 2002, the BBC, BSkyB, National Grid Wireless took over the DTT rollout, and were later joined by Channel 4 and ITV. As of Q4 2007, 86.7% of UK households received DTT broadcasting. Prior to mass availability of DTT, UK consumers were faced with three choices. For many, the five terrestrial analogue channels were (and largely remain) the extent of their TV viewing. DTT has changed this for households that did not sign up for pay TV in the form of cable or satellite services. However, since the introduction of DTT in its present form – Freeview – six years ago, the market has steadied, with little change in viewer numbers. For instance, Pay TV satellite services – provided almost exclusively by BSkyB in the UK, aside from cable subscriptions – grew by 1.8% from Q3 to Q4 2007, a growth of 145,000 users.

Pay TV ADSL excludes BT Vision figures. BT claimed 100,000 users signed up by December 2008, although this may not reflect actual deployment.

Source: OFCOM

Broadcast television in the UK has traditionally been limited to a few broadcasters. While just under a third of UK households now use BSkyB’s satellite service, the vast majority have been happy with four channels – two from the BBC, one from ITV and Channel 4. Regional variations include S4C, the Welsh language channel that broadcasts Channel 4 content as well as home-grown Welsh content in the principality. Five, launched in 1997 as Channel 5, has enjoyed around half of the audience figures of the second – least viewed terrestrial channel, Channel 4. In 2006, Five’s audience share was 4.9%.

Various things have shifted the UK consumer into change mode, however. The first is the arrival of cable and satellite TV in the UK some 20 years ago. While cable TV in the UK has never enjoyed the sort of uptake that say, Germany experienced, Sky took over its rival British Satellite Broadcasting to form BSkyB and never looked back. At the end of June 2007, BSkyB counted 8,582,000 customers, and is unlikely to grow considerably past that level in the near future. Some UK TV service providers believe Sky is reaching saturation level in the UK. The introduction of DTT more recently has provided those with no desire to pay for their TV past the annual license fee the chance to experience more than five channels for the cost of a set top box – currently retailing at around GBP 20 for the cheapest options. Consumers can upgrade their STBs with pay TV cards, including those for the Virgin Media, Virgin Media Television and BBC Worldwide joint venture, UKTV. Any new TV service has to be ‘better than free’; it must deliver to consumers something over and above what they already receive from terrestrial broadcasters free of charge over the airwaves and the Internet.

Against this background, it would be easy to suggest that IPTV has a good chance of success. However, various factors complicate matters considerably. It is easier to understand this once the various interactions between broadcasters, service providers and technology are explored.

The BBC

A public service broadcaster funded by the license fee, the BBC has plunged wholeheartedly into VoD and IPTV after a distinctly shaky start. The Corporation’s launch of iPlayer over Christmas 2007 was by no means the first streaming catch-up service launched by a UK broadcaster, but it has had the most effect. By late February, ISP Plusnet accounted 5% of network capacity to iPlayer. Most users stream content rather than download it. The BBC plans to get iPlayer onto as many devices as possible – from games consoles to set top boxes to mobile devices – as part of its remit to provide its content to UK license fee payers. The BBC has a commercial arm, BBC Worldwide, which allows it to sell – or sell advertising against – content. BBC Worldwide is involved in Project Kangaroo along with ITV and Channel 4. The BBC’s remit pushes the organization to provide services continually to license fee payers free at the point of consumption. This puts the Corporation in direct competition with commercial organizations that need to make a service able to pay its own way before introduction.

BSkyB

Owned by Rupert Murdoch’s News Corporation, which also owns a number of daily newspapers in the UK as well as studios, record labels, Asia’s Star satellite TV network and newspapers, BSkyB is the incumbent satellite provider in the UK. The company also offers broadband, telephony and VoD to subscribers in bundles. BSkyB offers box office services, high definition (HD) and own-content channels. The company is in a good position to compete with IPTV, as it has both broadband and a highly effective broadcast channel in the form of Satellite.

Freesat

ITV and BBC recently launched a Freesat service aiming to cater to consumers with poor DTT reception. Another distinct advantage is that signals can be broadcast in high definition. BSkyB also offers a standard resolution Freesat service, although this is relatively small, at just over a million viewers, and is aimed at capturing wavering consumers for its Pay TV services. Present network quality in the UK (early stage ADSL 2+, DOCSIS 2.0 Cable) does not allow for HD programming for many subscribers. While Virgin Media’s network will likely be upgraded to EuroDOCSIS 3.0 in the near future, DSL based broadband services and FFTH are some way off in the future.

VoD

All of the main terrestrial broadcasters (save Five, which offers only downloads of a small number of US shows - CSI and Grey’s Anatomy) offer VoD services to UK viewers free at the point of consumption. The BBC, ITV and Channel 4 have all plumped for streaming services provided by ioko, a UK integrator. The BBC also has a peer-to-peer based download service, although streaming is by far and away the most popular method of watching programmes. While Tiscali has made a great song and dance about the impact of iPlayer on its network, it is the only ISP to do so. There is also evidence to suggest that, after a strong start, iPlayer traffic is starting to plateau. Virgin Media has enthusiastically taken on the BBC iPlayer as an upgrade on its V-Boxes, allowing consumers to watch iPlayer content on their TVs. Of course, such a thing is a good and easy choice for Virgin, as it can use the multicast nature of its DOCSIS-enabled network to push content to consumers without racking up huge content delivery costs. That said, the BBC is also now available over the Nintendo Wii. Apple is working with US and domestic broadcasters to offer VoD via iTunes Music Store, although it is worth bearing in mind that this will likely affect the portable player market rather than the TV market; the Apple TV STB has not sold well.

Game Consoles

The BBC has dealt directly with Nintendo to bring iPlayer to the Wii in the UK, a move following BT and Microsoft’s announcement in January that the former would bring Vision, its IPTV service, to XBox 360 owners in the UK. The XBox deal is particularly significant; BT’s IPTV service is delivered using Microsoft Mediaroom and is the first of its kind. Microsoft has been keen to get a PC into the living room for years, and the XBox 360 makes a very decent Trojan horse of sorts for the firm, especially when combined with an IPTV operator that is a Microsoft customer.

HD

HD content will add another layer of complexity to the market. BSkyB currently offers HD as a premium service, as does the Freesat joint venture between ITV and the BBC. HD IPTV will require more resources than are currently available to DSL-based IPTV suppliers. DTT HD services are currently in limbo, not least because DTT broadcast bandwidth is finite. HD will create a have / have not demarcation in the market, and particularly in the IPTV market, where those with the ability to deliver HD services over their networks are likely to come out ahead – barring some form of business disaster.

In conclusion, the prosperous future of IPTV in the UK is far from assured. IPTV development does not follow the same path in all countries across Europe, and faces unique conditions in the UK. Significant influences are the state of broadband access in the UK today, content deals, the arrival of HD programming in the mainstream, the arrival of EuroDOCSIS 3.0, Internet-based VoD services and broadcaster’s deals with companies that have Internet-connected devices in the home, such as set top boxes and games consoles.

Recommended End User / Customer Actions

• Consumers should avoid signing up to extended contracts with TV service providers, as the marketplace is likely to change on a six-month basis. They should also be careful when signing up to bundled deals, especially those which offer ‘free’ broadband, if they are considering changing to different TV providers.

CLIENTS ONLY

Recommended Vendor Actions

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