France Télécom's newly instated CEO, Stephane Richard, has outlined the new direction for the company in Les Conquêtes 2015 (or loosely translated Conquest 2015). The main impacts are in Content & TV and Network Infrastructure. In the future France Télécom will scale back its investments in content acquisitions. Instead of purchasing expensive content rights on its own, it will seek partners for select bids, such as football rights. This change of tack is a contrast to the policy of the former CEO. In the past years the operator has made significant investments in content acquisitions in order to boost its IPTV services. This will now change. Instead the company will focus on investments in LTE (Long Term Evolution) and fibre networks. Although Mr. Richard states that that the company will continue its efforts in content & TV there is little doubts that the company is shifting investments from content to networks which worth while discussing.
One may wonder why the new CEO is downplaying investments in content & TV. France Télécom is after all by many industry observers and fellow operators considered as a leading IPTV operator. However, as I argue, being leading does not equal to being profitable. Our IPTV profitability estimates for 2008 placed France Télécom deep in the reds along with every other IPTV operator we reviewed. I have for years cautioned that current IPTV deployments and business cases in mature pay TV markets are unlikely to turn profitable. If they ever do it will be with a very low rate of return in comparison to the risk of the business. That is not to say there are no content & media business opportunities for telcos. We have outlined some opportunities for our clients.
France Télécom's decision could have ripple effects on other IPTV operators where there are two worth mentioning. First is Telenor which has over the years look to France Télécom for inspirations for its own IPTV play. France Télécom has followed a similar content acquisition track as Hong Kong's PCCW (another leading, but loss making, IPTV operator) which includes acquiring large scale exclusive content rights. By raising the white flag on content acquisition, France Télécom leaves Telenor with a dry source of inspiration. What now Telenor? The second operator is Telenor's neighbour Teliasonera. Teliasonera and France Télécom has been in a 'it is complicated' relationship for the past couple of years due to supposed M&A talks. This cosiness has led to close collaboration and sharing of ideas and views between the two organisations. Teliasonera, though, will probably be less impacted by this decision than Telenor, given that Teliasonera has already decided to focus investments on network infrastructure over IPTV.
So where did IPTV go wrong?
At first glass one may think that IPTV is a successful operator play. However, the reality could not be further from the truth. There are plenty of conferences and trade shows around the world covering IPTV. Telco suppliers talk up their IPTV solutions, business cases for IPTV and larger ones are happy to provide free consultants to help telcos design an IPTV play. Industry observers, often paid by the telcos and the telco supply chain, provide forecasts and report on subscriber growth. Chipset manufacturers release new chipsets so that the set top box industry can design new products that can support a wider range of services. The industry has all the signs of a healthy and profitable business, yet telcos lose money. Quarter after quarter, year after year. By using clever accounting and reporting lines the lack of profitability has normally been hidden away in annual reports. Therefore, stakeholders and industry observers have often failed to identify that IPTV is not profitable.
However, let's digest why IPTV is a loss making business for operators (this is a brief summary of some of our client feedback, non-exhaustive list):
Operators pay premiums for content. Not only are telcos typically less skilled at content negotiations, which results in higher price brackets than for cable & satellite operators, but telcos often pay a significant premium for exclusive rights in order to attract subscribers.
Telcos have largely adopted the same business models as cable & satellite operators. This is probably partially due to listening too much to the set top box and video delivery supply chain, that already serves cable & satellite markets. This means that telcos compete on the terms of the established market players. Also, there is no market the established players can flee to. This means that telcos face highly motivated and well entrenched competitors. History shows that when new entrants compete on the terms of the established market players, and compete with sustaining technologies, the entrant has little chance of success.
Lack a vision on how to innovate in content delivery.
The stretch between the resources, processes and values (that are finely honed on network development and management) and requirements for the content & media markets (bundling, packaging, customer insights and understanding, consumer behaviour etc).
Telcos may have been motivated to enter the content & TV markets to protect jobs, and not to create share holder value.
Pay TV markets are normally monopoly or duopoly markets, and they are saturated. It is therefore extremely difficult, as well as expensive, for a new entrant to gain a foothold in the market.
So what does this mean for IPTV? Well France Télécom's decision is a fresh reminder that the raîson d'être for publicly traded companies is to drive value for shareholders. For most operators it is safe to say that IPTV instead drives shareholder losses, with few realistic outlooks that any future profits will lead to significant returns on investments.
The question that now remains is: who is next in line to re-think IPTV?
