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Straight Talk Telecoms

Telecoms operators have not always embraced their role as video distribution networks. They have been providing IPTV services for several years, but when it comes to their broadband customers they have done little more than sit back and watch while their customers have consumed copious amounts of video – be it via Netflix, YouTube, or more traditional TV services.

But they are now looking to play a more proactive role and derive additional value from video, no matter how big a strain it places on their networks. And we are not just talking about video over fixed networks. Mobile operators are now turning their attention to video delivered over LTE.

The big question is how to monetize and whether monetization comes from end users, from third-party service providers, from brands seeking to reach mobile subscribers, or from a combination of all three.

TV is emerging as an integral component of any broadband package. Rather than viewing IPTV as a distinct, identifiable revenue stream, operators are using it to help win a larger share of the residential broadband market. They are also partnering with third-party digital video providers such as Netflix and Hulu in order to deliver more value to their customers.

The thinking around mobile is similar, but newer. LTE has made mobile into a viable platform for video, and many operators have formed partnerships with video content providers to add value to their LTE proposition. The concept of mobile IPTV has never really existed – except in Korea – and there is no real history of telecoms operators acquiring content rights specifically for delivery over mobile phones.

Mobile operators can monetize partnerships with video content providers either by selling more data or entering into revenue share agreements. Upselling customers to bigger data plans has had some success in regions such as North America and Scandinavia. But as data allowances increase – an inevitable consequence of competition – the upsell opportunity will diminish. When it comes to content partnerships, the evidence so far is that operators have been largely unsuccessful in securing wholesale or revenue share agreements that allow them to make a profit from reselling entertainment services such as video.

Verizon Communications’ bold acquisition of AOL earlier this month opens a new frontier in operators’ efforts to build new revenues from mobile and multiscreen video. Although most operators have scaled back their ambitions in mobile advertising in recent years, comments coming from senior executives at Verizon suggest that mobile and mobile advertising were the key drivers for acquiring AOL. However, Ovum does not believe that advertising alone can justify the $4.4bn AOL price tag. Rather, we believe that it will form part of a larger strategy to become a dedicated mobile and multiscreen video service provider. Such an approach would require the acquisition of exclusive – or semi-exclusive – content rights and, potentially, investments in dedicated mobile video content providers. Start-up activity has been relatively slow until now but there are signs that with the global rollout of LTE it is beginning to pick up.

There are a number of different potential business models for monetizing a mobile video service. The most likely approach will be the soft bundling or hard bundling of a range of video services with mobile broadband services. But other pricing models such as one-off payments for getting access to specific live events also hold some attraction. Verizon has been an evangelist of LTE broadcast technology and plans to launch services during 2015.

AOL has a number of content assets including Huffington Post. There is the option for Verizon to put some content behind a paywall and offer it for free only to Verizon customers. But this would only be worthwhile if Verizon believed that the value that such an approach offered to its core business – measured in terms of lower churn and a bigger share of new customers – offset the inevitable loss of advertising revenues that would result from less people accessing the content.

The other business model for mobile video involves charging content providers for access to specific network elements or capabilities. The idea of QoS-based pricing has been around for some time but only now with LTE and enhancements to it with LTE-Advanced, is this becoming a viable proposition for third parties. Telecoms operators are also keen to play a bigger role in helping to manage video traffic over their networks. But to date they have little success in competing with Akamai which dominates the content delivery network market.

There is no doubt that the video traffic volumes will continue to surge in the coming years. There are a number of different approaches that operators can adopt to leverage this traffic. Many will use video simply to add value to their core business. But the more ambitious service providers will see it as an opportunity to carve out a significant new line of business.

Straight Talk is a weekly briefing from the desk of the Chief Research Officer. To receive this newsletter by email, please contact us.

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