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STBs: from CAPEX to Cash-in

Un TV Connectée powered by Awox
A connected TV powered by Awox

For the last six years, I've been going around trade shows hearing and saying that the big bad wolf in IPTV economics is the STB, which typically represents up to 70% of total capital expenditure, or CAPEX in Telco-speak.

As OTT and social media are accelerating the arrival of a new technical and business environment, my premise is that the huge threat is becoming just as big an opportunity. This year's IPTV World Forum gave me more food for thought when I spoke to Awox, which has a foot in the operator set-top box market and also a smaller one in off-the-shelf devices.

The problem

Let me go back first to the initial problem I've had to surmount several times from within operator deployments.

Typically we are talking about a total cost of ownership for a single set-top box (packaged with remote cables and CAS, delivered, installed and maintained) of, say, 150€. If we have a million subscribers the math is simple. We need a spare 10% of boxes for repairs and to ship to new subscribers so the capital required would be 165M€, all for one happy operator to pay for.

All major Telco deployments have had to cross this difficult chasm. To make things worse, IP based boxes were initially very much more expensive than satellite or cable ones. In finance terms, a way of easing the pain is to remember that contrary to head-ends, STBs are a marginal cost, which means you only pay for boxes as you deploy them to customers who hopefully are, in turn, paying for a service.

Why did all of the early operators and many coming to market today want to do something so financially bizarre as own the STB?

The first reasons were security and control.

From the outset, operators needed to obey stringent security rules set out by rights holders to be given access to their content. Before considering interactive services, an operator must at least deliver plain vanilla pay-TV. For that they must have access to the premium content that people want to watch. Therefore they must adhere to the strictest security constraints imposed by content owners. A few years ago it seemed only natural that to get into such a business, one could only play by the rules. So like cable and satellite operators, who have always owned the STB and the smartcard therein, early IPTV operators did the same and most are still doing so.

But ten years on from the launch of the first IPTV commercial trials, a consensus is appearing (there is a good Farncombe white paper on this subject here). Operators only need to own a smartcard for broadcast networks that do not have an inherent return path like satellite or digital terrestrial. For IP networks, where each STB can establish an individual link with a security server, software-based security is sufficient. A smartcard is no longer required and thus, this first reason is vanishing.

Telco’s and especially incumbents have long had a phobia about letting anything that they don’t control onto their networks. They usually have a team of security gurus who have to give a blessing before any new device can be deployed. Looking back a few decades, PTT's have always jealously guarded their PSTN networks from non-vetted devices, even plain vanilla telephones. As a teenager in the early eighties in Europe (Paris & London), I remember the thrill of plugging an illegally 'smuggled' phone from the USA. The phone was made of transparent plastic with coloured LEDs. What a thrill when at the time BT, DT or FT only supplied cream or brown handsets. In the deregulated 2010 landscape, all operators have so little control over the last mile of their networks that it seems silly to pretend that owning the STB still makes a difference, and even incumbents that own the last mile are lost when it comes to managing the home network.

Awox has experienced this gradual change first hand. They got through France Telecom’s red tape with their Internet Live-radio devices currently available to Orange subscribers in France.

Service operators have always worried about stickiness. In today's Internet world, where the competition is only a mouse-click away, it’s no surprise to Awox that many Telcos have gone for a “walled garden" approach. Indeed Awox have been through those trials and tribulations with Orange already, helping the operator offer OTT services from within their walled garden. But operators still pertain that owning the STB is part of the secret to owning the subscriber, or at least locking him or her in.

Until recently, the lack of standards has meant that operators have had to develop a new portal for most new devices. This has provided yet another argument for those proponents of a tightly controlled device policy, which again ends up meaning that operators want to own the STB.

In the early days decision-makers considered that technology was the hard nut to crack. Getting digital video through IP networks and keeping the service up and running turned out indeed to be really hard. But technological difficulties were overcome in the end and the make-or-break issue for IPTV turned out to be content and features. It's been a while since anyone has risked the tired old "content is king" slogan, but it was dominant for a long time. If that 165M€ could have been spent on content rather than STBs there might well be even more competition from IPTV operators today.

Let's leave the past there. What has changed so that 2010 might be different?

Costs can come down:

As a device vendor Awox sees itself helping move the STB away from its current CAPEX-devouring Achilles heel position, in particular through the use of standards.

Throughout the whole tech industry, standards have been the best way to lower costs. Linux Vs Windows is such an example. Awox is one of the IPTV ecosystem's DLNA champions. Olivier Carmona, the CMO, pointed out that this is particularly true for advanced home networking, for example. You can commoditize many components so that in a fully DLNA home network, for example, a low-end hard disk simply plugged into an STB becomes a ridiculously cheap NAS. Looking further down the road, Awox have contributed DTCP/IP SYNC & DTCP/IP SOURCE to the spec so that DLNA systems will be able to distribute premium content within the home. It's no longer science fiction for that same 30€ hard disk to enable PVR functionality from a DLNA enabled Pay TV service. This is yet another initiative that goes against traditional STB middleware vendors.

Other reasons:

  • Content owners were badly bruised from the MP3 music phenomenon - I almost wrote debacle there. However, the story is still unfolding and some musicians are living well. Musicians, like the big film studios, have now acknowledged that they must innovate. They will already agree to release content into new distribution channels and even consider entirely new business models.
  • Users have got used to the Internet as a source of content, even if they don't yet get premium TV from that source. They expect ready access to what is considered as free, like YouTube.
  • New initiatives to deliver premium content are still searching for their business models. Some, like Hulu, are bound to find some kind of stability in 2010. In the same vein, many TV stations are eager for a chance to reach out directly to the world's hundreds of millions of broadband subscribers.
  • In this area, the never-ending success of Apple has shown that people, beyond early adopters, will pay if the product, including digital content, is truly desirable.
  • Until now, TV-based widgets have been a gimmick. Indeed, if you want stock quotes in your living room you will either use your laptop, smart-phone or some tablet. But finally, demos at the 2009 IBC (more at CES, then NAB this year) are showing some really useful widgets. The secret ingredient seems to be the interactions with content itself, which NDS's Oona concept illustrates well.
  • Early adopters have shown that they are prepared to pay for a physical device - as long as it is desirable. Take-up of expensive devices like the Sling-box is good evidence. Some pundits predict the latest Tivo box will reinvent TV yet again in 2010.
  • The advent of home networks has led users to expect some control over what goes into their sitting rooms. DLNA championed by Awox will accelerate this further. Empowering users with a wider and constantly renewed choice of devices makes them happy. The marketing message is that the pain of paying is replaced by the power of choice.
  • Operators are scrambling to deliver sexy new 2.0 features. Big companies are rarely successful at this kind of catch-up game. I eagerly await some real figures from Verizon's much-touted Fios Twitter and Facebook implementations to see if we have reached a turning point (I heard at IPTV World Forum in March that only 10% of the user base knew about the social media features).

There are two ways of looking at the OTT box market. Some are saying that the huge variety of devices, ranging from FetchTV to Myka or Roku through Apple TV, have not yet made a huge impact. I think the glass is half full: there is such a strong a vibrant offer out there, as well as a real demand, I have no doubt that it's just a question of time - in quarters, not years - before one meets the other and we see one of the OTT services turn their huge mind-share into an equivalent market-share and then ARPU. TiVo has already shown what success can look like, albeit at a modest scale. If a box were to be operator endorsed, that could only help and the TiVo reincarnation in the UK market with Virgin backing could create a de facto standard.

Google's entry into the TV space is only a question of time. Apple, too, will eventually get it right and both giants will get a slice of the sitting room pie. Again the only sensible way forward for operators is openness, as Martin Peronnet, CEO of Monaco Telecom, pointed out during IPTV World Forum. He pointed to the way the iPhone's Appstore has diverted ARPU from operators and said, "never again".

With their internal processes, operators are never quick enough to get the time-to-market right on their own. Many big operators are publishing specifications of network API's. This is, for example, the case with the Orange Telco 2.0 initiative described by Stephan Hadinger during the last World Broadband Forum. The end game is for end users to always have the best of breed, sexiest new devices that they want enough to pay for. A lightweight certification process could guarantee that basic services all work. Any new over-the-top services would be the vendor's responsibility.

Getting rid of a huge financial burden is rewarding enough. But that 165M€ of cost discussed already could become extra revenue instead. Indeed, why would you want a better, newer device if you were not going to use it more often? Even if much of the content revenue goes to over-the-top suppliers, those extra hours will always enable some marginal revenue opportunities. Nothing stops operators jumping on to any success story as it emerges and delivering their own service, either OTT or in a walled garden. OTT services are bound to flow through different parts of the home network, where Awox' staunch DLNA support makes all the more sense.

In the model of my premise, if some technology turns out to be a dead-end, that would be the subscriber's issue. Leading-edge technology customers expect this to happen from time to time. No one sued their vendor over Betamax or HD-DVDs after all.

Sleek new devices are coming to market anyway. Operators must become better at encouraging their customers to use devices over which they still have some influence because they will not retain control for much longer.

Olivier Carmona commented that "Operators don't want the living room and it's content related revenues hijacked by an OTT supplier. Getting the sleekest, newest devices available into subscriber's sitting rooms seems a good proactive strategy". Beyond the technology, that I agree is cool, the true innovation is in the new relationship operators can have with their subscribers.

The whole industry claims the ability to link broadcast content with the interactive experience from the web. With an open standards DLNA approach, Awox believes that it is important to make only the link that best suits the user, the moment, the content and the available hardware.

Operators should consider launching new devices or peripherals to existing devices, that customers go out and buy in the stores; after all it will take them at least two years to make a decision ;o)

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Telco’s : if you can’t beat DTT, at least get on the bandwagon

[lang_en]After launching IP-only boxes in France in 2003, Orange started to included DTT tuners in all its boxes from 2006. So at the launch of DTT in France some Orange customers already had an IP/DTT hybrid box before DTT coverage had actually reached their home.

But in France, when excited neighbours came to say they had a DTT box ready, an IPTV subscriber could answer back with their digital TV line-up that was already available with VoD also. Orange’s head start over DTT meant that most IPTV subscribers still today watch mainly IP channels despite the back that the box can receive and decode DTT. Orange, like its French competitors Free, SFR, Darty and the new entrant Bouygues now offer some exclusive channels which are not part of the national DTT line-up for free.

DTT rolls out in built up areas first and so it wasn’t until 2007 that a significant amount of subscribers were inside the DTT footprint without being eligible to IPTV. By then Orange had its hybrid IP/satellite offering ready and has been quite successful with it as they can also reach they still grey areas of DTT coverage.up

For the more mature operators DTT has been both an opportunity and a threat. The threat was of course of loosing customers to more reliable and cheap non-connected DTT zappers. The opportunity was of having a piece of a very much larger cake.

In a market where analogue TV is still predominant, the promise of IPTV is harder to sell. But once the whole market is moving towards digital anyway, customers can be easier to hoax towards the charms of interactivity that will always be IPTV’s strong suit like with an enhanced interactive EPG or community and communication widgets.

Despite being a positive influence overall, DTT brings a thorn into customers support centres. Bad DTT Reception can cost hybrid IPTV operators a lots of customer support money.

But what now of those operators who have not been able to launch in time?

If the local DTT market is already ripe or DTT will be launched in a similar time frame to the IPTV offering, a different strategy must be adopted.

DTT poses the threat of keeping fledgling IPTV service out of the market. So if you can’t beat the DTT bandwagon then join it. Using a Trojan horse will let an operator sneak back in to the TV space as soon as they’re ready.up

BT kind of did this, but instead of a supped-up “glass half full”, zapper they brought an IPTV service to market which without IP channels which turned out to be a half-empty glass for subscribers. From my viewpoint across the channel, BT has not been very successful. They came out of the woods too late for a head to head contest with Sky and Virgin, and too early for the lower profile approach suggested here.

For operators still to finalize plans, mainly T2 and T3’s, a possible tactic could be to subsidize a DTT zapper with Telco branding that has a return channel and some extra power. For the example of a DVB-T market, that’ll represent 50-80$ for an entry-level box instead of say 30$. It is important to spend an extra $ or two on the form-factor so the “box” is a desirable object (i.e. preferably not in the shape of a ordinary box).

Depending on market conditions, this super-zapper might even be sold with the promise of future interactive services even if they’re not ready yet. So the operator would only need to CAPEX the subsidy, not the whole cost.

In the worst case customers use the zapper unconnected, but still have the Telco Logo sitting next to the TV. There will always be scenarios to win-back the subscriber to an IPTV offering later on. These could for example start simply with a much better EPG or maybe a targeted catch-up TV service for one kind of popular program.

In the end IPTV holds the promise of much better interactive services than DTT, but for time to market issues, turn DTT into an opportunity not a threat.up[/lang_en]

[lang_fr]After launching IP-only boxes in France in 2003, Orange started to included DTT tuners in all its boxes from 2006. So at the launch of DTT in France some Orange customers already had an IP/DTT hybrid box before DTT coverage had actually reached their home.

But in France, when excited neighbours came to say they had a DTT box ready, an IPTV subscriber could answer back with their digital TV line-up that was already available with VoD also. Orange’s head start over DTT meant that most IPTV subscribers still today watch mainly IP channels despite the back that the box can receive and decode DTT. Orange, like its French competitors Free, SFR, Darty and the new entrant Bouygues now offer some exclusive channels which are not part of the national DTT line-up for free.

DTT rolls out in built up areas first and so it wasn’t until 2007 that a significant amount of subscribers were inside the DTT footprint without being eligible to IPTV. By then Orange had its hybrid IP/satellite offering ready and has been quite successful with it as they can also reach they still grey areas of DTT coverage.haut

For the more mature operators DTT has been both an opportunity and a threat. The threat was of course of loosing customers to more reliable and cheap non-connected DTT zappers. The opportunity was of having a piece of a very much larger cake.

In a market where analogue TV is still predominant, the promise of IPTV is harder to sell. But once the whole market is moving towards digital anyway, customers can be easier to hoax towards the charms of interactivity that will always be IPTV’s strong suit like with an enhanced interactive EPG or community and communication widgets.

Despite being a positive influence overall, DTT brings a thorn into customers support centres. Bad DTT Reception can cost hybrid IPTV operators a lots of customer support money.

But what now of those operators who have not been able to launch in time?

If the local DTT market is already ripe or DTT will be launched in a similar time frame to the IPTV offering, a different strategy must be adopted.

DTT poses the threat of keeping fledgling IPTV service out of the market. So if you can’t beat the DTT bandwagon then join it. Using a Trojan horse will let an operator sneak back in to the TV space as soon as they’re ready.haut

BT kind of did this, but instead of a supped-up “glass half full”, zapper they brought an IPTV service to market which without IP channels which turned out to be a half-empty glass for subscribers. From my viewpoint across the channel, BT has not been very successful. They came out of the woods too late for a head to head contest with Sky and Virgin, and too early for the lower profile approach suggested here.

For operators still to finalize plans, mainly T2 and T3’s, a possible tactic could be to subsidize a DTT zapper with Telco branding that has a return channel and some extra power. For the example of a DVB-T market, that’ll represent 50-80$ for an entry-level box instead of say 30$. It is important to spend an extra $ or two on the form-factor so the “box” is a desirable object (i.e. preferably not in the shape of a ordinary box).

Depending on market conditions, this super-zapper might even be sold with the promise of future interactive services even if they’re not ready yet. So the operator would only need to CAPEX the subsidy, not the whole cost.

In the worst case customers use the zapper unconnected, but still have the Telco Logo sitting next to the TV. There will always be scenarios to win-back the subscriber to an IPTV offering later on. These could for example start simply with a much better EPG or maybe a targeted catch-up TV service for one kind of popular program.

In the end IPTV holds the promise of much better interactive services than DTT, but for time to market issues, turn DTT into an opportunity not a threat.haut[/lang_fr]