Bundling: the battle for TV, broadband and telephony

It is a competition model that has evolved over time. It was once the case that telecoms operators and cable providers competed in a separate space and consumers had no choice but to subscribe to two separate providers for these different services. With the rapid development of broadband and increasing bandwidth requirements, the devaluation of the fixed line and continuous technological advancement of IPTV services, this has significantly changed. Both have established strategies that tap into the other’s territories with a view to offering triple and even quadruple play services.

“The direct competition stems from the fact that cable operators began offering voice telephony and broadband from the late nineties, and telcos entered into the broadband market at the turn of the decade when DSL was introduced,” says Jonathan Doran, senior analyst at Ovum. “The competition for services increased further when cable operators expanded from their traditional paid cable model into offering dual and triple play and the telcos have responded to that by offering TV services.”

The convergence of such services means inevitably there is a requirement on the network for triple play and quad play bundling to function to a certain quality for the user. With the competition model evolving, the networks of both the telco and the cableco have had to develop to offer such over the top services, whether in the underlining infrastructure to provide connectivity, or the last mile access networks to connect to the consumer.

Before mobile, telephone companies constructed and operated networks purely orientated towards telephony through the last-mile access network via a twisted pair in the capillaries of the system. This infrastructure then developed higher up in the network towards the metro and the core. The cable network, initially constructed purely to cater to TV services, has been historically shielded through a coaxial cable which enables a broader spectrum, and provides the capacity to hold vast amounts of content – delivering up to 700 TV channels for the consumer. As bundling packages became more prominent, the cable network has developed in a similar way to the telco network, through the metro and the core, and has the potential to develop further with DWDM fibre networks.

“By developing so much over time through the metro and the core, the networks are becoming virtually identical,” says Chuck Kaplan, VP industry marketing at Ciena. “We see a lot of the services coming in at the packet layer, and we see the cable and the telco industries building their core and their metro with this converged Layer 0, Layer 1 and Layer 2 networks. The products that we sell to the cable and telco industries are

virtually identical.”

The networks therefore function in a similar way, and although the requirements differ slightly there is an underlying need to provide an unfettered service to the end user. When two or three televisions are running in a home at the same time, whether they are running HD or standard signalling, or consumers are running IPTV services from a broadband network, the need for increased access to content only continues to rise. “They provide essentially the same services, but it is done in a very different way,” notes Kaplan. “You cannot broadcast 700 channels on a twisted pair because you don’t have the spectrum and you could not provide more than one-to-one IPTV type services to each of the end users on a twisted pair network. In a cable network, on the other hand, there is the scope to broadcast more of those TV services because of access to broader spectrum.”

As services become complementary and as market maturity increases, it is clear that the telecoms market, specifically in North America is reaching high levels of consolidation. A report released by financial research company Bloomberg shows that M&A volume in the telecoms industry amounted to over $162 billion in 2010, and is expected to rise by over 5% in 2011. It is equally evident to market watchers and the industry overall that there is very little or no investment made into cable companies by the telco, and vice versa.

“Taking the US market specifically, it differs from the UK and the BT Open Reach model, because of a lack of open access infrastructure,” says Vince Vittore, principal analyst, Yankee Group. “This stems from a case in the early nineties when regulators declared broadband access should be based on separate infrastructure and not network sharing. There may be a few cases of client relationships in mobile, where AT&T for example would allow cable operators to provide a backhaul service which is perhaps the only overlap. Generally, the two treat each other as mortal enemies.”

Enemies they may be, but is there scope for collaboration? According to Martin Peronnet, CEO at Monaco Telecom, the rapid development of internet streaming through IP and the continuing demands placed on internet capacity means a bigger potential for fibre access and a bigger potential to upgrade current networks – a wholesale potential cable operators must address. “It is clear that it is very difficult to establish a good business model for fibre-to-the-home (FTTH) but in some areas, like this one, it is a good solution,” believes Peronnet. “The existing cable networks are subject to continuous development and have the potential to provide high capacity internet. It is likely ISPs consider the segment as potential for partnership or acquisition and I believe both networks are bound to find solutions together.”

Monaco Telecom is in the unique position of operating quadruple play services in the principality of Monaco with no competition from cable providers and exclusivity in the fixed line, internet and television services of the region. The rapid convergence of IPTV services in neighbouring France in particular means the company must address the advent of TV on the internet, even if it competes with its own cable TV service. “Here we are speaking about substituting the old television solution with the new television solution,” says Peronnet. “We realised there is a potential for new hybrid solutions, enabling us to keep on broadcasting television through the cable by not compressing the HD signal but by broadcasting the service at more than 10Mbps and adding channels to it.”

The potential for IPTV services in the region is clear. Pyramid Research estimates that 51% of households in France will subscribe to the platform by 2015, up from 36% in 2010. Considering the increasing need for convergence and openness among French operators, the country is regarded by industry experts as offering the cheapest, most innovative bundles in Europe. The French government realised this potential, and as a way to limit the impact on the country’s TV cable companies, or to cash in on the increasing advent of bundling, a rise in value-added tax for triple play services was implemented earlier this year. The Financial Times cited this tax increase as a major contributor to France Telecom’s 1.3% decrease in earnings to €3.73 billion for Q1 2011. “In France, the cable market never really got over its fragmentation and lacked modernisation, so the gap in the market has recently, and continues, to be filled by IPTV,” says Doran.

A lack of power, penetration, coverage or modernisation of the cableco is certainly not applicable to the North American market. Comcast operates as the largest TV provider in the region and offers one of the largest home internet and fixed-line operations in the US. Its power in triple play services, though Comcast Xfinity directly rivals with AT&T’s U-verse and Verizon’s FiOS for subscriber share, has resulted in Comcast significantly dominating the TV market. This dominance could be short lived, considering reports declaring that Comcast lost up to 39,000 pay TV subscribers in Q1 2011 as AT&T’s and Verizon’s TV offerings gain traction.

“Considering Verizon’s offering, with the exception of similar offerings in Hong Kong and France, the company is doing quite well,” says Doran. “It is a huge wireless provider, but within the industry the company appears to market itself more as a cableco than an IPTV telco. With approximately three million video customers, it is not even close to Comcast yet.”

AT&T points to the lack of mobility in a cable triple play offering, which is an essential package point for consumers as a further reason the telco offering is beginning to look more attractive. “Evolving the bundle, integrating wireless services and allowing flexibility is essential,” says Jeff Weber, VP of U-Verse and video products at AT&T. “It’s about offering a flexible triple play and complete quad play, not just a fixed triple play like cable offers.”

When considering the North American market in a broader sense, it is clear that AT&T and Verizon have attempted to tap into the lucrative TV market after it had built up its core telecoms business. Conversely, the larger cable companies in Canada, Rogers Communications and Shaw, went the other route. Rogers in particular has been able to establish a strong mobile presence, and according to TeleGeography had a 36.6% market share in the wireless market as of Q4 2010. “Cable companies in Canada saw the potential of mobile as a key ingredient to their service offering and purchased licences early on,” says Vittore. “These companies could be considered slightly more developed in the bundled market than the US.”

Canada is an exception. For cablecos, mostly, there is a continued failure to tap into the mobility market and consequently lack the capability of offering quad play, but “there is potential for the segment to address other services in the industry” believes Manuel Mato, regional VP at test and measurement solutions company JDSU Communications. “Cable operators have the opportunity to offer traditional telecoms services like Ethernet, data and phone services to small and medium enterprise businesses. Cablecos are already providing backhaul,” he says.

Perhaps a more prominent concern is the ever occurring idea that the telecoms network value is slowly being reduced, not by offering less value-added over-the-top services, but simply being relegated altogether as a dumb pipe. Lee Bertman, president of Caribbean Cable Communications believes the entire advent of triple play is useless without ISP partnerships and providing access and to CDN companies like Skype. “The problem for mobile cellular companies is, despite offering triple play, there has never been a premise of an entire IP offering.”

It is the actual content, the amount of content and where this content is generated from, pushing traffic on the networks of both the cable and telecoms segments that has the potential to damage the business model of both operations. IPTV and cable offerings are equally at risk by the rapidly increasing advent of illegal internet streaming that increases the risk to the continued penetration development of IPTV, and also the subscription rates of the pay TV model. “It is a challenge for any content company and considering we invest over $3 billion a year in content, it is major concern for us,” says Stephan Gaynor, director of marketing at the UK’s largest commercial broadcasting company BSkyB.

Cable companies’ investment in content is clearly beyond that of the telco, but it is important for telecoms to not lose sight of its fundamentals, believes Kaplan. “It is important to turn the dumb pipe in to the smart pipe by understanding the difference in content,” he says. “By making over-the-top traffic work better and by leveraging, it improves the business model rather than telcos attempting to block an inevitable progression.”