ADL Exane BNP Paribas 2015 Telco Media OTT

Telecom and Media – how to ride the OTT wave

May 2015

Content

Executive summary 3

1. Significant shifts in media consumption – the beginning 8

2. New players and new business models: too big to ignore 15

3. Is content still king? 26

4. Serious threats to traditional media 33

5. Three possible market scenarios 43

6. Growing strains on networks 45

7. Opportunities for telcos: not a one-size-fits-all 50

8. Telco revenues: return to growth finally in sight 62

Author: Principal Contributor:

Bertrand GrauArthur D. Little [email protected]

Antoine PradayrolExane BNP Paribas [email protected]

Acknowledgement for their support and valuable input: Julien Duvaud-Schelnast, Ingomar Lang, Marlene Schlagbauer, Karim Taga, Clemens Schwaiger, Michael Williams, Agathe Martin, Kohulan Paramaguru, William Beavington

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How to ride the OTT wave

Executive summary

The telecom and media space is going through significant changes as the way we consume media evolves. In 2014, the move to content digitalization accelerated and we received confirmation of the emergence of key players in the video and music distribution industry. In this report, which draws from more than 110 interviews with executives from the telecom, media and Internet sector, we focus on the evolution of audio and video content delivery, and on the relationships between the major players in this ecosystem.

�� The megatrend towards online nonlinear video usage will only accelerate in the coming years.

�� New internet-based players compete with traditional ones in all segments of the value chain and are far too big to ignore.

�� Content remains king. We expect the rise in OTT to drive further content cost inflation.

�� Traditional media, both pay-TV and free-to-air, TV and radio, are threatened by pure OTT players. We explore three market scenarios with varying impacts on the different types of players, and we propose responses, including surfing the OTT wave, by launching their own OTT services.

�� For telecom operators, we see the OTT wave first and foremost as a growth driver for superfast broadband usage – with monetization opportunities in access, but also in proposing value added services to traditional media players and medium-size pure OTT providers.

�� We believe that a return to growth in European telcos’ revenues is finally in sight.

Significant shifts in media consumption – the beginning

The way we consume media – in particular, audiovisual content – is changing dramatically, with two concomitant trends: a strong increase in the number of digital devices such as smartphones and tablets, which are used more and more to watch videos and listen to music, and the rapid development in nonlinear usage.

Beyond the fall in physical sales, the impact of the “digital revolution” on traditional TV and radio is not evident – yet. A number of smaller channels have started to disappear and the profitability of large TV channels has suffered, but so far they seem to have been impacted more from audience fragmentation and economic recessions than from the rise of pure online players. In addition, pay-TV penetration and revenues are still growing, with no evident slowdown recently. Conversely, telcos’ connectivity revenues have continued declining due to continued pressure on ARPU.

However, the generational gap between traditional TV viewers, radio listeners and digital natives is huge. We believe that in the coming years, these secular trends are likely to accelerate rather than slow down, creating massive opportunities and threats for all types of players in the value chain – the traditional ones as well as the emerging ones.

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New players and new business models: too big to ignore

In all parts of the media delivery value chain – from content rights to distribution – a number of new actors have been emerging, leveraging new digital and online technologies to compete with traditional players. These new players include Internet giants such as Google (YouTube), as well as Amazon, Apple, Deezer, Spotify and Netflix.

Their scale is already an order of magnitude bigger than that of traditional players in the value chain, even compared to large pay-TV or telecom operators. This is true both in terms of operational metrics (e.g. geographic footprint and audience) and in financial terms (market capitalization, ability to finance themselves).

In each European country, many players have emerged and are competing in the online content distribution markets, with several business models (such as free-to-air, freemium, subscription based and transaction based). The largest and most successful players so far are global Internet leaders: Netflix, which is growing quickly on a global scale and accompanying its rise with large content investment; YouTube, owned by Google, looking beyond its free model; Apple, with further ambitions in streaming; and Amazon, which recently launched its Prime Instant Video service proposing S-VoD services.

Is content still king?

The evolutions of the ecosystem in the past few years have led to content producers capturing a growing share of value in the value chain. Will this trend continue with the rise of online services in the coming years?

Not all content is alike: we show the huge range of value attached to different types of video content, the real king remaining the global sporting events or national football championships. However, beyond premium sports and live news, exclusive series have an increasingly important role. This format is perfectly suited for OTT S-VoD providers, so we expect more along these lines.

Our analysis shows that unless one assumes Netflix’s customer bases in European countries will rapidly triple – reaching penetration of c.50% – which seems unlikely, even the leader in the OTT space will not have the scale to compete with the pay-TV leaders (such as BSkyB) for the whole range of their content line-ups.

Still, our industry experts anticipate that overall content costs will continue rising in the coming years – and we agree. From a qualitative point of view, we expect the key words to be “exclusivity”, “series” and “attractive”. Finally, international content should continue to grow, even though the global-versus-local content battle remains undecided in Europe, with preferences varying by country.

Serious threats to traditional media

The rise of pure OTT players is a challenge for traditional TV players, both pay-TV and free-to-air – but not all are equally placed to face these challengers. We believe that the largest and most innovative pay-TV groups will be able to adjust, but with rising costs, and leading free-to-air TV

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channels will also keep high advertising revenues. The most challenged players are small TV channels and low-end pay-TV.

Traditional pay-TV is facing competition from pure OTT players on multiple content segments, mainly on price. Also, with the rise of on-demand programs, there is less value in aggregating a large number of channels. The long tail of channels is therefore losing interest from users. As a result, we believe that the long tail of large pay-TV bouquets will be under growing pressure. Pure OTT players also compete with premium series production – hence, pay-TV players will be able to maintain their leadership in content, but they will face pressures on both prices and costs.

Some Industry experts believe that there is a serious risk that pure OTT services may cannibalize traditional TV in the long-term – i.e. that pure online video players have the scale and potential to move up the ladder and become the new pay-TV.

Leading pay-TV groups should be able to adapt, fending off pure OTT competition by launching their own OTT services and leveraging their key assets, such as brand, relationships with content providers, technical skills, and last but not least, intimate and long-established relationships with their customer bases. However, this will require more costs (in content but also in new services) and probably some price adjustments.

Finally, on the advertising revenue side, the move to online consumption is a threat to broadcasters’ advertising revenues. We believe that fee-to-air leaders should remain attractive to advertisers, and that innovative players will be able to capitalize on digital innovations, which can also enrich the advertising market. However, the new world will be a challenging one for smaller TV channels, which will not be able to amortize the growing cost of exclusive and attractive content for a sufficiently large viewer base.

Three possible market scenarios

The evolution of the TV market will depend on two main factors: 1) the level of virtualization in the edition and aggregation functions, versus the traditional programming function based on the manual analysis of audience; and 2) the share of the edition and aggregation market that the Internet players will capture – depending on the speed of change in behavior, Internet players’ ability to capture premium content, and the brand power and adaptability of traditional players.

A strong parameter influencing the market’s evolution will be the strength of the local content in terms of its availability and users’ appetency for it in each country.

We therefore see three scenarios for the evolution of the competitive landscape:

�� Scenario 1: local and premium content continues to “win”, enabling a leading pay-TV operator to keep its leadership versus pure OTTs, limiting Internet players to a long tail of content with relatively lower value;

�� Scenario 2: a few global pure OTTs manage to reach the scale necessary to compete with pay-TV on premium content;

�� Scenario 3: global pure OTTs take over not only pay-TV, but the whole TV market, attractive massive audience and advertising revenues.

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Growing strains on networks

A much-talked-about consequence of the growth in online video is the massive increase in data traffic carried over the Internet, and hence over telcos’ networks. Ensuring that the quality of the viewing experience remains up to standards requires players to continuously upgrade their equipment. Key investment areas are the core networks, the interconnection between different players and content delivery servers.

Local-access operators (telcos, cable operators) are very vocal about the need for content providers (e.g. Google – the owner of YouTube – and Netflix) to contribute financially to the required investment. We expect continued jockeying on this subject – which is tightly linked to regulation (see Annex), but the situation has already evolved significantly. Indeed, we show that pure OTT providers are also investing a lot in their own delivery infrastructures (worldwide CDNs) and also that, in a growing number of cases, in the US as well as in Europe, they have struck financial agreements with local-access operators.

Opportunities for telcos: not a one-size-fits-all

The balance between risks and opportunities associated with the rise of online video appears much more favorable for telecom operators than for traditional TV players. Indeed, telcos have much smaller vested interests than traditional TV operators, and their network assets and advanced positions in the digital revolution are key assets that they can – and should – monetize.

First, all telcos can create value through an “enabler” role, monetizing their network assets – i.e. turning the growing strains on networks into an opportunity. Regardless of the market scenario for the development of pure OTTs and its impact on traditional TV players, telcos should benefit from the rise in online video usage in two core ways:

�� Charging customers for faster speeds and/or data traffic. There is demand for this;

�� Monetizing their network assets with global OTTs – basically charging them for a quality delivery.

In addition, in a market scenario in which pay-TV players and smaller OTTs succeed (closer to scenario 1), telcos have the opportunity to provide additional services beyond the pure network connectivity to these players, becoming their partners of choice in their migration to the new online video world. This is a value-added wholesale model.

Second, the revolution in the TV market can also be an opportunity for some telcos to generate revenues, not only as enablers, but also as direct players in online video and/or pay-TV. In our view, this is not for everyone. Our analysis shows that the opportunity for a telecom operator depends on two main factors:

�� The operator’s scale, local and global;

�� The market context, including: who the established pay-TV operators are; how developed the market is; how successful the pure OTTs will be; the customers’ appetite for local versus global content; the cost of content.

Overall, opportunities for Telcos to actually create value by investing in content and/or their own pay-

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TV platforms will be the exception rather than the rule. Only the largest operators in specific market contexts can actually create value in such moves. For the majority, the preferred route should, in our view, be to partner with OTTs and local media players such as Pay-TV and FTA channels – sharing the risk and the upside with players that will have greater scale, both locally and globally.

Telco revenues: a return to growth finally in sight

As we anticipated, the sector revenue trend remained negative in 2014 (-3%), but this was a milder decline than in 2013 (-5%), thanks to improvements in both mobile and broadband.

We have left our estimates for 2015–2016 virtually unchanged, with -1.5% in 2015e and stabilization in 2016e. Optimism has returned to executives across Europe, and we expect the sector to return to growth from 2017e, with 1% growth per year in the longer term and a +0.6% CAGR over the 2016e-2020e period.

Figure 1: Evolution of European telecom industry revenue in eight European countries1)

111 104 94 89 87 87 88 89 91 93

8685

82 80 79 78 77 76 76 75

2425

2626 27 28 28 28 28 28

0

50

100

150

200

250

197 196

2013

202

2012

214

2020e 2016e

192

2015e

193

2014 2011

221

2019e

195

2018e

194

2017e

192

-3.4% +0.6%

In EUR billions

Mobile service revenues Pay-TV Fixed-line revenues

CAGR

Changed (larger) and inserted in exec sum

Source: Arthur D. Little/Exane BNP Paribas note: 1) Germany, France, UK, Italy, Spain, Netherlands, Belgium, Portugal


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1. Significant shifts in media consumption – the beginning

The way we consume media – in particular, audiovisual content – is changing dramatically, with two concomitant trends: a strong increase in the number of digital devices such as smartphones and tablets, which are used more and more to watch videos and listen to music, and the rapid development in nonlinear usage.

Physical sales – e.g. DVDs – have been falling off a cliff for a number of years, but the impact of the “digital revolution” on traditional TV groups is not evident. A number of smaller channels have started to disappear and the profitability of large TV channels has suffered, but so far they seem to have been impacted more from audience fragmentation and economic recessions than from the rise of pure OTTs. In addition, pay-TV penetration and revenues are still growing, with no evident slowdown recently. Conversely, telcos’ connectivity revenues have continued declining due to continued pressure on ARPU.

However, the generational gap between traditional TV viewers and digital natives is huge. We believe that in the coming years, these secular trends are likely to accelerate rather than slow down, creating massive opportunities and threats for all types of players in the value chain – the traditional ones as well as the emerging ones.

More and more time spent with digital devices

In just four years (2010 to 2014), the average time spent on major media using smartphones and tablets in the UK has grown from 12 minutes (per day per person) to almost two hours (76 minutes on smartphones and 32 on tablets). In the same period, average TV and radio usage time has shrunk slightly. See Figure 2.

In minutes In percent

Average time spent per day1) with major media 2010–2014, UK adults

200 197 195

108 122 130

95 89 86

7637

32+5.7%

2014

519

2012

455 10

2010

415 11 1

2014

37.6%

+22.8%

519

25.0%

16.6%

14.6%

6.2%

2012

455

43.3%

26.8%

19.6%

8.1% 2.2%

2010

415

48.2%

26.0%

22.9%

2.7% 0.2%

CAGR

Figure 2: Evolution of traditional and digital media consumption

Source: eMarketer Oct 2014, note: 1) regardless of multitasking


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These UK statistics, even though potentially more advanced than the European average, are, in our view, very representative of the evolution of media consumption across Europe, with:

�� A continuous increase in the total time that we spend each day consuming media content: +5% per year, on average;

�� A shift from traditional devices such as TV sets and radios to new devices such as computers, smartphones and tablets – which now account for almost half of the total time spent on major media.

Still, despite the strong growth in time spent on computers, smartphones and tablets, traditional devices (TV and radio sets) have so far seen only a small decline in their daily usage (by 2.9% per annum), continuing to capture more than half of users’ time, on average.

Growth in content consumption mainly driven by growth in nonlinear usage

The total time spent watching TV and listening to radio has been increasing in European countries. For both TV and radio, the increase in consumption is on linear as well as nonlinear content1.

However, nonlinear content has seen much stronger growth than linear content, and reached 10% of total TV consumption in 2014.

In minutes/day In minutes/day

Evolution of linear and nonlinear TV consumption 2008–2014, Europe1)

Evolution of traditional and online radio consumption 2008–2013, UK

219 219 226 230 233 232 232

2014

26

2013

22

2012

18

2011

14

2010

10

2009

7

2008

4

Linear average Nonlinear average

169 166 167 170 181 174

2013

11

2012

9

2011

6

2010

5

2009

4

2008

3

Traditional Online

Figure 3: Evolution of average time spent viewing videos and listening to radio

Source: IHS Electronics & Media, Ofcom, Arthur D. Little/Exane BNP Paribas, note: 1) average of France, Germany, Italy, Spain, UK

Generational gap

The above-mentioned statistics are averages across the whole population. The evolution towards an increasing share of digital devices and nonlinear content is by far more evident when comparing behaviors of different age groups. In the UK, viewers between

1 Linear TV refers to service in which the viewer has to watch a scheduled program at the time it’s offered. The opposite of this is nonlinear TV, including video on demand. This is independent from the device used to watch the content (such as TV, PC, or tablet) and the distribution network. (Linear TV can be watched over the Internet on a tablet.)


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16 and 24 years old reduced their viewing time by 12.5% between 2010 and 2013, while the average viewing time of the entire population dropped by 4.3%. (Source: BARB for Ofcom)

Younger age groups show a much stronger appetite for digital devices and nonlinear content. Although the above-mentioned evolutions affect all age groups, the younger generations are likely to maintain their consumption habits as they age – and this should further accelerate the overall trend.

Physical sales are falling off a cliff

The increase in online media usage has already strongly impacted the consumption of content on traditional physical supports. Both in volume and value, this market is dropping rapidly. The number of DVD and Blu-Ray rentals has fallen by 16% per year since 2008, and the market value (including rentals and purchases) has dropped by 9% per year over the same period.

Physical video1) transactions 2008–2013, Europe2)

Total revenues from physical video1) 2008–2013, Europe2)

Total number, millions EUR millions

730

910

2013

5,802

2012

6,588

2011

7,177

1,036

2010

7,750

1,154

2009

7,936

1,243

2008

8,774

1,421 -9%

Video sales Video rentals

784 768 722 672 599 529

430385

350298

473

231

2012 2011 2013 2010 2009 2008

-10%

Video sales Video rentals

CAGR CAGR

Figure 4: Evolution of physical video transactions and generated revenues

Sources: International Video Federation, note: 1) including DVD and Blu-ray discs, 2) 23 European countries

Impact on traditional TV groups is not evident…

The analysis of the evolution of traditional TV providers’ revenues, both free-to-air channels and pay-TV bouquets, shows that about half of the major European TV networks have seen their revenue drop or stagnate since 2008. In this context, only a limited number of TV groups, essentially pay-TV players, such as Sky in Germany and the UK, have managed to significantly grow their revenue over the period.

According to our interviews, this decline in revenue is mostly attributed to the appearance of new TV channels on the audiovisual landscape following the introduction of DTT – i.e. the fragmentation of audience, as can be observed, for instance, in France, where audience shares of traditional TV channels TF1, France 2 and France 3 have been declining in favor of the free DTT channels. (See Figure 6). This factor has been more important than the move to online consumption so far.

In addition, a big factor explaining the weak revenue trends at TV stations has been the tough macroeconomic backdrop over the past few years. Free-to-air channels, which derive revenues from advertising, are particularly sensitive to the level of economic activity and business confidence.


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Evolution of revenues of main FTA and Pay-TV networks 2008–2013, Europe

2008.0 2008.5 2009.0 2009.5 2010.0 2010.5 2011.0 2011.5 2012.0 2012.5 2013.0

170

160

150

140

130

120

110

100

90

0

70

80

Basis 100 in 2008

RAI

Mediaset

Mediaset España

Sky Germany

Channel Four Television

TF1 Group

RTL Group

ZDF

France Télévisions

ProSiebenSat.1 Media

Atresmedia Televisión

BBC

Canal+ Group

ITV Network Ltd

Sky UK

Figure 5: Evolution of media players’ revenues

Source: Company reports, MediaDB, Arthur D. Little/Exane BNP Paribas

Market shares of TV channels 1995–2013, France

0

5

10

15

20

25

30

35

40

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

4.4 2.8

11.6

9.5

2.0

14.0

1.8

37.3

14.3

23.8

17.6

3.3

11.5

5.5

22.0

3.3

10.8

22.8

2.9

Other channels

Free DTT channels

Thematic channels

2.3 DTT HD channels

Free DTT channels’ market shares:

3.4%

3.2%

2.9%

2.2%

2.1%

1.9%

1.8%

1.7%

1.3%

0.8%

In percent

Source: Conseil National de l’audiovisuel France

Figure 6: Market share of TV channels


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This activity lull has had a big impact on profitability for traditional TV players in the period – see Figure 7 below. However, they have managed to recover, maintain or even grow their EBIT margins by adapting rapidly.

Overall, at this stage, it is therefore difficult to affirm that the secular trends that we have described above have had a significant impact on the revenue of traditional TV players.

2007 2008 2009 2010 2011 2012 2013 2014

50

15

10

5

0

-5

-10

-15

45

40

35

30

25

20

-130

Evolution of EBIT margins of main FTA and Pay-TV networks 2007–2014, Europe

In percent

TF1 Group

Channel Four Television Corporation

RAI

Mediaset S.p.A.

BBC [~ EBIT]

Atresmedia Televisión

France Télévisions

ITV Network Ltd

Sky Germany AG

Canal+ Group

ProSiebenSat.1 Group

Mediaset Espana Comunicación

Mediengruppe RTL Germany

Sky Britain

ZDF [~ EBIT]

Figure 7: Evolution of media players’ EBIT margins

Source: Company reports, Thomson Reuters, Arthur D. Little

... but a number of channels have disappeared

Following the quick ramp-up in the number of channels across Europe in the wake of the development of digital terrestrial, cable and ADSL distribution, we have started to see a reversal of the trend, with a number of channels now disappearing. In France, for example, 2014 saw Stylia, TF6 and M6 Music Black stop broadcasting, and Canal+ announced the shutdown of Cuisine+, Home+ and Jimmy in 2015.

These disappearances are probably due to the massive market entry of players in the earlier years, following the opportunity created by the switch to digital TV – i.e. not everyone could survive, especially in a difficult macro-economic context in which TV groups have to make tough choices (the need to recover profitability, as shown above).

Still, this new trend shows that the business model of a number of TV channels is fragile. A decline in revenues, driven by a decrease in audience and/or of share of advertising dollars directed to traditional TV, could easily trigger a further drop in the number of TV channels across Europe.


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Country Channel Owner Genres covered

Lifetime Comment

FR Stylia TF1 Lifestyle 1996 - 2014 Lifestyle programming is now broadly available via FTA TV channels

TF6 TF1 & M6 (50/50)

Series and entertainment

2000 - 2014 Dwindling audience

M6 Music Black M6 Music 2005 - 2014 Heavy competition and difficulties negotiating carriage by various platforms (Canalsat, Free, Bouygues, SFR)

Cuisine+ Canal+ Lifestyle 2001 - 06/2015 Competition from FTA lifestyle channels in that genre

Home+ Canal+ Lifestyle 2006 - 06/2015 Competition from FTA lifestyle channels in that genre

Jimmy Canal+ Series and Entertainment

1990 - 06/2015 Content was partitioned into other Canal+ channels

UK BBC Three BBC Series and Entertainment

2003 - 2015 (fall)

Move to online distribution and reallocation of financial resources (savings of GBP 50 mn per year, of which GBP 30 mn will go into drama on BBC One)

Crackle Sony Pictures Television

Movies, series and entertainment

2010 - 2014 Sony would not clarify the reasons for shutting the online channel

Argos TV Argos Tele-shopping 2011 - 2013 Reallocation of resources towards digital offer

ES La Sexta 3 Atresmedia Corporación

Movies 2010 - 2014 Supreme Court ruling that cancelled out the concession of additional channels to existing broadcasters, on the grounds that the concession was made without a public bid and that new operators were thus deprived of a chance to join the market

- and 8 other channels from various Spanish broadcasters

Figure 8: List of channels that have disappeared

Source: Press releases, Arthur D. Little/Exane BNP Paribas

Pay-TV is still growing

As shown in Figure 9, we estimate that pay-TV revenues in Europe have continued to grow steadily in the past few years, by c.+3% per annum since 2010 – including pay-TV revenues of all types of players. Examples include satellite-based operators (DTH), cable operators (TV component of the triple-play packages) and telecom operators (pay-TV revenues derived from ADSL-based triple-play customers).

Revenues Pay-TV 2010–2014, Europe1)

EUR billions

2011

25.7

2012

24.8

2013 2014

26.4 +3.4%

24.0

2010

23.1

ARPU Pay-TV 2010–2014, Europe1)

EUR

-0.5%

2014

24.0

2013

24.7

2012

24.6

2011

24.6

2010

24.5

CAGR

CAGR

Figure 9: Evolution of pay TV ARPU and total revenues in Europe 2010–2014

Source: Arthur D. Little/Exane BNP Paribas Industry Model, note: 1) incl. FR, DE, UK, IT, ES, BE, NL, PT

.


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The pay-TV ARPU has been broadly stable over the past five years, declining by c.0.5% per annum, as the increase in ARPU of traditional pay-TV providers has been diluted by the lower ARPU generated by new non-premium pay-TV offers. This has been led by telecom and cable operators and their triple-play offers, as well as new pay-TV players such as beIN Sports in France. This small ARPU decline is therefore more than compensated for by an important increase in pay-TV penetration.

Connectivity revenues have been under pressure

The ARPU of pure connectivity services provided by telecoms operators in Europe has been steadily decreasing since 2008, with a -3% CAGR over 2010–2014. However, average download (and upload) speeds have significantly increased over the period, leading to a decrease in total broadband revenues of 2% per year over the same period.

ARPU Connectivity 2010–2014, Europe1)

Fixed line, EUR

10.9 10.1

2010

34.8

46.6

35.7

-3.1%

2014

41.1

8.1

33.0

2013

41.9

8.8

33.1

2012

43.6

9.4

34.2

2011

44.9

Broadband Voice

Revenues Connectivity 2010-2014, Europe1)

Fixed line, EUR billions

-2.1%

2014

81.0

34.3

46.7

2013

82.0

36.8

45.2

2012

84.6

39.6

45.1

2011

86.3

42.3

44.0

2010

88.3

45.6

42.6

Voice Broadband

CAGR CAGR

Figure 10: Evolution of connectivity ARPU and total revenues in Europe 2010–2014

Source: Arthur D. Little/Exane BNP Paribas Industry Model, note: 1) incl. FR, DE, UK, IT, ES, BE, NL, PT


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In all parts of the media delivery value chain – from content rights to distribution – a number of new actors have been emerging, leveraging new digital and online technologies to compete with traditional players. These new players include Internet giants such as Google (with YouTube), Amazon, Apple and Netflix.

Their scale is already an order of magnitude bigger than that of traditional players in the value chain, even compared to large pay-TV or telecom operators. This is true both:

�� In terms of operational metrics, e.g. geographic footprint (billions of people versus tens or hundreds of millions) and audience;

�� In financial terms, e.g. market capitalization in hundreds of billions versus tens of billions.

In each European country, several players have emerged and are competing in the online content distribution markets, with several business models (free-to-air, freemium, subscription based, transaction based).

The largest and most successful players so far in terms of viewership are global Internet leaders: Netflix, which is growing quickly on a global scale and accompanying its rise with large content investment; YouTube (owned by Google), looking beyond its free model; Apple, with further ambitions in streaming; and Amazon, which recently launched its Prime Instant Video service proposing S-VoD services.

New players across the value chain

We look at the media delivery value chain by segmenting it into five parts, in addition to the final user (see Figure 11):

�� Content rights owners, e.g. movie producers, TV program producers, or music majors that own the content and sell the distribution rights to editors;

�� Editors, traditionally the TV channels, purchasing content and organizing it in a consistent stream, eventually with advertising, following a specific editorial line;

�� Aggregators, traditionally the pay-TV bouquets, compiling several streams from editors or content into a bouquet or library that is distributed via different platforms;

�� Distributors, traditionally the satellite and cable operators, bringing the offer to the client and as well as taking care of the physical distribution of the audio/video stream to the screens;

�� Terminal manufacturers, which produce the devices that display or play the content, or enable the content to be played on a screen (e.g. the set-top box).

Increasingly, in addition to traditional players, new actors from the Internet are becoming active in the role of delivering content to end users. Actually, we believe that all five segments in the value chain are seeing the emergence of new types of players leveraging new digital and online trends.

2. New players and new business models: too big to ignore


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Content rights owner

1

Editor

2

Aggregator

3

Distributor

4 Terminal

manufacturer

5

User

6

Movie producers

TV programs producers

Music majors

Users

OTTs and telcos commissioning original content

TV channels

Radio channels

Pay TV bouquets Satellite operator

Cable TV operator

DTT multiplex/ technical broadcaster

Physical store

Radio broadcaster

Traditional TV set

Radio set

Linear TV viewing/radio listening

DVD/CD purchase/rental

Free-to-air or subscription based pay-TV

Online channel OTT bouquet providers

OTT media library

OTT platform

Smart TV

Set-top box

PC

Tablet

Smartphone

Web radio set

Streaming

Nonlinear

Subscription based

Traditional players

New online players

Telecom operators

IPTV providers

Figure 11: Value chain of media delivery

Source: Arthur D. Little/Exane BNP Paribas

New content providers are establishing themselves as global giants

To understand the scale of the phenomenon, it is interesting to compare the sizes of the different types of players active in this market.

For instance, looking at market capitalization of different types of groups, we show that the largest publicly listed telecom operators operating in Europe are each worth USD70–95billion. The largest content owners are worth USD65–185billion, and the three largest Internet players have market capitalizations of USD200–370billion, 2–4 times larger than the other players.

Figure 12: Market capitalization of top 10 telco and cable companies, content providers and Internet players in Europe in 2015

Vodafone Group PLC 95,404 Walt Disney Co 185,290 Google Inc 368,311

Deutsche Telekom AG 85,915 Time Warner Inc 69,003 Facebook Inc 220,498

Telefonica SA 76,311 21st Century Fox Inc 67,088 Amazon.com Inc 198,790

America Movil SAB de CV 69,921 Vivendi SA 34,774 eBay Inc 70,411

BT GROUP PLC 60,648 Thomson Reuters Corp 32,106 Priceline Group Inc 62,903

Liberty Global PLC 44,870 CBS Corp 30,503 Yahoo! Inc 41,376

France Telecom 43,889 BSkyB Group PLC 28,662 Netflix Inc 34,267

Telenor ASA 36,101 Viacom Inc 26,499 LinkedIn Corp 25,379

TeliaSonera AB 27,109 Pearson PLC 16,663 Twitter 24,540

Telecom Italia 21,174 RTL Group SA 14,220 Rakuten Inc 22,566

Source: Thomson Reuters, Arthur D. Little/Exane BNP Paribas, note: 1) as of 11th of May 2015

Market capitalization of players active in Europe (Top 10 per sector, as of 20151), in USD millions)

Telecom and cable operators Content Internet

Total: 561,342 (26.3%) Total: 504,808 (23.6%) Total: 1,069,041 (50.1%)


17

Furthermore, content and Internet players have global scale, while network operators often operate on local or regional scale.

For instance, Netflix is present in 53 countries, with an addressable market of 1.3 billion people; Spotify is in 58 countries and has 1.7 billion potential users; while Vodafone, the largest telecoms operator in Europe in terms of market capitalization, is addressing a potential market of 1.7 billion in 20 markets. Also in terms of financing, companies such as Spotify recently raised EUR450m, while major European radio stations have much more limited means. (Annual revenue of French radio group RTL is EUR175m).

In terms of audience, YouTube.com is the most visited web domain in Europe, with a total of 260 million unique visitors in February 2014 (Source: ComScore). At this date, Vodafone had ‘only’ around 125 million European customers (Source: Vodafone).

A large number of platforms are emerging and the market is booming

In each country, several players have emerged and are competing in the online content distribution markets.

In particular, a large number of video-on-demand (VoD) platforms have emerged in Europe, often on a very small scale. In the MAVISE database, registering at European level, on-demand audiovisual services have more than 3,700 entries (Source: Observatoire Européen de l’Audiovisuel).

Video

illustrative

Music

Figure 13: Global video and music platforms



18

France

Germany

Spain

Italy

UK

Figure 14: Local video platforms per country

Source: Arthur D. Little analysis

illustrative

The main business models observed for the online delivery of media content are illustrated in Figure 15 below.

No significant offering

No significant offering No significant offering

VoD service categorization by business model

Internet Telecom and cable operators

Purely free (ad based, public

funding)

Freemium

Subscription (SVoD)

Transaction based

A

B

C

D

Content

Figure 15: Video platforms per type of player and business model

Service selection

Source: Arthur D. Little analysis, note: boxes indicate access to local content, e.g. national sport events, news Highlighted


19

A – Free-to-air model. In this model, the user does not pay directly for the content. The revenues are generated through advertising, by financing from public funding, via cross-subsidy from other services, or often by a combination of these three sources of revenue

B – Freemium model. The user does not pay for the services, but has restrictions until he switches to a pay model.

C – Subscription based. The user pays a fixed monthly fee for unlimited use of the service. Usually this model is based on streaming and the user cannot download the music/video on his terminal. In some cases in which downloading is possible, the user has some restrictions and can watch/listen to the content only when his subscription to the content is active.

D – Transaction based. The user pays a fee each time he uses the service. Usually the user can download the content on his terminal. We can then differentiate two main models: download to own, in which the user owns the content and can listen to/watch it an unlimited number of times for an unlimited time; and download to rent, in which the user can watch/listen to it a limited number of times over a limited period.

Customer spending on VOD is exploding, in particular in S-VoD

The VoD market recently witnessed a strong increase. In value, consumer spend on VoD has grown more than 70% per year since 2010.

The first large-scale S-VoD models appeared in Europe in 2011, and enjoyed immediate success. Figure 16 depicts the significant shift in consumer spending from physical rental to online VoD services, which developed along various pricing models, such as download to own (DTO), download to rent (DTR) and subscription based (SVoD).

The parallel analysis with the decline in the DVD market is striking.

Consumer spend on VoD per transaction model 2009–2013, Europe1)

EUR millions

2013

1,183

2012

686

2011

364

2010

236

2009

200

+71.1%

Online DTO-VoD Online SVoD Online DTR-VoD

Consumer spend on physical video rental 2009–2013, Europe1)

EUR millions

730

910

-12.4%

2013 2012 2011

1,036

2010

1,154

2009

1,243

CAGR

Sources: TV Video Yearbook 2014, note: 1) 23 European countries, DTO = Download to own, DTR = Download to rent

Figure 16: Evolution of consumer spend on OTT VOD services per business model

On-demand music is rapidly moving to subscription-based services

In the music market, download services still represent 52% of online music revenues, but revenues from subscription-based music-on-demand-services (MoD) are growing at a fast pace, contributing an estimated 29% (EUR460m) to the total spend on online


20

music so far in 2015. Subscription services for MoD have already gotten ahead of download services in terms of usage in a number of European markets, e.g. Sweden, France and Italy.

Consumer spend on online music per type of service

2008–2015e, Western Europe

In EUR millions

1,600

18.9%

52.4%

28.7%

2014

1,297

23.2%

53.9%

22.9%

2013

1,233

27.5%

55.5%

17.0%

2012

1,201

31.4%

56.8%

11.9%

2011

1,001

34.3%

57.3%

8.4%

2010

933

36.8%

57.2%

6.0%

2009

779

37.5%

57.8%

+14.3%

2015e

4.7%

2008

629

38.5%

57.2%

4.3%

Personalization services1)

Download services

Subscription services

Internet users using music subscription/ download services in the past 6 months2)

(2014), per country

In %

CAGR

12

22

3236

47

21

33

15

97

DE UK IT FR SE

Downloads Subscriptions

Figure 17: Evolution of consumer spent on MOD services per business model

Sources: Gartner, Ipsos MediaCT, Arthur D. Little/Exane BNP Paribas, note: 1) ringtones, ring-back tones, 2) also includes free users of subscription services Companies such as Spotify, Deezer and Rhapsody/Napster are proposing similar catalogs. Around 30 million songs are proposed for unlimited usage at around 10€/month (including VAT).

Differentiation between these platforms is difficult, and mostly driven by the conditions negotiated by the content owners, which enable limited marketing creativity for the distribution platforms.

Case study – Netflix, the rising star

New players such as Netflix, YouTube, Apple and beIN Sports are representative examples of the business model innovation undertaken by fully digital companies. Netflix, perceived as the rising star, launched its services in Europe in 2012, and in January 2015, it claimed that it had about 9m subscribers in Western Europe.

Netflix history and business model

Netflix started in the US in 1997, first by renting out physical DVDs and delivering them by post. The Netflix model then evolved to online, and has met significant success over the years.

As described in Figure 19, Netflix is a pure OTT service that produces content or acquires rights. Netflix’s content strategy is based on a large catalog of rather old content, mainly based on movies produced in the US and a limited amount of very exclusive content (around 300 hours) with international and local series.

Netflix also mainly includes a powerful recommendation engine and is distributed both directly and indirectly with tiered pricing.


21

Netflix’s global expansion Breakdown of Netflix subscribers per country end of 2014, Western Europe

200 countries by 2017

Subscribers paid, in millions

% of Households

Launch

Norway 0.90 39% 2012

Denmark 0.79 30% 2012

Finland 0.54 21% 2012

Sweden 1.10 26% 2012

United Kingdom 3.30 12% 2012

Netherlands 0.94 12% 2013

Ireland 0.18 11% 2012

Luxembourg 0.011) 5% 2014

Switzerland 0.14 4% 2014

France 0.51 2% 2014

Germany 0.47 1% 2014

Austria 0.05 1% 2014

Belgium 0.031) 1% 2014

Figure 18: Netflix: geographic breakdown of subscribers in Western Europe

Source: Arthur D. Little/Exane BNP Paribas, New York Times, Digital TV research, note: 1) as of September 2014

Original and licensed content Pure OTT

Tiered SVoD pricing

Netflix is a pure OTT player that partners with ISPs on a technological level to efficiently deliver content, thus managing QoS

Netflix provides three classes of a monthly subscription-based video-on-demand offer

SD € 7.99.-

HD € 8.99.-

UHD € 11.99.-

Netflix provides video-on-demand services of original and licensed content

Netflix approaches the question of creating successful content by systematically micro-tagging available content and analyzing big data on user behavior

Position at technological edge

Recommendation engine

Distribution

Netflix acknowledges its recommendations engine as a central competitive advantage

User behavior and taste are derived from an algorithm that combines offline machine learning experimentation with online AB testing

Netflix is distributed either directly over its Internet platform

or via a reselling partnership with local telecom and cable providers, which make it accessible via their set-top boxes, ie:

Netflix is producing its original content (so far House of Cards, Marco Polo) in ultra-HD (4K), trying to position a differentiation factor against the traditional pay-TV offers

Its positioning at the technological forefront of the matter enables Netflix to use the image of a pioneer

ISP

Virgin Media, UK Com Hem, SE

Waoo!, DK Proximus, BE

…..

1

2

4

# of devices that can use

Netflix’s offer simultaneously

Figure 19: Netflix business model

Source: Arthur D. Little / Exane BNP Paribas, New York Times, Digital TV research

Strong worldwide growth

Since 2011, Netflix has managed to both grow its customer base, with a 35% CAGR, and to progressively increase its share of paying subscribers – users enjoy a free trial period in the beginning. This growth was driven by Netflix’s penetration increase in US households, as well as by its geographical expansion, as Netflix has expanded in Canada, Latin America, Australia and Europe.


22

Figure 20 illustrates Netflix’s latest published figures for 2014 with a customer base exceeding 57 million households worldwide, of which 95% are paid customers and 32% are located outside the US.

Forecasts

Subscribers paid/free 2011–2020e, worldwide

Subscribers US/international 2011–2020e, worldwide

Total number, millions Total number, millions 146,2

143,8

2,4

2019e

129,4

127,0

2,4

2018e

113,0

110,6

2,4

2017e

96,7

94,3

2,4

2016e

80,4

78,0

2,4

2015e

72,4

69,4

2,9

2014

57,4

54,5

2,9

2013

44,4

2020e

41,4

2,9

2012

33,3

30,4

2,9

2011

23,5

21,6

1,9

Paid Free

61,8

2017e

96,7

48,6

48,1

2016e

80,4

45,4

35,0

2015e

72,4

43,9

28,4

2014

57,4

39,1

18,3

2013

44,4

33,4

10,9

2012

33,3

27,1

6,1

2011

23,5

21,7

1,9 51,2

2020e

146,2

55,0

91,2

2019e

129,4

53,3

76,1

2018e

113,0

USA International

Figure 20: Netflix subscriber base evolution

Source: Netflix, Arthur D. Little/Exane BNP Paribas

Forecasts

Likewise, Netflix has continuously grown its revenue, as can be seen in Figure 21. Nevertheless, operating income was very low in 2012 and negative in 2013 due to a significant increase in marketing and technical distribution related to its penetration of new markets.

Forecasts Forecasts

Streaming revenues 2012–2020e, worldwide

Operating income 2011–2020e, Streaming + DVD, worldwide

In USD millions

712

2020e

15,717

5,603

10,114

2019e

13,679

5,430

8,249

2018e

11,744

5,214

6,530

2017e

9,843

4,895

4,949

2016e

8,010

4,515

3,494

2015e

6,237

4,021

2,216

2014

4,739

3,431

1,308

2013

3,464

2,751

2012

2,472

2,185

288

USA International

744542

403

-63

50

376

2013

3,849

2019e 2020e

2,840

2018e

2,017

2017e

1,370

2016e 2015e 2014 2012 2011

In USD millions

Figure 21: Netflix revenues and operating income



23

Massive investment in content

In parallel, Netflix also significantly increased its investment in content, as detailed in Figure 22.

This enabled Netflix to make the content available in multiple markets and add original content to its catalog. The amounts spent by the group are amortized on a global scale and therefore not directly comparable with the amounts spent by national broadcasters, but these figures give an idea of relative sizes and power.

Spend on content 2010–2014, worldwide

1.6

2.0

2012

3.0

2013 2014 2011

0.9

2010

0.3

USD billions (estimates)

Figure 22: Netflix cost of content

Source: Investor relations, Leichtmann Research Group, Inc., Arthur D. Little analysis

Case study – YouTube: looking beyond free

Google’s YouTube distributes content with an advertisement model. YouTube is also looking at options to introduce a paid revenue stream. Revenue generated through advertisement is shared with the content creator according to the following model:

Gross ad revenues 2011–2020e, worldwide

In USD billions

CAGR

Ad revenue split model

Shares on gross ad revenues

Threshold according to YouTube rate card (ranging from 4,000 to 120,000 euros, depending on category)

55%

100%

Content creator

Figure 23: YouTube model

20.0

5.63.72.0

2020e1) 2013 2012 2011

+29%

Source: YouTube, Variety, Forbes, WSJ, Morgan Stanley, Time; note: 1) Estimates by Forbes and Morgan Stanley


24

YouTube revenues come almost entirely from advertising, and YouTube accounted for almost 20% of the US online video advertising market in 2013.

Revenues from paid content have not reached a significant level yet. For this paid content, the channel owners set the financial conditions: either a subscription monthly/yearly (from $0.99.-to $5.99.-/month) or a pay-as-you-go model. Paid content owners have the option to enable advertising on their channels as an additional revenue stream.

YouTube shares the revenues generated by advertising with the content owner: 45% YouTube/55% content creator – up to a threshold. Above that threshold 100% of ad revenues go to the content creator. The actual ad price (CPM) is negotiated between YouTube and the advertiser based on a number of contextual factors relating to the video. The content owner has no influence on this. YouTube’s CPM is usually in the range from $18 to $24.

Google recently announced its launch of a MVNO in the US, and could potentially bundle the mobile service with access to specific YouTube paid content at preferred rates.

Case study – Apple ambitions

The content strategy of Apple is based around the iTunes platform, which delivers video and audio content via a transaction-based model. The content is then limited to use on Apple devices as a means of enriching the value of the equipment sold by the company.

Apple is looking to enter the audio-streaming market following the acquisition of Beats in 2014. The group has also announced plans to enter the pay-TV space in the US in autumn 2015, with a TV bouquet on its Apple TV platform. (So far, the limited success of the Apple TV has been attributed to its lack of attractive content).

Apple acquired Beats Electronics, including Beats Music for USD 3 billion. Beats Music is a subscription-based online music-streaming service that gives users access to more than 20 million titles. Apple has announced plans to integrate Beats Music into iTunes or merge the two brands, giving Beats a permanent place on its 800-million-sold devices’ home screens. The monthly subscription is currently at USD 9.99.-/month for up to three devices, but this is expected to be cut.

Evolution of Apple’s revenues total and share by product

In USD millions

Central store and media library for content purchased from Apple

Focus on multi-device accessibility within the Apple ecosystem

Apple acquired Beats Electronics, including Beats Music, in 2014 for USD 3 billion

Beats Music is a subscription-based online music-streaming service that gives users access to more than 20 million titles

Apples has announced plans to integrate Beats into iTunes or merge the two brands, giving Beats a permanent place on its 800-million-sold devices’ home screens

The monthly subscription is currently at USD 9.99.-/month for up to three devices, but this is expected to be cut down

7%4%

18%

20%19%

4%

100%

Acces- sories

iTunes, software

and services

iPod

Mac

iPad

iPhone

2013

170,910

3% 9% 3%

13%

53%

2012

156,508

3% 8%

15%

50%

2011

108,249

9%

20%

42%

App Store

Music

62.0%

24.0%

14.0%

Videos, books, other

In terms of revenue, content might still be a side business for Apple – but the announced integration of the newly

acquired music subscription offer “Beats” into the next version of iOS signals the strategic value of music content for the

company

Movies & TV shows on demand

85,000 movies1)

300,000 TV shows1)

Music on demand Audio titles

(43m songs1)) Music videos iTunes Radio

Source: Arthur D. Little analysis, Apple investor relations, Financial Times note: 1) total amount worldwide, not available in all countries

Figure 24: Apple iTunes model


25

Case study – beIN Sports innovates in pay-TV

beIN Sports is a pay-TV bouquet available in France that focuses on sports. Although the business model, with a subscription-based offering providing a set of linear channels, is not significantly new, the positioning purely on sports is new. It has aggressive pricing, is relatively innovative compared to traditional pay-TV offers and provides a wide range of content at a higher price. The company has significantly invested into acquiring content, with reasonable success. However, the long-term sustainability of the model is questioned, with projected cumulative losses estimated at EUR1.8bn in 2020 (Source: BFM Business) and the recent loss of the Rugby Top14 rights against Canal+.

In Europe, beIN Sports is available in France only, where it is included in TV bouquets of French television operators or accessible via beIN Sports Connect – an OTT application

beIN Sports offers 10 channels with premium sports content, live and with a rewind function (go back for max. of two hours), accessible via PC/Mac, smartphone & tablet and gaming consoles

Monthly subscription beIN Sports Connect:

– without engagement: € 12.00.-/month

– with engagement: € 11.00.-/month1)

Subscribers and content 2012-2014, France Access and pricing

Subscribers, millions

Sports content:

2.5 2.0

0.0

1.5 1.0 0.5

June 2014

2.5

February 2014

1.8

June 2013

1.4

October 2012

1.0

June 2012

0.0

Football World Championships

Brazil 2014

Figure 25: beIN Sports model

Source: Arthur D. Little analysis, Kantar Media, note: 1) 12-month engagement, € 5.50.-/first two months

OTT

non-exhaustive

Included in TV bouquets of


26

3. Is content still king?

The evolutions of the ecosystem in the past few years have led to content producers capturing a growing share of the value chain. Will this trend continue with the rise of pure OTT players in the coming years?

Of course, not all content is alike: we show the huge range of value attached to different types of video content, the real king remaining the global sporting events or national football championships. However, the premium sports and live news, exclusive series have an increasingly important role. This format is perfectly suited for OTT S-VoD providers, so we expect more along these lines in the coming years.

Our analysis shows that unless one assumes Netflix’s customer bases in European countries will rapidly triple – reaching penetration of c.50% – which seems unlikely – even the leader in the OTT space will not have the scale to compete with the pay-TV leaders (such as BSkyB) for the whole range of their content line-up.

Still, our industry experts anticipate that overall content costs will continue rising in the coming years. From a qualitative point of view, we expect the keywords to be “exclusivity”, “series” and “attractive”. Finally, international content should continue to grow, even though the global-versus-local content battle remains undecided in Europe, with preferences varying by country.

Figure 26: Evolution of value captured by different players of the ecosystem

Flow of funds in the media industry total in France, Germany, Italy, Spain, UK, 2013

Source: Arthur D. Little analysis, note: all figures in EUR, all percentages are CAGR 2007–2013

PUBLIC FUNDING

77.6bn (-2.1%)

8.7bn (-3.4%)

8.7bn (+0.7%)

9.8bn (+29.2%)

20.7bn (+12%)

20.8bn (-3.6%)

24.4bn (-6.7%)

4.4bn (+4.2%)

35.7bn (-1.3%)

9.5bn (+2.6%)

10.2bn (-3.7%)

8.4bn (+24.5%)

Retained:

39.5bn (-5.0%)

Retained:

22.1bn (+13.7%)

Retained:

63.7bn (+0.6%)

Total spend: 22.6bn

(+2.1%)

ADVERTISING SPEND

CONSUMER SPEND

Total spend: 87.4bn (-0.5%)

Total spend: 53.8bn (-1.3%)

Retained:

38.6bn (-1.7%)

Offline spend

Online spend

TRADITIONAL AGGREGATORS

ONLINE PLAYERS

CONTENT PRODUCERS / RIGHTS HOLDERS

TRADITIONAL RETAILERS


27

Until now, content owners have played the game very well

The 2014 Arthur D. Little study “Flows of Funds” in the media industry illustrates the dynamics “of the funds flowing through the industry between 2007 and 2013”. It shows that changes in user behavior from offline to online have strongly benefited the online players, to the detriment of traditional players (See Figure 26 above).

Interestingly, content owners have been benefiting from this move with an increase in their revenue since 2007. It is, however, uncertain how long this trend can last, since a number of players competing for content are increasingly cash constrained.

The different types of video content�� The cost of the content relates either to the content acquisition cost when rights owners are not media studios, or to content

production costs otherwise;

�� The local/global aspect describes the geographical relevance of the distribution. News and talk shows are particularly local, whereas movies and series usually have global reach;

�� The live aspect is key to identifying content whose relevance decreases significantly when put in a VoD catalog.

Figure 27 describes six content segments and 14 subsegments. The peak in terms of content acquisition costs is reached for global sporting events and national football championships, with an average cost of EUR6m per game. Production costs also give a sense of the content value, but have to be put into perspective with the different monetization possibilities used by rights owners. For example, in the case of a movie, those would also include movie theater revenue, DVD and multiple sales to different TV channels (including pay-TV) as well as VoD services.

Premium content is a key differentiator for pay-TV – live sports and premium movies, but also increasingly premium series, and these are mostly fixed costs

Pay-TV providers are leading a fierce competition to build an attractive content catalog. Premium content is highly valued by those players. There has also been a growing interest in series over the last few years.

Content segment

Sub-segment Examples

Non-exhaustive

Price range (in EUR millions) Transmission

Local/ Global Production costs National license acquisition costs

Sports Premium sports

International competitions (Olympic games 2012) (Football World Cup 2014) (Football Champions League)

National football championships (Premier League England 2014) (Ligue 1 France)

Motorsports (Formula 1)

Other sports, event-based, e.g. (Rugby World Cup) (Tennis Wimbledon)

0.08/game

Up to 3.3/event or day (45–65; 3.3/day) (130–180; 2–3/game) (1–3/game)

Up to 6/game (6/game) (2/game)

Up to 3/race 2-3/race

Up to 1/event (0.85–0.95/game) (0.43/game)

Live

Global Global Local

Local Local

Global

Local Local

Other sports 2nd League football, Handball, Basketball, Ice hockey, Skiing, etc.

Live All

Local

Entertainment

Reality TV Voting related Job search, dating, etc.

Up to 0.9/episode 0.08-0.38/episode

Live Pre-recorded

Local Local & Global

Events

Society (Oscar awards) (Royal wedding Monaco)

Concerts (New Year’s concert)

Adventure (Red Bull Stratos)

15

(0.4/event)

Live

Global Local

Global

Global

Kids’ shows Pre-recorded Local & Global

Talk Shows Pre-recorded Local

Movies

Hollywood studio movie 23–320 Pre-recorded Global

Independent movie (no “Big-6” studio) Up to 75 Pre-recorded Local & Global

Premium TV movies (TV only) Up to 11 (11/movie) Pre-recorded Local

TV Series

Premium TV series 1.5–6.8/episode Pre-recorded Global

Other TV series (Independent crime series)

1.4/episode Pre-recorded Local & Global

Local

Animation 0.45–0.53/episode Pre-recorded Local & Global

Documentaries (Science topic)

up to 19/episode 0.65/episode Pre-recorded Local & Global

Newscast Pre-recorded Local


Figure 27: Video content segmentation and cost in large European countries


28

Content drivers of Pay-TV subscriptions

“Please indicate how important the following genres of content are to your TV-viewing habits.”

Numbers reflect the occurrence of a genre in the top-two boxes of a seven-point scale, in percent

19

23

24

50

51

5846

17

16

17

26

40

Late-night comedy

Paid-subscription shows

Live events

Live sports

Prime-time shows

News

Free-to-air users Pay-TV subscribers

Pay-TV subscribers rank any genre higher than free-to-air users respectively – they generally attribute a higher level of importance to the TV content they consume.

Live sports events are significantly more important to pay-TV subscribers than to free-to-air users. Thus, they become the most important differentiation factor between the two kinds of linear TV.

Figure 28: Pay-TV subscription drivers

Source: comScore on US TV users

In order to attract customers, pay-TV providers heavily rely on live broadcasts – more specifically, news, sports and shows. Figure 28 highlights that premium sports represents the main reason for which users subscribe to pay-TV. (Live Sports is the category with the largest difference between pay-TV subscribers and free-to-air users. News is the most important category for pay-TV subscribers, but also for free-to-air users).

Volumes of VoD by genre 2007-2013, France

In percent

Revenues from VoD by genre 2007–2013, France

2013

68.0%

32.0%

2012

65.8%

34.2%

2011

60.1%

39.9%

2010

61.2%

38.8%

2009

35.8%

64.2%

2008

27.9%

72.1%

Series and movies Other

In percent

2008 2009 2012

38.5%

2013 2011 2010

39.7% 46.7% 46.6%

63.7% 68.9%

53.4%

36.3% 31.1%

53.3% 60.3% 61.5%

Figure 29: Series increasingly gain audience on VoD

Source: GfK Consumer Choices


29

Among the different types of content proposed by VoD providers, movies and series represent an increasing share of media consumption. Figure 29 illustrates that, in France, this phenomenon has particularly grown since 2010 – when it exceeded the 60% threshold in viewing time and the 50% threshold in revenues.

Series have several advantages for the distributors: they create stickiness, as the user will come back to see all the episodes. They also cost less than movies, with a large number of episodes being produced as part of the same production. Finally, the series can be renewed season after season.

Media editors and aggregators rely on their catalogs to enroll customers

VoD service providers rely on both breadth and exclusivity of content to attract viewers. Figure 30 illustrates the positioning of the different players:

�� Global pure OTT players such as Netflix and Amazon manage to attract viewers with their large and mainly international catalogs, using advertising-based business models for the largest ones and subscription-based models for premium content.

�� Free-to-air TV channels such as TF1 and ITV benefit from large viewership as they reach all TV households in a country. Their catch-up services leverage the same content, mostly free to access but with pay-per-view models for premium content or after a given time period.

�� Local OTT services, most of them recently launched, charge EUR4 to EUR15 per month and have lower penetration rates/audiences than the two previous types of players. They differentiate from catch-up TV services with premium content.

�� Finally, at the high end of the market are premium TV channels such as Sky and Canal+, with high ARPU and a large availability of premium content.

For the moment, there are limited offers in the EUR7–10 per month range with a sizable success – with the exception of Netflix.

Notes: 1) FTA channels

assumed to provide 4,380 titles/year [12*365; avg. duration: 1 hr/title, 50% repetition per day]

2) TV take-up per country represents FTA viewers

3) Catch-up channels assumed to provide 2,920 titles/year [12*365*2/3]

4) Yearly subscription to Amazon Prime by month = EUR 4.08.-

Free

45

105

55

40

20

15

10

5

0

1,000

22 12 11 10 9 35

25

8 7 6 5 4 0

Germany

Britain France Italy

Spain

Filmin

Nubeox

sd Sky Online

Maxdome

Voddler

Vie

wer

ship

(m

illio

ns)

[mon

thly

sub

scrib

ers

or u

niqu

e vi

sito

rs/m

onth

]

Size of bubble

indicates amount of available

content

Yellow bubble

indicates premium content

Monthly subscription (EUR/month)

4)

FTA catch-up channels3)

Global OTT

Local OTT

Pay-TV

FTA channels1,2)


Figure 30: VoD service per price, audience and size of catalogue


30

How will the current shifts affect the content rights market?

Based on our interviews, on average in Europe, the market evolution is expected to push content towards premium and global production, as illustrated in Figure 31.

The chart shows that:

�� Executives in all countries typically expect to see evolution towards premium and more expensive content (except for France);

�� Regarding the balance between local and global content, opinions vary more by market. France, Italy and the Nordic countries are more sensitive to local content, while Spain, Belgium, Central Europe and the Netherlands expect the current balance to remain unchanged, and Germany and the UK foresee evolution towards more global content.

Looking now at how the different types of players see this question:

�� The average European view is strongly championed by telcos;

�� Media players expect a strong shift towards premium content, but a slight shift towards local content;

�� On the other hand, OTTs expect content cost to decrease, with no major change in the local/global balance.

We expect the rights acquisition costs to increase. Around two-thirds of our interviewees saw an increase in content cost. Half saw the increase more specifically affecting premium content, while the other half forecasted an overall increase.

33%

Overall increase

Stable

13%

Only premium will increase

47%

Decrease

7%

Figure 31: Interview feedback – What will be the key evolutions for content production and cost?

-80

-60

-40

-20

0

20

40

60

80

-100 -50 0 50 100

EUROPE

Netherlands

Nordics Central Europe

Spain Germany Italy

UK Belgium

France

-80

-60

-40

-20

0

20

40

60

80

-100 -50 0 50 100

EUROPE

Others

Telcos

Regulators

Media

OTT

Mass content/ user generated

(cheap)

Premium (expensive)

Local Global Local Global



31

Towards pan-European rights?

It is important to note that we are in the early days regarding content purchasing at the European level.

The model has historically been constrained by the sellers, but this may change. Netflix has initiated the purchase at global level. For example, Netflix acquired from Warner Bros. the exclusive subscription on-demand rights for the series “Gotham” in all the countries in which it operates.

Such a trend could minimize the risk for content owners that obtain in one transaction a European reach for their content. It also reduces the potential gain if the content were to be broken down into national rights and sold in each of the European countries.

Will online video players compete against traditional providers for content?

Pure OTT players are gaining traction in the media industry. For example, as detailed in section 2, Netflix reached 57.4 million subscribers by the end of 2014, 95% of which were paid subscribers. This important subscriber base generated over USD4.7bn in revenue and USD776m gross profit (net of direct costs and marketing) in 2014.

With such firepower, it is logical to wonder whether pure OTT players will increasingly compete with local pay-TV channels for exclusivity on content such as premium sports, premium movies and local content.

The analysis described in Figure 32 shows that in order for a pure OTT player like Netflix UK to propose a content catalog that could compete with BSkyB while amortizing its cost, it would require an additional 9.4m subscribers – i.e. it would need to have a subscriber base of c.13m and hence penetrate 50% of UK households. We do not see this as a reasonable assumption in the short to medium term, given the strong market position of traditional pay-TV players.

This theoretical analysis is based on a pure OTT player like Netflix investing GBP250m annually in Premier League rights (which corresponds to a fraction of the sports contents acquired by BT for 2016e – see Figure 55. In addition Netflix has been explicit about not investing in sport), as well as an additional GBP300m in premium series and movies and original local content (which represents 25% of what BSkyB invests in those segments).

647

150

Football Premier

League rights

250

Total Marketing, technology & development,

G&A

97

Long tail

0

Original content, locally

produced

150

Licensed premium movies & series

Annual rights costs and theoretical Netflix’s customer base growth to fund premium content acquisition

In GBP millions

Additional customers required at GBP 6.99.-/month 3.6 m 2.2 m 2.2 m 0 m 1.4 m 9.4 m

Equivalent to BT’s level of investment

Equivalent to 25% of BSkyB’s investment

Already included in Netflix’s catalogue

15% of revenue from OTT benchmark

Graph changed

Figure 32: Assessment of Netflix’s ability to purchase premium rights in the UK



32

Even considering a scenario in which Netflix only competes in the premium movies and series and original content segments, this would represent over GBP350m (including 15% for marketing, technology, development and G&A). It would therefore require over 5m additional subscribers. We do not expect Netflix to achieve such scale in the short to medium term, either.

Yes, good content will still be king

We expect the shift of the ecosystem toward an increasing number of media distributors to increase the competitive intensity for content rights acquisition. This means that content prices are likely to continue to increase. We expect content rights owners to continue capturing an increasing share of the value in the ecosystem.

We also anticipate changes regarding video content quality over the coming years, along four axes:

�� More exclusive content

�� More series

�� More international content

�� More attractive content

Exclusive content being a key differentiator for VoD services, we expect VoD providers to invest into producing their own content and leverage on it to build their brand image.

This evolution would go along with an ongoing shift towards series that engage customers in the longer term and represent an investment better suited to the capabilities of VoD companies. They can extend/stop after the trailer and the season, and series offer a better production cost/video time ratio than movies.

Then, the S-VoD model fosters the production of a limited number of global blockbuster contents, which will be amortized among a wide customer base. We also expect that the shift towards VoD will favor attractive content, to the detriment of less attractive content, by making it available at any time.

So far, the increase in content rights has been financed by the uptake in video services driven by broadband penetration increase. In the future, we believe that the amount of content will need to be reduced in order to finance a limited, but more expensive set of content.


33

The rise of pure OTT players is a challenge for traditional TV players, both pay-TV and free-to-air – but not all are equally placed to face these challengers. We believe that the largest and most innovative pay-TV groups will be able to adjust, but with rising costs, and that leading free-to-air TV channels will also keep high advertising revenues. The most challenged players are small TV channels and low-end pay-TV.

Traditional pay-TV is facing competition from pure OTT players in multiple content segments, but mainly on price. As such, we believe that the long tail of large pay-TV bouquets will be under growing pressure. Pure OTT players also compete with premium series production – hence, pay-TV players will be able to maintain their leadership in content, but they will face pressure on both prices and costs.

Industry experts believe that there is a serious risk that pure OTT services may cannibalize traditional TV in the long-term – i.e. that pure online video players have the scale and potential to move up the ladder and become the new pay-TV. However, pure OTT players will face a number of challenges themselves if they are to succeed in such a revolution.

Leading pay-TV groups will be able to adapt, fending off OTT competition by launching their own OTT services and leveraging their key assets, such as brand, relationships with content providers, technical skills and, last but not least, intimate and long-established relationships with their customer bases. However, this will require more costs (in content as well as new services) and probably some price adjustments.

Finally, on the advertising revenue side, the move to online consumption is a threat to broadcasters’ advertising revenues. We believe fee-to-air leaders should remain attractive to advertisers, and that innovative players will be able to capitalize on digital innovations, which can also enrich the advertising market. However, the new world will be a challenging one for smaller TV channels, which will not be able to amortize the growing cost of exclusive and attractive content on a sufficiently large viewer base.

Traditional pay-TV is facing competition in multiple content segments as-well-as on price

The long tail of large pay-TV bouquets is under pressure

By providing any user with access to quality thematic content, free VoD services such as catch-up services from free-to-air channels or free video platforms such as YouTube and Dailymotion put pressure on the long tail of channels offered by pay-TV bouquets. Putting together free-to-air catch-up services and YouTube channels, customers can get a choice of content similar to the long-tail of premium pay-TV bouquets – as shown in Figure 33 in the case of Sky Deutschland.

Pure OTT players also begin to compete with premium series production

As seen before, Pure OTT players are increasingly investing in their own original content, and more specifically, in premium series. Well-known examples include House of Cards, Alpha House, Marseille and Vorstadtweiber. (This effort still brings the number of hours of exclusive programs on Netflix to 320h for 2015, versus more than 1,000 per month for a typical large free-to-air channel.)

This effort is key for pure OTT players to differentiate with exclusive content, as well as to have a number of content rights at their disposal that can be monetized on a global scale, allowing rapid expansion and delivery into a global footprint.

4. Serious threats to traditional media


34

Identified genre of channel

Quantity of channels offered on Pay-TV1)

Comparable content available on YouTube?

Comparable content available for free on FTA catch-up services?

Pay-TV channels covered on YouTube or

FTA catch-up

Animation 6

Animation movies 1

Crime 3

Erotic 1

Folk 2

History 2

Lifestyle 2

Movies 13

Music 2

Nature 3

Premium movies 1

Premium series 1

Premium sports 8

Reality 1

Science fiction 1

Series 3

Soaps 2

Sports 3

Sports news 1

Coverage of Sky Germany’s offer in YouTube and FTA catch-up channels 2015, Germany

Figure 33: Coverage of pay TV long tail channels in YouTube and FTA-catchup services

Source: Sky Germany company landing page, Arthur D. Little, Note: 1) Non-repetitive: meaning HD, +1h, +24h versions of channels not included

98

6

1

1

1

1

3

2014 2013 2015 ITV, UK

Amazon Netflix

HBO, USA Showtime, USA CBS, USA

AMC, USA Fox, USA

FTA OTT Pay-TV

Nominations per type of player

Golden Globe awards 2013–2015

Pay-TV:

OTT:

FTA:

Examples for nominations per type of player 2013-2015, non exhaustive

Figure 34: Golden globe award for series by origin between 2013 and 2015



35

The Figure 34 shows the increasing share of series distributed by OTTs among the Golden Globe Award winners. Every year, 10 series get awards, corresponding to five in each category: drama and musical/comedy. In 2015, the OTTs got three nominations, versus zero in 2013. Even if the Golden Globe Awards are run by a panel of traditional production houses, their distributors and are more likely to be aligned with an established production paradigm and value-chain actors, it gives a good indication of the value of such content and the importance given to it by OTT players.

Pay TV players maintain their leadership in content but face strong price competition

Figure 35, based on a 4,000+ customer survey across 11 markets globally, shows that consumers currently consider pay-TV providers to offer better content, customer service and video quality than pure OTT services. However, it also shows that OTTs are perceived as having clear price leadership.

Pay-TV vs. OTT providers: key advantages

“What are the key advantages of Pay-TV vs. OTT providers respectively?”

11%

11%

18%

49%

50%

51%

70%

51%

Video quality 82%

Customer service 89%

Content 89%

Price 30%

Recommendations of relevant content 49%

Availability on multiple devices 50%

User interface

OTT provider Pay-TV provider

Figure 35: User view on Pay TV vs. OTT provider’s strengths

Source: Linx-IE Market Research Corporation worldwide survey (including FR, DE and the UK from Europe)

Pure OTT services may cannibalize traditional TV in the long term

Growing online consumption versus broadcasters’ advertising revenues

We expect traditional linear TV to stay alive for at least for one generation. However, with the audience shifting towards online content, advertisers are finding traditional distribution platforms less attractive relative to online platforms, and this threatens today’s revenue streams of legacy TV channels.

Figure 36 shows 1) the continuous decline in TV and video advertising revenue over recent years and 2) the continuous growth of the proportion of online video net advertising revenue in EU5 countries, increasing to 5% of overall video net advertising revenue in 2013. Net advertising revenue differs from an advertiser’s gross expenditure as it does not include production cost.

The online platforms provide access to detailed consumption metrics. In addition, the ability of online advertising agencies to process the data and provide targeted ads attracts advertisers better.


36

95.0%

2011

17

96.3%

5.0%

2012

18 17

97.4%

2.6%

2013

3.7%

2010

18

98.1%

1.9%

2009

17

98.6%

1.4%

2008

19

99.4%

0.6%

2007

21

99.7%

0.3%

TV and online video net advertising revenue 2007–2013, EU5

Online TV


Figure 36: TV and online video net advertising revenue between 2007 and 2013

42%

31%

27%

Online players will get a growing part of the

advertisement revenues at the cost of

traditional players

Traditional players will attempt to move their business online to offset this advertisement change

No shift occurred in the revenues yet

Is a shift happening in the revenue stream for traditional actors (Pay-TV, FTA...) with the emergence of online video players?

Figure 37: Interview feedback – What implications will there be on revenue streams?


This shift to online provides an opportunity for pure OTTs to capture advertising revenues from traditional players. As can be seen in Figure 37, close to half of our interviewees expect the advertising revenue shift from TV to online video players to continue. At the same time, over one-quarter of interviewees also expect traditional media players to evolve towards online distribution and therefore capture a share of the online revenue stream.

Pure online video players have the scale and potential to move up the ladder and become the new pay-TV

Even though we have seen in section 3 that even a leading OTT such as Netflix should not have the financial means to acquire premium content to the same extent as a pay-TV group, over half of our interviewees predicted that pure OTT players would grow to a size at which they would replace traditional audiovisual players in the medium term. (See Figure 38) One-third of our panel did not believe in nonlinear players replacing traditional TV broadcasting.

OTT will replace a current actor in the mid term

Will OTTs be able to challenge other players in the market and become tier 1 or tier 2?

45% 6%

16%

Not clear

33%

They are already tier 1/2

Figure 38: Interview feedback – Can online video players be more than second-/third-tier offerings complementing premium pay-TV, or can they actually move up the ladder?

People will stay more interested in traditional

broadcast

What could be the relationship between OTTs and Pay-TV in the future?

Place both charts on Figure 37

67%

33%

Pay-TV doesn’t have to see OTTs as a threat

Pay-TV will suffer from OTTs



37

Which challenges do pure OTT players need to overcome before they can displace pay-TV?

A first challenge for OTT players consists of providing a seamless customer experience. Users paying for premium content also expect perfect quality of service. This aspect is particularly challenging when a large number of users watch the same content at the same time. By definition, OTTs are not mastering the QoS and need to develop technical solutions in partnership with ISPs or rely on external suppliers. We have seen IPTV providers encouraging their customers to plug their set-top boxes into their DTT antennas in order to ensure premium QoS.

Another obvious competitive challenge comes from pay-TV players themselves, first because they launch their own OTT services (see section 4), but also because of new players entering the pay-TV market – e.g. beIN Sports in France, though its future profitability is being challenged.

Last, pure OTT players with international footprints need to address local market needs. Users expect to find local content on their VoD services. This is why a player such as Netflix invests in a French series such as Marseille. Netflix’s investment in this series is expected to reach EUR6–8m for the first season of eight episodes.

Algorithms threaten the editor and aggregator roles

Along with our interviewees, we believe that the current shifts are putting pressure on the edition and aggregation functions of traditional players.

Indeed, the aim of the “edition” functions is traditionally to define an editorial line for a stream of content, and to produce or acquire content along this editorial line. Internet players are using the capabilities offered by the delivery of content over telecoms networks associated with their Big Data capabilities to virtualize the editor and aggregator functions and re-linearize the content. In other words, editing can be increasingly done by algorithms rather than by people.

Internet players are employing significant efforts to digitize these functions by collecting user preferences to influence the content, as well as proposing smart recommendation engines, claiming to adapt to each individual tastes, in order to provide a compelling experience. This role is becoming important given the chaos of content abundance.

Two examples of such recommendation engines are Netflix’s and Amazon’s:

�� Netflix

– Netflix has invested significant R&D efforts into the setup of its recommendation engine. The company even launched an open public contest to improve the algorithm, called the “Netflix Prize”. It ran from 2006 to 2009, with USD1m awarded in 2009 even though the winning algorithm was not fully implemented due to engineering costs.

– In 2012, Netflix stated that 75% of Netflix viewing was based on recommendations, and that the team was investigating how to include context in the recommendation engine. That would translate into the same user not having the same recommendations depending on his location, the device he is currently using and the time of day.

�� Amazon

– In 2010, online retailer Amazon launched its own production company, Amazon Studios, with a collaborative and consumer-centric approach in mind for selecting the content.

– Amazon started to invite creatives from all over the world to submit ideas for consideration. Several pilots have been produced, and users can watch the pilots and vote for the ones they would like to see produced for full series.

The future of TV channels

We can imagine a future in which the video stream edition is fully virtualized and handled by a recommendation engine or the user himself. The editor (or TV channel) would be producing/acquiring rights for different types of content with a wide range of choices, and then proposing personal streams to their users based on their preferences.


38

As illustrated in Figure 39, the stream can be produced along a specific editorial line and adapted by users, who can tailor them with specific on-demand programs. This does not mean the end of premium or mass-market content or of traditional players, but a more customized user experience in which players need to demonstrate why it is better to view TV content through them and not directly through the content owner’s OTT service or the TV channel’s on-demand service.

User 1

User 2

User 3

20:00 21:00 22:00 23:00 19:00 18:00 17:00

Major sport event

Major sport event

Reality show C

Series A

Major sport event

Reality show C

8pm news

8pm news

Music show

Blockbuster movie on demand

Series B

Major life event gathering audience at

a specific time

Near-live events watched at

different times

On-demand programs

Figure 39: Potential viewer experience of future TV based on dynamically customized linear content

Source: Arthur D. Little

These changes will:

�� Provide Internet players with the opportunity to further enter the ecosystem, with differentiated offers in terms of user experience and business models;

�� Force traditional media players to adapt and engage in digital transition with impact on their value propositions and cost structures;

�� Filter the content landscape to provide only the most attractive content, as there will be less gaps to fill with low-cost content at remote times or on less-viewed channels. The number of long-tail channels in large pay-TV bouquets will significantly decrease.

Who will capture advertising revenues?

A key element of the business model is that the owner of the editing function is the party able to incorporate advertising into the video stream, and thereby the one controlling the advertising revenue. This is why the integrity of the signal is essential for traditional players.

Many traditional players fear that the growing role of Google’s operating system, Android, in the ecosystem (in set-top boxes, for example) would enable the company to insert advertising into, before or around the video streams and therefore capture a growing part of the advertising revenue. So far, regulatory decisions have guaranteed signal integrity for channels.

TV manufacturers also have the capacity to enter this market. As an example, users in Australia have reported seeing advertising inserted into their personal video streams by their Samsung Smart TV sets. Even if this event was reported as an issue by Samsung and promptly resolved, it shows that equipment manufacturers and operating system developers can propose to directly deliver advertising to the consumers, bypassing the content editor or aggregator.


39

The answer of traditional TV players

To address the OTT threat, traditional TV players have relied on their differentiating assets in the media ecosystem to renew their service offerings.

Key assets of traditional TV players

Traditional TV players have a number of key assets they can leverage:

�� First, they usually benefit from established market presence and strong, well-recognized brands.

�� They have built their positions over the years by developing specific editorial lines and strong relationships with content rights owners.

�� They also master sets of key skills in terms of programming and technical control over the quality of services delivered – even over third-party networks.

�� They have contracted user bases with regular relationships in terms of billing, etc.

�� As a consequence, traditional TV players also have strong emotional relationships with their audiences and have gained their trust when it comes to the quality of content broadcasted.

�� Additionally, TV players have deep knowledge of their customer bases and significant behavior data that they can leverage at their disposal.

Some traditional TV players have launched their own OTT services

As we see consolidation happening on a pan-European scale, with a number of large cable operators and pay-TV providers driving mergers and acquisitions to achieve scale – Liberty Global and BSkyB being the two main examples – some traditional pay-TV players actively enter the OTT world by launching their own VoD services. Broadcasters also increasingly distribute their content online in OTT mode, providing access to their linear content live and in catch-up mode.

Sky Germany

2014

+11.6%

3,529

2013

3,908

2012

3,212

2011

2,857

2010

2,521

In thousands

2013

Sky Pay-TV subscribers 2010–2014, Germany

In millions

Sky Go sessions 2010–2014, Germany

Q1 2014/15 Q1 2012/13

26.0

1.7

Q1 2011/12

18.1

0.0

8.2

Q1 2010/11 Q1 2013/14

2006 2011

SVoD Included in Sky Online or from

€ 3.99.-/month individually “Tier-2” movies, series and

documentaries

PVR & Push-VoD service Access to 400 premium titles Record, pause and rewind live

TV

2014

SVoD Premium movies and series From € 9.99.- to € 19.99.-/

month 1-day access to all sports

channels for € 19.99.-

1)

Free linear OTT service that allows Sky’s Pay-TV subscribers to stream content on PC/Mac, smartphones and tablets, and via game consoles

CAGR

Source: Company landing page, Arthur D. Little analysis, note: 1) Now TV is Sky Online’s equivalent in the UK

Figure 40: Sky evolution towards OTT services


40

For instance, Sky Germany has progressively developed its OTT strategy. First, Sky launched Sky Go in 2011. This service enables Sky’s traditional pay-TV customers to watch the linear channels online and gives them access to a catch-up TV service.

As can be seen in Figure 40, Sky managed to continuously grow its customer base over this period and Sky Go rapidly took off. In 2013 and 2014, Sky then launched two OTT services. The first one, called SNAP, gives access to a VoD library of movies, series and kids’ programs with very aggressive pricing at EUR3.99/month. The second one was launched in 2014 with premium positioning and includes linear content as well as VoD.

In France, Canal+ has adopted a similar strategy and proposes multiple OTT services in addition to its pay-TV offer. MyCanal provides pay-TV users with OTT access to all channels and a catch-up service. Canal Play started as a pay-per-view video service but, since 2011, it also proposes a subscription VoD service with a recommendation engine. Figure 41 shows that despite those innovations, Canal+ has had difficulty maintaining its subscriber base over the last few years.

Canal+ France’s offer

2013

Canal+ subscriptions1) 2009–2014, Mainland France

CanalPlay subscribers 2012–2014, France

599

335

156

2014 2013 2012

2005 2011

Free linear OTT service for Canal+ and CanalSat subscribers Catch-up function of the last eight hours of programming; stop

and rewind functions SVoD with a library size of about 7,300 available Recommendation engine From EUR 15.90.- 3) to 29.90.-4) (for Pay-TV subscription)

TVoD Download to rent & download to

own 8,500-title library From EUR 1.99.- to 5.99.- for rent

and to 13.99.- to buy a title

SVoD 10,700-title library (40% French programs) 500 new programs each month EUR 7.99.- to 9.99.- 2)

9,000

9,500

10,000

0

2011

9,563 9,199

9,569 9,720

2013 2010 2012

8,864

2009 2014

-1.5%

9,760

CAGR In thousands In thousands

Source: Company landing page, note: 1) incl. Canal+ and CanalSat, 2) incl./excl. available. on TV, 3) € 24.90.- after 6 months, 4) € 79.80.-/month after 6 months

Figure 41: Canal+ evolution towards OTT services

Finally, in the US, HBO has entered OTT distribution in a similar progressive way. HBO is a premium cable content provider, and so far had been distributed as an add-on to pay-TV packages with a revenue share model between HBO and the cable company, which was also in charge of the customer relationship.

In 2010, HBO launched HBO Go to provide multi-device OTT access to its existing customer base. More recently, HBO announced the launch of a stand-alone Internet service. Content is exclusively available on Apple devices at launch, but rapidly available on other platforms as well. This illustrates HBO’s strategy of being distributed on all platforms: direct broadcast, via distributors (cable or telecom operators) and directly in OTT, although revenue share with OTTs is rumored to be around 10–15%, – significantly less than with cable channels (~50%).


41

HBO’s offer USA and Nordics

In millions

April 2015

HBO & Cinemax2) subscriptions 2010–2014, USA

2010 Dec 2012

Free linear OTT service for HBO subscribers that allows them to access video content from their pay-TV subscriptions via various platforms and devices

Announced: Stand-alone SVoD Available via Apple’s iTunes store Billed by Apple USD 14.99.-/month

0

40

44

48

42

46

39

2014

46

2013

43 +4.1%

41

2011

40

2010 2012

CAGR

Linear TV channel & SVoD New HBO content available within hours after

first appearance in the USA EUR 9.95.- to 14.95.-/month1)

JV with Parsifal International (TV broadcaster)

HBO Nordic users 2014, Nordics

HBO Go usage 2014, USA

9

30

Number of subscribers to linear HBO Pay-TV and HBO Go users in 2014 in millions

A study from May 2014 reports that:

120,000 people have access to HBO Nordic and

17,000 people use it daily

Compared to Netflix, which has 1.3 million people with access and 410,000 daily users

Source: Company landing page, mms.se, note: 1) one-year engagement, 2) disclosed together as subsidiaries of Time Warner Inc.

Figure 42: HBO evolution towards OTT services

Free-to-air leaders should remain attractive to advertisers

Major free-to-air television channels should remain attractive to advertisers in the medium term. Free-to-air is the only mass-market platform for advertisers (especially consumer goods), and large channels should be able to continue attracting high advertising prices.

However, niche channels will be attacked by on-demand players. The trend of smaller channels shutting down (see section 1) is therefore likely to be a long-lasting one.

Digitization brings innovations in the advertising market

In the UK, Sky has introduced the AdSmart service. Instead of broadcasting the same advertisements to all users, different ones can be shown to different households watching the same program.

The set-top box inserts targeted advertisements into the linear content on Sky channels, depending on a household’s profile. Households are individually targeted based on segmentation derived from a combination of Sky’s own customer data and information from consumer profiler experts. The effect is increased relevance of advertisements due to household-specific attributes, which allows Sky to extract a higher CPM from advertisers on its platform.

On the other hand, some small advertisers can use the service to target only small numbers of people. Geographic targeting based on postcode areas has opened up a new revenue stream for Sky by making it accessible for the first time to niche brands, small & medium-sized enterprises (SMEs) and location-specific advertisers. As a result, 77% of the advertisers that have used Sky AdSmart so far had not previously advertised on TV or with Sky.


42

Pay-TV operators’ dilemma

Pay-TV players face increasing competitive pressure from pure OTTs, but it is their aggregator role that is being attacked. Cautious about the cannibalization risk inherent to their launch of pure OTT S-VoD services, they have entered the OTT ecosystem progressively, leveraging their established customer relationships. Doing so, they have managed to maintain their ability to charge monthly for premium content.

However, in order to protect the traditional revenue stream and progressively grow the OTT revenue stream, pay-TV players need to continuously propose premium content with the right balance of catalog availability on the different distribution channels.

They also need to permanently stay on top of innovation by regularly introducing new features such as UHD content or second screen, especially on OTT services where direct competition is very aggressive. While doing so, pay-TV players should nevertheless capitalize on their ability to editorialize content, especially for the passive viewer and to control quality of service.

As a consequence, we expect costs to increase for traditional pay-TV players while revenues are put under pressure – and we anticipate that margins will drop. These players may be forced to specialize in narrower content types to optimize resource allocation, and thereby strengthen their brand power and ability to differentiate.

Online video is an innovative and cost-effective distribution platform for traditional pay-TV operators as well, and they should develop on this front as high-speed Internet development is fostering online usage.


43

The evolution of the TV market will, in our view, depend on two main factors:

�� First, the level of virtualization in the editor and aggregator functions, versus the traditional programming function based on the manual analysis of the audience;

�� Second, the share of the editor and aggregator market that Internet players will capture. This will depend on the speed of change in behavior, Internet players’ ability to capture premium content and the brand power and adaptability of traditional players.

A strong parameter influencing the market’s evolution will be the strength of the local content in terms of its availability and the appetency of users for it in each country.

We therefore see three scenarios for the evolution of the competitive landscape. In scenario 1, local and premium content continues to “win”, enabling a leading pay-TV operator to keep its leadership versus OTTs, and limiting Internet players to a long tail of content with relatively low value. In scenario 2, a few global OTTs manage to reach the scale necessary to compete with pay-TV on premium content. Finally, in scenario 3, global OTTs take over not only pay-TV but the whole TV market, attracting massive audience and advertising revenues.

Scenario 1: Local and premium content remains the differentiator for traditional audiovisual players

In this scenario, traditional national premium audiovisual players (e.g. large free-to-air channels; pay-TV channels and bouquets) broadly maintain their leading market position. They manage to secure premium and local content by maintaining high content purchase prices, and monetize this content through relatively high ARPU (in the EUR30–40/month range) or generating large advertising revenue. This would be feasible in the countries where local content is highly valued – i.e. in markets that do not rely exclusively on international productions.

In such a scenario, traditional players would succeed in transforming their models around the editor/aggregator function – i.e. they would evolve towards the digital model described previously by fully integrating the premium and/or live content in dynamically customized video streams with on-demand/recommended nonlinear programs.

Besides these players, Internet players would develop a market to provide additional on-demand programs based on 1) a long tail of programs for an attractive price and on 2) specific premium content in a limited manner (attractive series or blockbuster movies, but no live sports, talk shows, reality shows, etc.) and with more affordable prices (e.g. c.EUR10/month).

The consequence of this scenario on the market structure would be a pay-TV market with only one remaining player. Indeed, this is the only solution to amortize expensive content on a sufficiently large subscriber base with retail prices slightly below the current levels (i.e. generating ARPU at around EUR30–40/month).

A reduction in the resources for free-to-air channels and pay-TV bouquets associated with a potential increase in the cost of premium content should ultimately lead to a reduction in the number of free-to-air channels or long-tail channels in the pay-TV bouquets.

Finally, two or three Internet-based players would consolidate the most serious offers/catalogs at around EUR10/month.

Scenario 2: Global pure OTT players reach the scale to acquire sufficient premium content to compete with traditional pay-TV bouquets and large free-to-air channels

In this scenario, the Internet challengers would manage to acquire and/or produce sufficient premium content to build an offer that directly competes and cannibalizes the offers of the traditional Pay-TV bouquets and leading free-to-air channels.

5. Three possible market scenarios


44

As demonstrated in section 3, the current pricing levels would be hardly sustainable in the long term, given the cost of content of these players. We would therefore expect an increase in the price of services provided by these players, or that they would incorporate a significant share of advertising, which would enable them to generate ARPU of EUR15–20/month.

Traditional pay-TV bouquets would then need to reduce the premiums paid by their subscribers, given the limited differentiation in the offers, and we would expect the prices in the bouquets to decrease significantly, towards a level similar to that of the Internet players.

The number of long-tail channels would significantly decrease in these bouquets, and the bouquets would need to be more specialized to afford the lower prices and optimize resource allocation. A strategy for them would be to focus and be the best in their niches.

In this scenario, free-to-air channels would suffer the most from the decrease in their audiences and the loss of premium content – and we would expect a large consolidation of the players. Some of them would have to refocus their activity on content creation and sell distribution rights to larger or global players.

…No possible option

…Current scenario = Scenario 1 …Scenario 2

Price (EUR/month)

Quality (Amount of local and premium content)

Free ~10 ~30–40

Scenario 2

Traditional Pay-TV

FTA

Figure 43: Scenario 2 illustration


Scenario 3: Global pure OTT players reach the scale to acquire premium content and attract both audience and advertisers

In this scenario, pure OTT players progressively manage to acquire or produce sufficient premium and diverse content to become relevant substitutes to traditional TV channels. Like in scenario 2, this would potentially imply a price increase in the long run.

In the meantime, traditional pay-TV players would not manage to execute their digital transformation, and their content could not be accessed on the main distribution platforms (i.e. IPTV set-top boxes or mobile OS), while OTT players would approach those distribution channels to benefit from privileged access for end users.

As a result, the passive users would turn to the OTT service by default, and hence, advertisers’ interest would shift to OTT players.

Traditional pay-TV players would have to decrease their investments in content and lose attractiveness. They would eventually sell their content to the most successful OTT platforms in order to survive, and turn into content producers exclusively.


45

A much-talked-about consequence of the growth in online video is the massive increase in data traffic carried over the Internet, and hence over telcos’ networks. Ensuring that the quality of the viewing experience remains up to standards requires players to continuously upgrade their equipment. Key investment areas are the core networks, the interconnection between different players, and content delivery servers.

Local-access operators (telcos, cable operators) are very vocal about the need for content providers (e.g. Google – owner of YouTube – or Netflix) to contribute financially to the required investment. We expect continued jockeying on this subject – which is tightly linked to regulation (see Annex), but the situation as already evolved significantly. Indeed, we show that pure OTT providers are also investing a lot in their own delivery infrastructures (worldwide CDNs), and also that, in a growing number of cases, in the US as well as Europe, they have struck financial agreements with local-access operators.

OTT video is driving massive traffic growth

As a consequence of the development of over-the-top TV usage, the video traffic carried on telecom networks across the world has been growing rapidly (+25% in 2014, according to Cisco), and similar further strong growth is expected over the coming years. Video usage already represents more than half of the total traffic carried over the Internet globally – and this is due to become an even larger share in the years to come.

1,554

2014 2015 2017

10,622

1,960

7,026

8,850

1,655

5,578

2013

7,419

1,406

4,459

1,618

3,202

15,015

1,616 1,636 1,634

2016

12,969

2,356

8,979

2018

16,071

1,630

2,812

11,628

19,835

Web, email and data Internet video File sharing

Consumer Internet traffic by subsegment 2013–2018, Europe

CAGR

+27.5%

+17.9%

+0.8%

1)

Figure 44: Evolution of share of OTT video in traffic

Source: Cisco Visual Networking Index, note: 1) Difference between total sector and sum of subsegments is due to exclusion of online gaming from subsegments. Online gaming will be 27 petabytes in 2018; the 2013–2018 CAGR is projected to be 32.3%

In petabytes

6. Growing strains on networks


46

Telecom networks sometimes show their technical limits on video distribution

Telecoms data networks forming the basis of Internet networks had historically been designed to deliver traffic on a best-effort basis (with the exception of cable TV networks). However, usage has evolved from a data transfer platform for applications such as email, web browsing and file transfer to a media delivery platform.

This implies growing strain on networks – and hence the need to increase the capacity and quality of networks along two axes:

�� Delivery of larger amounts of information. Video delivery becomes more data-hungry as the quality moves to higher definition (to HD and then to Ultra-HD).

�� Evolution from download mode used for VoD or peer-to-peer to streaming mode, requiring:

– near-real-time capabilities, with limited buffers for applications such as Netflix and YouTube;

– full real-time streaming mode for the delivery of live sporting events;

– even two live-streaming feeds for video conferencing services such as Skype and Google Hangouts.

Already a number of large events have led network failures, illustrating the strain on telecom networks generated by large, simultaneous video-streaming demand – see Figure 45.

May 2014, UK: Now TV outage during Premier League final day

September 2014, global: Apple’s iPhone 6 release event stream went down

September 2014, France: Netflix France collapsed on its first Sunday evening

June 2014, UK: ITV Player crashes during Football World Cup opener

Autumn 2014, Germany: Repeated problems with Sky Go streaming during German Bundesliga

June 2014, USA: Watch ESPN collapses during Football World Cup game, USA vs. Germany

April 2015, USA: Sling TV’s stream of March Madness basketball semi-finals stopped working

Figure 45: Examples of network failures for large events

August 2014, UK: STV player stopped working during Scottish independence debate


Access is not the only bottleneck

We asked interviewees which parts of the networks were the main constraints for quality delivery of video streams. Half of the respondents considered that the main network capacity issues lay in the core network, while only 22% saw the access bandwidth as the main issue for the delivery of video streams. This is logical as the access part is dedicated to a specific user (or group of users), while core networks are where the different requests from the different users converge and must be taken care of.


47

28% Access bandwidth

42% Core network capacity

8%

9% CDNs

13%

No bottleneck

Interconnection capacity with content provider

Where, in your opinion, are the bottlenecks regarding Network capacity?

Figure 46: Interview feedback – Where, in your opinion, are the bottlenecks regarding network capacity?


OTT services have started building their own delivery platforms…

Historically, companies such as Akamai and Level 3 have been developing “content delivery networks” – i.e. CDNs around the world to improve the delivery of content over telecom networks. This is done by storing the content on servers that are as close to users as possible, thereby minimizing the use of backbone, core network and interconnection bandwidth.

In the recent years, the largest content providers and internet service providers have been setting the pace and determining the nature of IP interconnection innovation through vertical integration. Content providers seek end-user proximity and are increasingly investing in proprietary content delivery networks or relying on third-party CDNs. ISPs invest in network-based content delivery platforms (“deep caching”) for internal purposes and as services to third-party content and application providers.

Google’s and Netflix’s network equipment in Telco data centers

END-USERs

Grow scale Defend profitability

and investment payback

Secure quality of service for own applications

Search for economies of scale

Reach/keep critical mass

Attract new members

Diversify revenues Grow scale

Defend profitability Look for new

revenue streams and monetize eyeballs

Partnering with access providers

IP transit providers

Content distribution providers (CDNs)

Terminating ISPs Interconnection exchanges (IX)

Content & application providers

Large CAPs seek for user proximity

own infrastructure

own platforms

own infrastructure

Partnering with access providers

own platforms

own platforms

own platforms

Strategic moves

Drivers

Figure 47: Trend in IP Interconnection value chain

Source: Arthur D. Little analysis


48

As a result, content providers and internet service providers increasingly interconnect directly – see Figure 47 – “disintermediating” the pure Internet connectivity providers to some extent. The main motivation behind such moves is to improve control over the quality of content delivery.

For example, Netflix and Google promote their ability to support telecom operators in bringing the content as close to the customer as needed, thanks to their own deep-caching platforms:

�� Netflix is offering telecom operators access to its “open connect” CDN for free, bearing the possible transit costs from IP interconnection point to the CDN.

�� Google is proposing a similar offer called the “Google Global Cache” (GGC). Google provides the ISP servers that they install in their facilities and attach to their networks, in order to store content providers’ most popular content anywhere in the operators’ networks – maximizing savings in backbone usage and transit bandwidth. Typically, 70–90% of cacheable traffic can be served from these CDNs. Google is building a global core network and infrastructure to carry its content and connect the GGCs. It is composed of 13 mega-data centers and 70+ edge points of presence. Google has built two global backbones: one Internet facing (for user traffic), and one for data center traffic (internal traffic between the data centers).

Figure 48: Google’s global backbone

Source: Google

Access: Net neutrality

Peering policy: Settlement free Paid transit (when exchange

of traffic is out of balance) Congestion when “abused”

by CDNs

Netflix’s average prime-time bit rate through Comcast April 2013–May 2014, USA

2.7

2.6

2.5

2.4

2.3

2.2

2.1

2.0

1.9

1.8

1.7

1.6

2.8

0.0

May Apr

2.8

Mar

2.5

Feb

1.5

Dec Nov Oct

2.1

Jan Aug Jul Jun May Apr Sep 2013 2014

Deal: Netflix paying Comcast for direct traffic access

In Mbps

Netflix’s content delivery stream

Paying third-party CDNs for content delivery to ISPs

Scale: Cut out the middle-men (third-party CDNs)

Netflix

Third-party CDNs

ISPs

ISPs that collaborate with

Netflix Open Connect for free

ISPs that charge Netflix for direct

access

Netflix ISP speed index: increase pressure on ISPs to collaborate

Con-sumer

Congestion between ports of Cogent (3rd party CDN) and Comcast

No conflicts in: settlement-free

peering Paid traffic

1 2

3

Figure 49: Trend in IP Interconnection value chain

Source: Netflix Speed Index, Arthur D. Little/Exane BNP Paribas


49

…and/or paying access networks for content delivery

A number of ISPs (including Google Fiber, RCN and Cablevision) signed up for Netflix’s Open Connect, Comcast and Verizon refused to collaborate. The disagreement with Comcast lasted for almost a year between 2013 and 2014, and went over three major steps as illustrated in Figure 49.

�� 1 – Initially, traffic was exchanged between both companies in a settlement-free peering mode.

�� 2 – Netflix purchased transit from a third-party CDN provider (Cogent) that had a settlement-free peering arrangement with the network provider Comcast. After Cogent began carrying Netflix, Comcast did not increase capacity at its interconnection ports with Cogent. Congestion on routes into Comcast’s network increased steadily, to a level at which it affected Netflix’s and Comcast’s customer experiences significantly (reducing the video quality from HD to near-VHS).

�� 3 – Comcast suggested that Netflix return to using CDNs, which Comcast could charge access fees to, and those fees would then be passed on to Netflix, or use a Tier 1 network that charged its own access fees. The company eventually closed a deal. Netflix’s servers are installed in third-party data centers, connected to Comcast’s network in the same building via a cross-connect.

Comcast has been the first large terminating access network to successfully implement a “congest transit pipes” peering strategy to extract direct payment from Netflix, but it is not the only one to do so. Since agreeing to pay Comcast, Netflix also has agreed to pay Time Warner Cable, AT&T and Verizon for interconnection. Details of the agreement are not publicly known, despite the efforts of the US Federal Communications Commission (FCC).


50

The balance between risks and opportunities associated with the rise of online video appears much more favorable for telecom operators than for traditional TV players. Indeed, telcos have much smaller vested interests than traditional TV operators, and their network assets and advanced positions in the digital revolution are key assets that they can – and should – monetize.

First, all telcos can create value through an “enabler” role, monetizing their network assets – i.e. turning the growing strain on networks into an opportunity. Regardless of the market scenario for the development of OTT and its impact on traditional TV players, telcos should benefit from the rise in online video usage in two core ways:

�� Charging customers for faster speeds and/or data traffic. There is demand for this;

�� Monetizing their network assets with global OTTs – basically charging them for a quality delivery.

In addition, in a market scenario in which pay-TV players and smaller OTTs succeed (i.e. closer to our scenario 1), telcos have the opportunity to provide additional services beyond the pure network connectivity, becoming the partner of choice in their migration to the new online video world. This is a value-added wholesale model.

Second, the revolution in the TV market can also be an opportunity for some telcos to generate revenues, not only as enablers, but also as direct players in online video and/or pay-TV. In our view, this is not for everyone. Our analysis shows that the opportunity for a telecom operator depends on two main factors:

�� The operator’s scale, local and global;

�� The market context, including: who the established pay-TV operators are, how developed the market is, how successful the OTTs will be, the customers’ appetite for local versus global content and the cost of content.

Overall, opportunities for Telcos to actually create value by investing in content and/or their own pay-TV platforms will be the exception rather than the rule. Only the largest operators in specific market contexts can actually create value in such moves. For the majority, the preferred route should, in our view, be to partner with OTTs – sharing the risk and the upside with players that will have greater scale, both locally and globally.

The role of telcos: access and beyond

With the advent of broadband, most telecom operators have moved beyond the provision of telephony and Internet access. In fixed-line, their core business is now to provide triple-play services, including TV.

In recent years, Telcos have actively participated in a number of innovations regarding the delivery of audio-visual content:

�� Rolling out high-speed data networks (xDSL, Fiber being, 4G), which enable the transport of video files and video streaming;

�� Delivering managed IPTV services and video distribution platforms;

�� Developing triple-play services, including boxes and their user interfaces;

�� Building VoD platforms and pay-TV bouquets and, in some cases, acquiring or producing content.

Telcos are therefore in direct competition with cable operators, as well as satellite-based pay-TV providers.

Looking ahead, telcos do not see the advent of nonlinear TV and the rise of OTT players with the same eyes as traditional pay-TV providers, for two main reasons, in our view:

7. Opportunities for telcos: not a one-size-fits-all


51

�� First, telcos generally have much less to lose in the evolution of the TV market, because their existing pay-TV revenue streams are much smaller than those of cable of DTH operators. For telcos, pay-TV is an add-on that helps to cement the customer relationship (triple-play bundles);

�� Second, Telcos own the broadband networks, in particular the access networks, which are at the heart of the growth of online video, so they are theoretically well placed to leverage this key asset.

From competition to cooperation

According to our interviews, relationships between players in the ecosystem can be analyzed following three different phases.

Figure 50: Three steps in the relationships

Competition Coopetition Cooperation

1 2 3


The first step, observed in the early 2000s, has been more or less aggressive competition between different types of players in the value chain. For example:

�� Telecom operators have tried to compete head-to-head with pay-TV operators by acquiring premium content and even putting together and proposing their own bouquets of TV channels.

�� OTTs were proposing their services with strong intentions to cannibalize telecom operators’ services and no apparent consideration for the effects on the networks and peer-to-peer services, which supported piracy and destroyed value among content rights owners.

In a second step, we currently note a smoothing in the relationships between different parties, which realize that they need the other players in the value chain:

�� Content owners and media companies consider telecom operators interesting distributors.

�� Over-the-top players and telcos are collaborating more and more to improve quality of delivery.

�� Content owners are benefiting from increasing competition in the downstream parts of the value chain.

The third step, potentially the end-game situation, is likely to be sharing the value between the different players. Ultimately, only a minority of our interviewees saw one of the players emerging as winner in the game. A large share of them (39%) consider fair cooperation between the players to be key.

Who will be the end winner among telcos, content owners and OTTs?

OTTs

19%

6% Telcos

8%

Rights owners/ content providers

11%

New business models will emerge

39% Cooperation is key

17%

Doesn’t say

Figure 51: Interview feedback – Who will be the end winner among telcos, content owners and OTTs?



52

Telcos have assets to monetize

More than 65% of the interviewees believed that telcos would succeed in attracting additional revenues from their relationships with the other stakeholders in the ecosystem. However, 40% of them estimated that these additional revenues would be limited.

Will the telcos succeed in attracting additional revenue streams from their relations with content owners and OTTs ? If yes, how?

17% No

17% Maybe

28% Yes, a little

38%

Yes

10%

13%

17% 33% Traffic monetization

Wholesale network supply

Revenue sharing

22%

Other/not provided

Advertising 4%

Direct content sale

If yes, how?

Figure 52: Interview feedback – What is, in your view, the dynamic between the different players among telecom operators, content owners and OTTs … and the end-game scenario?


When looking at the sources of additional revenue that could be extracted, the larger share of respondents still estimated that traffic monetization would be successful. However, we believe that in most countries, the competitive intensity will prevent operators from extracting value from the tiered pricing offers that have been implemented.

Revenue sharing comes next, and only 22% of respondents illustrated the difficulty of implementing fruitful partnerships in the ecosystem. The majority of our interviews foresaw telcos’ revenues benefiting mainly from the launch of new services. Consolidation, which was the main factor mentioned in our previous edition, only attracted 9% this year.

What are telcos’ key assets?

In their relationships with other players in the ecosystem, telecom operators have a number of key assets that they can monetize. According to our interviews, their networks and proximity to clients are the two main aspects on which telecoms operators can capitalize to extract value from media content distribution.

Which key assets/key success factors can telecom operators leverage?

9%

14% 19%

23%

Local presence/distribution

18%

Network quality

10%

5%

Security & confidentiality

Invoicing relationship/brand Large customer

base

Customer knowledge/

care/QoS

Network capacity (Spectrum)

Network related: 28% Customer related: 65%

Figure 53: Interview feedback – What are the key assets and success factors of telecom operators?



53

Regarding the network- and technology-related assets, the key monetization opportunities for telecom operators include their ability to:

�� Provide broadcast-grade networks – including building the infrastructure (potentially with infrastructure partners/owners) and constantly optimizing their networks. Software defined networks (SDNs) can help;

�� Enable a unified user experience throughout different types of devices;

�� Influence the quality of the customer experience – for instance, the program zapping times.

Regarding the customer-related assets, the key elements that operators can leverage are, in our view:

�� The sheer size of their customer bases, which enables them to act as distributors for content partners;

�� The portal and/or box: telcos can offer content providers visibility on the box interface;

�� Marketing tools – e.g. ability to call or email clients;

�� Billing capabilities, which are superior to credit cards (e.g. with no expiration date);

�� Their ability to keep personal information secure, especially in a context where a number of other players are using customers’ personal information and monetizing it;

�� Their knowledge of customers, which enables them to provide elements for a recommendation engine or targeted advertising;

�� Potential ability to develop their own recommendation engines and lower the barrier for users to find their desired content, or provide content provider with data to do so;

�� The opportunity to send feedback to content owners to adapt their offers according to users’ tastes and selections.

A number of opportunities for all telcos

We see the following strategic opportunities for telecom operators with regard to their relationships with media and OTTs.

Monetize data traffic

Content consumption and, in particular, video content, is an extraordinary traffic generator. We believe that telecom operators are in a position to extract value out of this traffic growth.

The majority of operators have changed their price structures from unlimited packages to tiered pricing with definite data caps. Users increasingly reach their caps, and if the opportunity is given to them to pay a little extra to increase their data allowances (either temporarily or by upgrading to a larger data plan), we increasingly expect them to do so.

In order to achieve this, operators should:

�� Make sure that their tiered pricing is in place with appropriate thresholds given typical usage and competition price plans in the market;

�� Provide users with opportunities to increase their data allowance. This should be easy, instantaneous and for a limited amount in order to stimulate impulsive usage. A user should not pay more than a few euros to see the end of a movie.

These points are relevant whatever the “market scenario” happens to be (see section 5), and both for:

�� Mobile operators. Mobile offers are generally tiered – i.e. 10GB of data cost more than 3GB of data;

�� Fixed-line operators. Superfast broadband should be priced at a premium to traditional broadband, and we believe customers’ appetite for faster speeds is consistent with such a premium.


54

Monetize the network quality, especially with large global OTTs

OTTs are in demand for quality delivery of their content, hence of quality networks. The Netflix ISP speed index illustrates the OTT’s interest in this.

Telecom operators should find a way to provide enhanced services for certain applications in a non-discriminatory way. This would enable them to capture value from the improved quality without obstructing the net neutrality principle. To some extent, the IPTV service is already providing this, forming a separate virtual network-carrying video with a higher level of quality of service.

With large international players such as Apple, Google, Amazon and Facebook, there will always be a factor of size and footprint, even if the telecom operator is strong in its country. Large OTTs will not need more than network services from the telecom operators, and this may reduce to only the local loop part in extreme cases. However, these players are dependent on the telecoms operators to provide high-quality access for a premium user experience, and telecom operators have a clear opportunity here.

Such opportunity for telcos would be larger in a scenario with very successful growth in OTT players, but we expect it to be significant in all three market scenarios described in section 5.

Provide additional services to smaller OTTs and traditional pay-TV players

Traditional players in the editor and aggregator roles are in the middle of the telecom media evolution. To compete with large OTT providers, such players have to complete their digital revolutions in terms of their offerings and processes. This is the case for pay-TV bouquets and free-to-air channels. However, small to medium-sized OTTs are in a similar position, in needing to compete with large OTTs and lacking the scale to “do it themselves”.

Traditional players in the editor and aggregator roles are in the middle of the telecom media evolution. To compete with large OTT providers, such players have to complete their digital revolutions in terms of their offerings and processes. This is the case for pay-TV bouquets and free-to-air channels. However, small to medium-sized OTTs are in a similar position, in needing to compete with large OTTs and lacking the scale to “do it themselves”.

We believe that telecom operators should become the partners of choice for such players, providing them with key elements of the value chain, or with processes that they have not mastered or cannot develop internally due to lack of scale.

In other words, telecom operators should take the role of digital enablers of traditional pay-TV bouquets. Relationships already exist with the distribution of the bouquets on managed IPTV platforms. We believe that further cooperation would be mutually beneficial, enabling pay-TV bouquets to perform their digital transitions and not to be disintermediated by large OTT players.

In this respect, the services that telecom operators can offer include:

�� The distribution and marketing of services through their portals, shops and direct customer relationships;

�� The aggregation of services by proposing portals or set-top boxes as a gateway;

�� Proposing the platform for the TV of the future: dynamically customized linear content;

�� The billing of services via their billing systems, which invoice millions of clients every month, or via pay-as-you-go platforms;

�� Securely collecting and providing anonymized user data and information for marketing purposes in order to improve the recommendation engines or provide the information for targeted advertising;

�� Security services to authenticate users and transactions and secure the user data and information;

�� Ensuring the quality of service for a good multimedia user experience.


55

A direct role in content and TV? Depending on scale and the market scenario

For Telcos, developing their own role in content and/or pay-TV services is a challenging proposition. Indeed, the investment in content needs to be amortized on a sufficient scale, which is difficult because telecom operators can effectively address only their subscriber bases with the service. In addition, the context is not favorable, since content costs are on the rise and we expect this trend to continue.

Still, a number of telcos have rolled out different types of strategies to try and capitalize on the growing online content distribution market. In the following pages we give different examples of these strategies – which involve different levels of capital intensity, i.e. from a wholesale/partnership model to a “build” or “buy” model.

We believe that there is no one-size-fits-all strategy in this respect, and different approaches are adapted to different cases, depending notably on:

�� The types of players, e.g. their market share and scale (locally and globally) and where they come from (e.g. cable versus telcos);

�� The context, e.g. who are their main competitors, how advanced is pay-TV penetration, how successful are global OTTs in the market (see scenarios in section 5) and how expensive is premium content in their particular market?

Figure 54: Strategies envisaged by telecom players on the distribution of content

1A: Regional player

1B: Global brand

2A: Alone

2B: With partner

3A: Value-chain

play

3B: Consolidation

play

3C: Capabilities play

3D: Scale play

Resell 1 Build 2 Buy 3

Use the existing customer base and resell a strong brand in OTT

Benefit from OTT through a revenue-share or commission-based business model

Limited to no investment required, no extra capabilities

Build a regional OTT platform either from scratch or in a JV with a leading content provider: of regional importance or of global importance

Engage in M&A activity with a view to: take control of key positions in the value chain acquire capabilities (e.g. platform, content licenses, talent,

market access) that would otherwise need to be built from scratch

acquire scale actively shape the ecosystem in the region by reducing

fragmentation

Changed (larger)

Figure 54: Strategies envisaged by telecom players on the distribution of content


Telcos and cable operators acquiring content – expensive with uncertain returns

A small number of telcos have chosen to acquire content – the most prominent one currently being BT in the UK.

BT’s content investments are massive, including, most recently, the rights to distribute Premier League football games in the UK for three more years for GBP320m per season (compared with GBP246m per season over the past three years). The total amount spent on sports content rights for 2016 will reach c.GBP800m, including the football games and production of content and other rights.

The group’s “BT Sport” TV offering is free for BT broadband customers, with three channels showing live top-tier content from:

�� Premier League Football

�� Champions League Football

�� Aviva Premiership Rugby

�� NBA, MotoGP, UFC, etc.


56

BT’s strategy is to protect its broadband business against pay-TV leader BSkyB, which is developing into triple-play, and cable operator Virgin Media, and break Sky’s domination over exclusive sports content.

Non-BT broadband customers on some networks can subscribe to BT’s TV offer and access this content for GBP12/month for standard definition or GBP15/month for HD. (BT has c.3m direct Sport customers.)

Although it is difficult to isolate the direct effect of this specific content rights acquisition strategy, BT’s number of subscribers and market share have steadily increased over the past few years, with a regular increase in the number of broadband subscribers of more than 9% per year since 2010.

However, our analysis shows that the net financial benefit for BT of this aggressive content acquisition is negative, as the cumulative positive financial effects are so far not offsetting the total investment into the content.

In GBP millions per year

Cost and revenue breakdown for BT Sport 2016e

231

6450

4060

45

811

321

Cash cost of BT Sport

Adver- tising

DTH sales

Loss on TV

Pubs and

Clubs

Whole- sale

(VMED)

Market share

benefit

Churn benefit

246

240

204

82

38

Football Premier League

Football Champions

League

Other

Production

Rugby Premiership Mark

et share benefit:

Market share benefit: 550,000 customers retained/won 35 GBP contribution/month/customer

321

BT Broadband subscribers and market share 2010–2014

In thousands/market share (%)

7,000

5,000

0

2014

+9.1% 7,281

2013

6,704

2010 2011

5,132 5,691

2012

6,280

Broadband subscribers

CAGR

DSL + fibre + cable DSL + fibre

35% 36%

37% 38% 39%

28% 29% 30% 31% 32%

Retail broadband market share:

Figure 55: BT's sports rights acquisition

Source: Arthur D. Little/Exane BNP Paribas, SportsBusiness Intelligence

Another very different but relevant example of an operator investing in its own content is the Flemish cable operator Telenet. Contrary to BT, Telenet has a very high market share in triple-play in its own market and a historical TV offering to defend.

In June 2014, Telenet acquired a major stake in the Belgian group De Vijver Media, which owns two commercial TV channels: VIER and VIJF, as well as the production group Woestijnvis, for a total of EUR58m. Telenet’s stated strategy is to reinforce the importance and quality of local content by supporting local production and fueling competition in the local content market.

The European Commission granted approval on the deal, obliging De Vijver to license its channels to TV distributors in Belgium under “fair, reasonable and non-discriminatory terms.” In addition, Telenet should not integrate these channels into a premium package, and they will remain available to other distributors.

Telcos establishing their own pay-TV bouquets or buying existing ones

Orange’s “OCS” bouquet

In 2008 in France Orange introduced a bouquet of five channels named “Orange Cinema Series”, which was exclusively available on the Orange network.


57

In 2011, Canal+ entered in the capital of Orange Cinema Series for 33.33% and the deal extended the availability of the bouquet to all ISPs that would agree to distribute it.

In 2013, the bouquet was rebranded OCS and offered HBO content 24 hours after its first appearance on HBO, including the series Game of Thrones.

With OCS Go, a catch-up offering, all programs are available for 30 days, enabling a near S-VoD service.

Orange Cinéma Séries – OCS

In thousands

OCS subscriptions1) 2008–2015, France

OCS’s spend on content France

2008

Bouquet of four TV channels with focus on premium movies and TV series

HBO content available 24hrs after first appearance on HBO in the US

OCS is accessible via TV d’Orange, Canalsat, SFR, Numericable, Bouygues Telecom, Free and Fransat

Subscription price from EUR 11.99.-/month2)

Non-linear OTT service for OCS subscribers: On-demand access to titles for 30 days after the broadcast on OCS’s channels

324

0

2,000

1,000

3,000 +46.7%

2014

2,200

2009

CAGR

Rebranding and refocusing:

Launch in November 2008 Bouquet of five channels,

including movie blockbusters, series, family and independent programming, and classic movies

2013 2015

Multi-year deal with Sony Pictures Television for first-window rights to movies and TV series

In 2013 OCS spent EUR 80 million on content (reduced from EUR 100 million in 2012)

The content agreement between OCS and HBO lasts from 2013 until 2017 and is estimated to cost OCS EUR 7-8 million per year

OCS will spend EUR 179 million on French and European content between 2013 and 2018

Source: Company landing page, Les Echos, Telecompaper.com; Note: 1) Including “Orange Cinéma Séries” subscriptions before October 2013, 2) Varies between operators

Figure 56: Case study OCS

OTE TV in Greece

OTE & Nova TV 2014, Greece

73 117 10871

71

83

2009

403

286

2008

351

278

2007

289

264

25

2006

238

238

0

2012

542

471

2011

472

401

2010

433

325

+15%

+26%

2013

743

660

Launch of OTE TV:

DTH IPTV

Figure 57: Evolution of Pay-TV subscribers in Greece (thousands)

Source: CNMC, Forbes, Variety, Arthur D. Little


58

In late 2011, the Greek incumbent telco OTE launched OTE TV, a pay-TV bouquet available via both IPTV and DTH.

Thanks to its moderate price level (~EUR25/month), OTE TV has enjoyed strong growth, reaching about 340k subscribers in 2014 – which represents a market share of 37% (up from 13% in 2011).

In addition, in July 2014, OTE acquired Forthnet’s Pay-TV entity, Nova, for EUR250–300m. Nova reported having 256k subscribers at the end of 2013. The main value driver for the merger between OTE TV and Nova was extraction of content and other cost synergies – savings estimated at c.EUR70m per year by 2020, since the new player will have greater bargaining power with content owners. It is, however, too early to assess the real benefits of this acquisition.

Telefonica and Canal+ in Spain

Spain’s incumbent, Telefónica, acquired the country’s largest Pay-TV operator (operating under the Canal+ brand) from Prisa in May 2014 for EUR725m. The deal was cleared by the competition authorities in April 2015.

Telefónica’s motives for the acquisition were content on the one hand (Canal+ owns premium sports rights such as the local football championship), and the large satellite subscriber base on the other hand, which Telefónica plans to migrate into its triple- and quadruple-play bundles.

Telefonica & Canal+ 2014, Spain

Evolution of pay-TV subscribers per operator, in thousands:

707 932 873

741 790

1,734 1,756 1,649

2013 2011

830

2012

Canal+ Ono Telefónica

Source: CNMC, Forbes, Variety, Arthur D. Little

Figure 58: Evolution of Pay-TV subscribers in Spain (thousands)

AT&T and DirecTV

AT&T announced its intention to acquire DirecTV in May 2014. AT&T is awaiting regulatory clearance on the USD48.5bn deal, which would increase its subscriber base by 20m to about 140m. AT&T and DirecTV compete for video subscribers with Comcast and Time Warner Cable.

DirecTV brings comprehensive programming rights and superior customer reach, which are complemented by AT&T’s mobile and fiber services – a stronger “TV everywhere” package would be the result, allowing higher prices for bundled products. The company would also benefit from a stronger bargaining position for content rights, and more efficient monetization of the same are two key drivers for the acquisition. DirecTV also owns premium sports rights (especially NFL).


59

AT&T acquires DirecTV 2015, US

21.7

11.4

5.5

20.3

Figure 59: Pay-TV subscribers in the US (millions)

Source: Company investor relations, AT&T landing page, Arthur D. Little

Incumbents’ investments into digital platforms have not been fruitful

Orange and Telefonica are two examples of large European incumbents that have made forays into the digital content delivery market.

Orange has directly invested in media delivery platforms such as Deezer, DailyMotion and the Internet activity of the Skyrock radio channel (Skyblog). However, since then, Orange has been diluted with Deezer, is currently trying to open the capital of Dailymotion to a partner that would help develop Dailymotion internationally, and has written off its investment in Skyrock.

Examples of Orange participations in Media/OTT platform

49% share bought in Jan 2011 for EUR 58.8 million, and the remaining 51% were bought in Jan 2013

80% sold to Vivendi for EUR 217 million in April 2015

105m unique monthly users worldwide (second to and dwarfed by YouTube, with more than 1 billion unique users)

Orange bought 34.15% of the web & mobile activities in 2011, then a further 14.6% in 2013

12 million visitors each month as of March 2014

Social network Video Music

Orange signed agreements with LG (2010), Samsung (2011) and TCL/Thomson (2012) to offer content & services on their connected TVs – accessible via any ISP

The content offered includes news, weather, sports information, movie trailers

Connected TV 2010 - 2012

11% share bought in July 2010 (undisclosed amount)

20m unique users worldwide (6m France) as of January 2015

Source: Orange Disclosure, ComScore, YouTube, NYPost, SAP, Arthur D. Little Analysis

Figure 60: Examples of Orange participations in Media / OTT platform

Telefonica Digital, which was established in 2011 by Telefonica to develop mobile and digital content, was closed at the beginning of 2014.


60

Collaboration with other players in the ecosystems is increasingly popular

Based on our interviews and feedback, we believe that the industry is starting to find its way regarding fruitful collaboration between players in the ecosystem. Indeed, more than half of interviewees declared that they favored the partnership route over the stand-alone approach to content delivery.

How telcos will offer content to their customers? What would be the relationship between telcos and OTTs?

Own development of VoD

M&A 12%

68%

7%

5%

Partnerships with other players

9%

Acquisition of contrent No relation

Competition

67%

26%

Coopetition

Bit pipe job/cooperation

7%

Figure 61: Interview feedback – Can you shed some light on your positioning and strategy with regards to your interactions with the other players? (telecom operators, content owners and OTTs)


Many partnerships have been established between telecom operators and over-the-top players. These partnerships can be classified into three main categories:

�� Distribution agreements The services of OTTs are sold through the platform of the telecom operators, which obtain remuneration for this service. The offer is the same as the stand-alone offer, and there is no adaptation of the OTT’s service.

– Netflix has signed reselling agreements in almost all European markets: Virgin Media (UK cable), Vodafone UK (mobile), Orange and Bouygues Telecom on IPTV in France; Deutsche Telekom (IPTV) and Vodafone (mobile) in Germany; ComHem (cable in Sweden), Waoo! (triple-play in Denmark), T-Mobile Austria.

– CanalSat is distributed by all the main French ISPs.

– Sky Germany is also distributed by Deutsche Telekom.

�� Commercial partnerships The telecom operator proposes the offers of the OTT to its subscribers. The offer is the same or similar to the stand-alone one, but it is proposed with a discount or even free of charge. Sometimes the network traffic to use the service is free of charge (zero rating), although this has been banned by regulation in some countries (Slovenia, for example):

– Three in Austria established a partnership with Spotify. Data volume consumed streaming Spotify is free of charge and not deducted from purchased volume. The first six months of Spotify are offered for free, and after this period the service is charged at its normal price of c.EUR10/month;

– Bouygues Telecom’s post-paid mobile offers (Forfaits Sensation) with 5/10/20GB of mobile data include a choice of Internet service: Spotify, CanalPlay Start or Gameloft;

– Orange Switzerland chose to bundle mobile voice and data plans with Zattoo, a linear OTT video service focused on generations Y & Z, with the aim to boost the uptake of mobile data plans.

�� Joint development of offers This type of partnership is nascent in Europe, but starting to be observed in other geographies:


61

�� Singtel, Sony Pictures Television and Warner Bros Entertainment have established HOOQ, a regional OTT video JV targeted at Asia. At launch, HOOQ will have a catalog of over 10,000 items, combining “the best of Hollywood with the depth and richness of local Asian video content”.

�� AT&T and the Chernin Group have committed USD500m to a joint venture with the purpose to acquiring, investing in and launching niche OTT video services. Portfolio companies include:

– Crunchyroll (Japanese anime and Korean drama series)

– Fullscreen (YouTube MCN)

– Creativebug (YouTube MCN)

�� In 2014, Telstra, Fox and Channel Seven in Australia launched Presto, a TV OTT streaming service. Presto is a joint venture between the leading Australian pay-TV platform, Foxtel (itself a joint venture between Telstra and Fox/News Corp), and Channel Seven, the second commercial FTA network. Presto was made available on Telstra’s STB one day ahead of Netflix’s entry into the Australian market (March 24, 2015).

The specific direct impact of these different types of partnerships is difficult to isolate, and operators rarely communicate on the topic.

One example is Orange France, which has reported the following benefits from its partnership with Deezer:

�� Additional revenue streams from revenue sharing;

�� Increased data consumption, with potential benefits in terms of monetization;

�� A 60% decrease in the churn of customers subscribing to Deezer.


62

8. Telco revenues: return to growth finally in sight

As we anticipated, the sector revenue trend remained negative in 2014 (-3%), but this was a milder decline than in 2013 (-5%) thanks to improvements in both mobile and broadband.

We have left our estimates for 2015–2016 virtually unchanged, with -1.5% in 2015e and stabilization in 2016e. We expect the sector to return to (modest) growth from 2017e with a +0.6% CAGR over the 2016e-2020e period.

We have taken a slightly more positive stance on the mobile revenue outlook, but on the other hand, our analysis of the OTT development has led us to cutting our pay-TV revenue estimates (to +1% CAGR versus 3–4% CAGR previously expected).

2014: still declining, but finally improving

We calculate that European telecom revenues (aggregated revenues in eight countries: Germany, France, the UK, Italy, Spain, the Netherlands, Belgium and Portugal) were down 3% year-on-year in 2014 compared to -5% in 2013, with the improvement driven by mobile service revenues (-6% in 2014 versus -10% in 2013) and fixed broadband (returning to 2% growth after a relatively flat 2013). Fixed telephony revenues continued to drop at a similar pace (-8%) while growth of pay-TV slowed down slightly (+3%).

Mobile revenues are getting progressively better

In mobile, the impact from lower mobile termination rates on the service revenue trend reduced drastically (from -3% in H2 13 to less than -1% in H2 14), and the underlying trend (ex-MTR) also improved throughout 2014 (from -6% in Q4 13 to -3% in Q4 14).

Mobile service revenue trend, including and ex-MTR Q1 2011–Q4 2014, big 8 countries1)

Contribution to fixed-line revenue trend Q1 2011–Q4 2014, big 8 countries1)

Source: Arthur D. Little/Exane BNP Paribas, note: 1) Germany, the UK, France, Italy, Spain, the Netherlands, Belgium and Portugal

1%

0%

(1%)

(2%)

(3%)

(4%)

2%

3%

Q3 13

Q2 13

Q1 13

Q4 12

Q3 12

Q2 12

Q1 12

Q4 11

Q3 11

Q2 11

Q1 11

Q4 14

Q3 14

Q2 14

Q1 14

Q4 13

Telephony Pay-TV Broadband

0%

(10%)

(8%)

(6%)

(4%)

(2%)

2%

4%

Q4 12

Q3 12

Q1 13

Q1 12

Q3 13

Q2 12

Q4 13

Q2 13

Q4 11

Q1 14

Q3 11

Q2 14

Q2 11

Q1 11

Q3 14

Q4 14

Adjusted for MTR Service revenue growth

Figure 62: Quarterly revenue trends


63

Splitting mobile service revenues between voice, SMS and data has become increasingly difficult and irrelevant as more and more customers buy bundles that include unlimited voice and SMS and large data allowances.

However, the main drivers of the revenue improvement are, in our view: 1) the slowing price erosion, both regulatory and underlying, with consolidation helping in a number of markets, and 2) data traffic growth – even though, in the majority of markets, mobile data monetization remains elusive due to competitive pressure, leading to increasingly generous data allowances.

Fixed-line: broadband is returning to growth

We estimate that fixed-line revenues (including telephony and broadband for incumbents, alternative carriers and cable operators) were down 2% year on year in 2014, improving compared to 2013 (-3%), but similar to previous years (-2% in 2011–2012).

Fixed-line telephony revenues continued to decline ( 8% versus -7%), broadband revenue growth improved (+2% versus flat) and pay-TV revenues slowed slightly (+3% versus +4%, including satellite-based pure-players, cable operators and telcos’ estimated contribution).

The better broadband revenue trend was driven mainly by France (emergence of superfast broadband), Spain (re-emergence of volume growth) and Italy, while the UK continued to grow strongly (superfast broadband, price hikes).

Regarding pay-TV, the slowdown was mainly driven by France (competitive pressures in traditional pay-TV), the Netherlands and Portugal (slowdown in cable).

Interview feedback: optimism has returned

Based on our interviews with executives across Europe, the industry has made a spectacular U-turn in terms of its revenue expectations. Indeed, the industry had been expecting its revenues to decline for a number of years, but the majority (59%) now believes in telcos’ ability to return to growth (versus 25% expecting further decline).

As shown in Figure 63, the main drivers of growth as seen by the industry are due to be 1) new services, 2) mobile data monetization, and 3) consolidation.

Do you see top-line growth coming back in the near term?

22.6%

Not clear

4.9% 11.1%

No/Others or not given

Maybe

9.9%

6.2% 8.6% No/Pipe job 11.1%

No/Price war

Yes/Others or not given

12.6%

Yes/New services

Yes/4G data monetization

4.1% Yes/Regulation

Yes/Consolidation 8.8%

59% believe in the telcos’ ability to generate growth

25% believe that telcos won't be able to generate growth

Figure 63: Interview feedback – Do you see top-line growth coming back in the near term?



64

We expect the sector’s revenue to stabilize in 2016

Overall, we have made very little changes to our revenue scenario for the sector: at the European level, we expect revenues to be down by c.1.5% in 2015e, to stabilize in 2016e and grow by c.1% per year in the longer term.

We have made three changes in our scenario compared to last year:

We are taking a slightly more optimistic view on the mobile revenue turnaround and long-term growth potential. Overall, 2014 mobile service revenues were in line with our forecasts, but we see two positive developments: 1) H1 was slightly worse than expected, but the run-rate in Q3 and Q4 turned out better than expected; 2) consolidation was approved in a number of countries during 2014, and we expect more markets to consolidate – which should, overall, lead to a generally milder competitive environment across Europe over the coming years.

We have cut our forecasts for pay-TV revenue growth in the mid- to long term, reflecting the analysis in this report regarding pure OTT threats to traditional TV players. See more details in Figure 67.

Finally, we have modeled a marginally better outlook for broadband revenues, as we expect a positive feedback loop between adoption of faster speed broadband and growth in online video usage.

Figure 64: Contribution to sector growth

4%

0%

2%

(2%)

(8%)

(6%)

(4%)

2011 2014 2016e 2012 2015e 2020e 2019e 2018e 2017e 2010 2013

Pay-TV Total revenue incl Pay-TV Voice & text Fixed broadband Mobile data Fixed telephony

Contribution to Growth 2010–2020e, big 8 countries


EUR Billions 2010 2011 2012 2013 2014 2015e 2016e 2017e 2018e 2019e 2020e CAGR 16/20e

Mobile service revenues 115.1 111.0 104.3 94.2 89.0 86.7 86.7 87.7 89.5 91.3 93.4 1.9%

Fixed-line revenues 88.3 86.3 84.6 82.1 80.4 78.8 77.9 76.9 76.2 75.6 75.1 -0.9%

Fixed telephony 45.6 42.3 39.6 36.8 34.0 31.6 29.5 27.7 26.2 24.9 23.7 -5.3%

Fixed broadband 42.6 44.0 45.1 45.2 46.4 47.2 48.3 49.2 50.0 50.8 51.4 1.5%

Pay-TV 23.1 24.0 24.8 25.7 26.5 27.2 27.6 27.8 27.9 28.2 28.5 0.8%

Total revenue incl Pay-TV 226.5 221.2 213.7 202.0 195.9 192.7 192.2 192.4 193.6 195.1 197.0 0.6%

Sector Revenue Outlook 2010–2020e, big 8 countries

Figure 65: Sector Revenue Outlook



65

0

10

20

30

40

50

60

70

2019e

58,6

15,9

28,6

14,0

2018e

58,9

15,8

28,3

14,8

2017e

59,3

18,0

2014

60,9

15,1

26,4

19,4

2013

61,5

14,7

25,8

21,0

2012

62,6

14,2

25,8

22,6

2011

63,1

13,7

25,2

24,2

2010

63,9

13,2

24,5

2020e

58,4

16,0

28,9

13,4

15,7

27,9

15,7

2016e

59,8

15,7

27,4

16,8

2015e

60,2

15,4

26,8

26,2

Pay-TV Fixed broadband Fixed telephony

EUR / month per household

Spending per month per household 2010–2020e, big 8 countries

Figure 66: Fixed-line revenue per household


Fixed-line service revenue per household will decline marginally in the long run. Overall, we anticipate that total fixed-related revenues, including telephony, broadband and pay-TV will decline marginally over the coming years, at c.EUR58/month per household in 2020e versus EUR61 in 2014. This is based on:

�� Fixed telephony revenues declining by 8% per year, similar to the past few years. This is a secular trend as customers migrate to broadband and switch to voice-over-IP or to unlimited voice bundles;

Pay-TV revenue per household

2011–2020e, big 8 countries

ARPU (EUR/month) 2011–2020e, big 8 countries

EUR / month per household EUR millions

Figure 67: Pay-TV revenue drivers

5,5 5,8 6,1 6,4 6,6 6,5 6,4 6,2 6,1 5,9

8,2 8,4 8,6 8,7 8,9 9,1 9,4 9,6 9,8

2020e

16,0

10,1

2019e

15,9

2018e

15,8

2017e

15,7

2016e

15,7

2015e

15,4

2014

15,1

2013

14,7

2012

14,2

2011

13,7

Premium Pay-TV Basic Pay-TV

0

5

10

15

20

25

30

35

40

2019e 2018e 2017e 2016e 2015e 2014 2013 2012 2011 2020e

Basic Pay-TV Premium Pay-TV



66

�� Broadband revenue growth of 2% per year, driven by customer growth of c.3% per annum (pointing to almost 90% penetration in 2020e, versus 79% in 2013) and with stabilized broadband ARPU thanks to superfast broadband adoption;

�� Pay-TV revenue growth of 1% per year, with more penetration gains than we previously anticipated, but a more cautious outlook on blended ARPU.

More precisely, we anticipate that:

�� Basic pay-TV revenues will start shrinking as non-premium pay-TV will be under increasing pressure from pure OTT players;

�� Premium pay-TV revenues will continue growing, with continued penetration gains and flat ARPU at a relatively high level, reflecting the greater difficulty of OTT to compete on premium content.

Mobile: service revenue per inhabitant of EUR22 in the long run

We expect mobile service revenues to bottom out in 2015-2016e, at EUR20-21/month per inhabitant (down from EUR25 in 2012, for instance), and then to start growing slowly, to reach almost EUR22/month in the long run.

Mobile pricing is evolving towards all-inclusive bundles with unlimited voice and SMS, so showing a breakdown of revenues between voice, SMS and data may seem specious.

Still, we have continued to model mobile service revenues on the back of drivers for voice, SMS and data (traffic and price per GByte) because we believe that the volume-versus-price equation will remain important, particularly in data, the key question being: will operators be able to “monetize” the increase in data usage per customer through higher ARPU, or will they include progressively larger data allowances in their current price points, as they have been doing for years?

Given the ongoing consolidation in a number of European countries, we expect price declines to progressively slow while volume growth continues, driven by 4G adoption. With mobile voice and SMS representing an ever-smaller portion of revenues, we expect the data-driven revenue trend to finally translate into service revenue growth by 2017e.

Figure 68: Mobile service revenue per inhabitant

17,3 15,3 12,9 11,5 10,7 10,0 9,5 9,0 8,5

4,75,4

5,8 6,2 6,7 7,5 8,5 9,5 10,6

4,44,2

3,7 3,4 3,2 3,0 2,8 2,6 2,4

19,3

8,1

3,9

11,6

2,2

4,4

0

10

20

30

24,8

2020e 2016e 2019e 2015e 2014 2013 2017e

21,5

2012

21,1 20,5

2011

22,4 21,1 20,7

2018e

21,9 20,5

26,5 27,5

2010

EUR / month per pop.

Mobile service revenue per pop. 2011–2020e, big 8 countries

SMS Mobile data Mobile voice



67

Regulation has grown as a cornerstone of the liberalized communications and media market. It has developed into coordinating with competition authorities in order to avoid hindering industry development, or addressing new topics such as protection and security of data or scope extension to all IP communication services. Nevertheless, the emergence of new media and international players brings up a series of limitations and challenges for regulators.

Regulatory frameworks in Europe show national differences

Although the telecom and media industry sees the emergence of multinational and global players, regulation is mostly done at national level with limited coordination between the countries. This results in discrepancies in two major aspects: media windowing and media production financing constraints.

Windowing differs between countries

Windowing defines the delay between a movie’s availability on the different distribution channels, starting with the movie theater and followed first by transaction-based distribution, on Blu-Ray or VoD, and later by pay-TV distribution. Currently, windowing is defined at national level, which is why it differs between countries. Incidentally, not all countries have specific legislations on the topic like that in France, and some markets rely on contractual agreements that are negotiated on individual bases, such as in Germany and the UK. Figure 69 illustrates windowing in France and gives the average milestones for the UK and Germany. Regulators have historically used media windowing to help support local production financing. This also resulted in additional complexity due to the differentiated windowing between content whose production was financed by the broadcaster and content that was acquired after production.

months

4 10–12

1st Pay-TV Free TV

Thea

tre Physical

retail/rental 1st Pay-TV (incl. SVoD)

3 22–24 30 36

Transactional VoD

48

Free VoD

0 8 20–22

Free TV

32–34

Transact. VoD

Germany and the UK leave the matter of release windows up to the industry. Given numbers are averages of individually negotiated release windows between content owners and aggregators/distributors.

Subscription VoD

2nd Pay-TV (used by selected studios only)

Theatre

6

Physical retail/rental Transact.

VoD

Pay-TV (incl. SVoD)

18

Free TV

Free VoD

Theatre Physical retail/rental 2nd Pay-TV

Free TV1)

Physical retail/rental Transact.

VoD

Pay-TV (incl. SVoD) Free TV

Free VoD

Thea

tre

Figure 69: Windowing in France, UK and Germany

Sources: France: https://technology.ihs.com/484446/, iMinds report 2014, note: 1) Free TV and other services contributing at least 3.2% of their turnover to co-production

Annex – Regulation: what is at stake?


68

As a result of the discrepancies between markets, a given movie cannot be made available at the same time on a particular platform across European markets. International players such as Netflix would benefit from windowing unification as they could then also potentially propose the same catalog to all their European subscribers, provided they own the rights to do so. According to Netflix, some of its users are using the services of VPN providers in order to “appear” in different countries and walk around the restrictions to see content that is not available for distribution in their home countries.

Some industry leaders we spoke to during our interview sessions downplayed the importance of windowing, given that the key selling points for media players are live sports and series, which are distributed according to simplified windowing timelines. Nevertheless, traditional TV players acknowledge the importance of windowing to bring audiences to linear channels.

Media production financing constraints differ between markets

To favor the local media industry, regulators have imposed a certain amount of constraints upon local content distributors. Those translate into direct financing constraints – e.g. France – or content acquisition constraints – e.g. the UK. Figure 70 illustrates the constraints existing in France that are based on the previous year’s revenue.

TF1 group

Canal+ group

France TV group

M6 group

Content production obligation in % of revenues

12% 4.7% 20% 15%

Figure 70: Content production financing constraints of media players in France

Sources: http://www.ladocumentationfrancaise.fr/var/storage/rapports-publics/144000197/0000.pdf

In the UK, broadcasters have to comply with a series of obligations, illustrated in Figure 71.

Public service broadcasting obligations UK

Original production quota (min. hours):

50% 65% 56% 50%

Content commissioned from independent producers (min. hours):

25%

Out-of-London-production quota (min. value):

30% 35% 35% 10%

National and inter-national news quota (min. hours per year):

1,330 265 208 260

Current affairs quota (min. hours per year):

105 35 80 10

Figure 71: Content production financing constraints of media players in the UK

Source: Audiovisual Media Sources Directive


69

Regulation challenges

Regulators face multiple challenges in adapting the regulatory framework to the converging and fast-evolving industry. As of today, regulation is not ready for the competitive dynamics that are shaping the digital sector –this is demonstrated by the dispersed debate around net neutrality.

Indeed, according to our interviewees, net neutrality is found as the most relevant regulatory topic discussed in the ecosystem, followed by telecom competition copyright protection and data protection (see Figure 72).

Figure 72: Interview feedback – What are the regulatory rules which are the most relevant to your opinion?

Source: Arthur D. Little / Exane BNP Paribas

12%

4%

7%

7%

8%

9%

Telcos Competition

6%

FTTH Roll-out Net neutrality 35%

Copyright protection/ Copyright roaming

Data protection

8%

Access to content

Positive differenciation & subsidies

Spectrum distribution

MTR / roaming 4%

Others

When asking our interviewees for opportunities for future regulation, answers focused on enabling better competitive dynamics, facilitating partnerships between telcos and OTTs, establishing ground for international copyrighting, and increasing value for customers, especially by extending service coverage. The main risks mentioned by telecom operators were related to uneven regulation, especially between European and US players, value destruction or investment slowdown because of heavy regulation, and lack of clarity on players’ responsibilities.

More specifically, telecom operators highlighted that more legal certainty on net neutrality as well as regulation enabling balanced profits between telcos and OTTs that partner for content distribution would increase predictability of return on future investments, and therefore incentivize them to invest. They also reflected on the current lack of urgency, which could potentially translate into a competitive disadvantage for European players, given that players outside of Europe are able to pay for quality delivery. Nevertheless, the OTT players we interviewed mentioned that regulation of managed services could also induce a situation in which telecom operators would get to decide which services were discriminated against because of their strong bargaining positions in local access.

During our interviews we also got feedback on the competition regulation, which should further enable MVNOs, while multiple players warn against the danger of antitrust regulation that only affects certain type of players.

Traditional media companies also expressed concern about a fully unified copyright landscape, which would simplify content rights acquisition, but also favor global players versus national players and potentially erode the value of those rights given the bargaining power and limited number of global players.

The debate around other topics is also alive – for example, the ban on geographical blocking of rights (i.e. establishing a single European copyright market) and content portability (the ability of a subscriber to access the purchased content irrespective of where he intends to consume it).


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Regulatory frameworks do not ensure a fully level playing field

At the center of the debate and challenges that regulators are facing is the alleged uneven balance of current regulatory frameworks. Our discussion with leaders in the industry highlighted important topics on regulation, in particular:

1. The content production financing constraints only apply to traditional TV players, not to all content distributors in the ecosystem;

2. Local content distribution quotas also only apply to traditional media, TV and radio;

3. Telecom operators and traditional media players have to comply with strong antitrust regulation and are prevented from consolidating extensively, whereas OTT players are able to establish globally dominant positions;

4. Taxation rules differ significantly between countries, which enables international players to optimize their costs;

5. Advertising regulation on TV does not apply to OTT content;

6. The usage of customer data is strongly regulated in the telecom industry, while regulation is considerably more liberal for OTT players;

7. Other, more specific constraints apply to telecom and traditional media, such as price regulation, “must carry” (which affects cable operators but not IPTV), “must deliver” and transport obligation.

In addition, we regularly see new topics emerging and raising controversial debates. The recent example of Popcorn Time leveraging the Bit Torrent protocol and a sequential download model rather than streaming has drawn significant attention, as it is not illegal in itself but enables illegal behaviors.

In this sense, an important signal is expected from the adoption of the European Digital Single Market framework, in particular on the aspects of copyright regulation, the definition of a new audiovisual media framework, and in the redefinition of EU telecoms rules that ensure a level playing field for all market players.

Traffic management, telcos and OTT relationships

In the wider context of the net neutrality debate, traffic management and relations between OTT, content providers and telecom operators are also a heavily discussed topic, and we expect this to become more and more critical over the next few years.

The US Federal Commission recently adopted a decision based on a strong interpretation of net neutrality principles – that is to consider the Internet a public utility, preventing “de facto” carriers and Internet service providers (ISPs) from striking deals with content companies.

In synthesis, this decision states the following principles:

�� “No blocking” – broadband providers may not block access to legal content, applications, services, or non-harmful devices;

�� “No throttling” – broadband providers may not impair or degrade lawful Internet traffic on the basis of content, applications, services, or non-harmful devices;

�� “No paid prioritization” – broadband providers may not favor some lawful Internet traffic over other lawful traffic in exchange for consideration of any kind – in other words, no “fast lanes”.

The same decision also includes also a transparency obligation on traffic management and the creation of a specific agency in charge of reviewing end user complaints related to net neutrality issues.

The European Parliament is still analyzing the topic and different stakeholders’ point of views, and seems to be oriented toward a lighter form of regulation of traffic management regulation for telcos, according to which telco operators must guarantee “an equal management for all the traffic”. This is with the exception of some special circumstances, such as in the case the customer asks for a parental control option to assure the security of networks if there is a specific public authority request. At the same time, telcos


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could offer specialized services, with higher speed, provided that these services did not interfere with the services offered to other customers.

It is debated whether a lighter form of regulation of traffic management can favor better cooperation among telcos, content providers and OTT. A win-win relationship between telcos, OTT and content providers is envisaged:

�� Telcos

– want premium content on their networks to support broadband services takeup and satisfy their core customers’ needs;

– need to invest in developing the capacity of their networks, and have looked into different options to monetize this asset, providing privileged access to certain services.

�� OTTs and content providers:

– need guaranteed quality services to successfully distribute their content/applications;

– desire the highest level of proximity to final customers;

– expect other potential services, such as secure payments, billing services, etc.

Accordingly, both telecom operators and OTT are paying significant attention to the evolution of the regulatory framework around the traffic management and net neutrality topics, especially regarding the possibility of supplying special network services upstream (towards OTT and content providers) and monetizing special IP interconnection services.

As described in details in Arthur D. Little’s report, The Future of the Internet, different scenarios are foreseen: from “best effort 2.0” to “quality-guaranteed Internet services”. Given the need to migrate the current Internet to a mission-critical platform, non-differentiated management of Internet traffic may delay the emergence of new services while potentially endangering the quality of the global traffic.

As of today, in Europe only two countries have adopted a “net neutrality” regulation at national level: the Netherlands in 2012 and Slovenia in 2013. Similar initiatives are currently under discussion in Belgium and Luxemburg, and other countries are joining the discussion, especially after the FCC’s decision in the US.

In the Netherlands, Norway and, more recently, Slovenia, this regulation banned the so-called “zero rating” offers given that these practices were intrinsically discriminatory. Similarly, regulator-imposed fines in the Netherlands for allegedly blocking access to some services, such as VoIP on Wi-Fi hotspots.

Paradoxically, some “zero-rating” initiatives – see India’s Airtel Zero offer – can contribute to local digital inclusion agendas by enabling app owners to grant users free access to some specific “socially relevant” apps.

Conversely, our interviews with industry leaders confirmed that zero-rating offers may be in the sphere of Internet players’ interest, as such business models can provide content to users with guaranteed quality of service.

Nevertheless, the distance among the different stakeholders on this topic remains significant:

�� Some stakeholders consider this practice a violation of net neutrality principles because such solutions create de facto preferred and discriminatory access to some services;

�� Telcos’ associations believe that forbidding “zero rating” would deprive consumers of interesting services already in use, and would discourage services innovation and innovative business models;

�� Some institutional stakeholders acknowledge that zero rating can be considered a form of commercial promotion, if no service is blocked or downgraded and there is substantial transparency in the offer.

The European Commission is expected to deliberate on the net neutrality regulation framework by the end of 2015.

Authors / Contributors

Acknowledgement

We want to thank everyone from outside Arthur D. Little and Exane BNP Paribas who contributed to this project. We would particularly like to thank all those that we interviewed at the companies listed below, including fixed, mobile, cable and satellite operators, internet companies and software developers and over-the top players, media groups, regulators, equipment manufacturers and others

�� Telecoms operators (Fixed, Mobile, Satellite and industry associations): A1, Abertis Telecom, Azerfon, Base, Bouygues Telecom, BREKO, BSkyB, BT, Cyta, Deutsche Telekom, Everything Everywhere, EI Telecom, Euskatel, Fastweb, GSMA, H1 Telecom Croatia, Iliad, Jazztel, KPN, Liberty Global, Neo Sky, O2, Orange, Persidera, Proximus, R-Cable, Sazka, SES Global, SFR-Numericable, Swisscom, Telefonica, Tele2, Telecable, Telecom Italia, Telefonica O2, Telefonica O2 Germany, RTBF, Telekom Austria Group, Telenet, TeliaSonera, Three, T-Mobile, UPC Ziggo, Ventocom, Vipnet, Virgin Connect, Vodafone, Vonage, VOO

�� Internet, software players and Over the top (OTTs): Deezer, Facebook, Google, Microsoft, Netflix, YETU

�� Media groups: Bonnier Growth Media, Canal Digital, Canal+, Discovery, Hitfox, Maxdome, Mediahuis, Medialaan, Rai, RTL, SF Anytime, TF1, Viacom, Voddler

�� Regulators: ANFR, BIPT, ComCom, CSA, CTU, Hakom, NMHH, PTS, RTR

�� Equipment manufacturers and others: Alcatel, Arqiva, Aurelius, Axos Capital, Ericsson, Gigaset, Nokia Networks, QSC, Qualcomm, Sagemcom, Technetix, Telenor Connexion, Teracom, TDF

Main contributors Arthur D. Little

Julien Duvaud-Schelnast, Ingomar Lang, Marlene Schlagbauer, Karim Taga, Clemens Schwaiger

Bertrand GrauArthur D. Little [email protected]

Antoine PradayrolExane BNP Paribas [email protected]

Disclaimer

This report is authored by Arthur D. Little with the collaboration of Exane BNP Paribas, draws upon research and analysis of both Exane and Arthur D. Little. The conclusions are the results of the aggregation of public materials and information provided in the course of recent interviews with a sample of industry players. At no point in the development of this report was access given to the research team to client confidential information held by Arthur D. Little as a result of our recent and ongoing consulting work in this area. Use of this report by any third party for whatever purpose should not, and does not, absolve such third party from using due diligence in verifying the report’s contents.

Any use which a third party makes of this document, or any reliance on it, or decisions to be made based on it, are the responsibility of such third party. Arthur D. Little, its affiliates and representatives accept no duty of care or liability of any kind whatsoever to any such third party, and no responsibility for damages, if any, suffered by any third party as a result of decisions made, or not made, or actions taken, or not taken, based on this document.

Arthur D. Little does not make investment recommendations, in this report or otherwise, and nothing in this report should be interpreted as an opinion by Arthur D. Little either on market forecasts or on the prospects of specific companies.

For further information, consult the Arthur D. Little website at www.adl.com.

Main contributors Exane BNP Paribas

Michael Williams, Agathe Martin, Kohulan Paramaguru, William Beavington

ContactsIf you would like more information or to arrange an informal discussion on the issues raised here and how they affect your business, please contact:

Austria Karim Taga [email protected]

BelgiumGregory [email protected]

China Antoine Doyon [email protected]

Czech Republic Dean Brabec [email protected]

France Didier Levy [email protected]

Germany Michael Opitz [email protected]

India Srini Srinivasan [email protected]

Italy Giancarlo Agresti [email protected]

Japan Shinichi Akayama [email protected]

Korea Hoonjin Hwang [email protected]

Latin America Guillem Casahuga [email protected]

Lebanon / Levant region Albert Kostanian [email protected]

MalaysiaThomas Kuruvilla [email protected]

Middle East Lokesh Dadhich [email protected]

The Netherlands Martijn Eikelenboom [email protected]

Nordic Martin [email protected]

Singapore Yuma [email protected]

Spain Jesus Portal [email protected]

Switzerland Clemens [email protected]

UK Richard [email protected]

USA Guillem Casahuga [email protected]

www.adl.com/TelcoMediaOTT

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