At Mobile World Congress 2018, Huawei and the information analysts IHS Markit released the white paper Video as a Core Service for Telcos – Analysis of 50 Leading Operators in Achieving Video Business Success. What are the report's findings and how can telcos develop a successful video strategy?
In recent years, growth in traditional operator services and revenues has slowed. From 2012 to 2017, the average annual growth rate was just 1.3 percent, with ARPU declining 2.2 percent year on year. At the same time, video grew to account for more than 60 percent of traffic on telco networks, becoming the most important service type and the key service for telcos to avoid pipefication. Users have grown accustomed to video anytime, anywhere, and experience is now a major factor for many when it comes to choosing an operator.
As a result, telcos have been investing in infrastructure. But, they cannot recover their investment through network monetization alone, and are thus forced to rethink the positioning and monetization of video services.
At the end of 2002, a handful of operators worldwide were providing IPTV services for less than 100,000 users. But by 2017, 130 operators were offering video services, with IPTV subscribers alone numbering over 200 million. The rapid growth in operator video services over 16 years shows us how telco video has developed from VAS into a core service that can enable business success. At the end of 2017, the top 50 telcos by video subscribers accounted for more than 300 million video subscriptions and generated US$89.3 billion in video revenue, up 8 percent over 2016.
Not only does video directly generate revenue for operators, it also grows subscriber numbers, revenue, and profits, and increases subscriber stickiness.
Video as a Core Service for Telcos analyzes the strategies and real-world practices of the top 50 fixed-network telcos. The results reveal that fixed-line operators use video as a major value proposition, treating it as a core service to drive the growth of overall telecom services. Crucial to this is the inclusion of video services in basic service packages that aim to open new markets and drive growth. The five main strategies operators use to deliver video services are package bundling, premium content, aggregating multiple content sources, providing innovative service experiences, and providing their own video services.
Aggressive bundling: Bundling video with broadband, mobile, and fixed-line services lowers the barriers to entry for video services. However, this strategy is at the expense of ARPU, with the contribution video makes to the operator typically becoming less direct. In the early stages of developing video services, operators tended to use this kind of strategy to rapidly grow video subscribers or to respond to market competition and prevent customer churn. China Telecom bundled video with broadband and mobile services, driving the growth of both. At the end of 2017, its video service had achieved a market revenue share of 28 percent. In France, the big four operators started offering packages with video services to broadband subscribers in 2003, which helped France become the world's largest IPTV market after China. IPTV became the leading pay-TV platform in France in 2007, and today there are close to 18 million subscribers.
Premium content disruption: Premium or even exclusive content can create brand differentiation by helping carriers stand out from the competition. However, this is a very expensive approach and the loss of key content rights can lead to customer churn. This strategy is often used in mature, high-end video markets. A classic example is BT's purchase of the Premier League's broadcasting rights to counter the threat of its competitor, the well-established cable TV operator Sky TV. BT’s sports offering successfully snatched broadband subscribers away from Sky TV, but the strategy didn’t come cheap – the UK operator invested £5.09 billion to secure rights from 2013 to 2019. At first, BT adopted a bundling strategy, with broadband subscribers able to watch exclusive sports programs at no extra cost. At financial year-end 2017, BT's consumer division, which includes BT Sport and BT TV, reported an increase in revenue of 7.1 percent to £4.93 billion. But this wasn’t enough to offset BT's investment in premium content, so the operator introduced a direct content monetization strategy, launching a monthly charge of £3.50 in April 2017. Monetizing premium content places higher requirements on a telco's operating capabilities, but it shows how operators have shifted from a focus on network monetization to content monetization when it comes to video.
Multisource aggregation: Most operators prefer to use content aggregation strategies rather than buy expensive premium content. By working with content providers, telcos can aggregate various types of content to provide users with integrated, high-quality video experiences. The content aggregation model offers limited revenue generation opportunities as operators only take a share of subscription fees when customers sign up to a service on their platform. But, few customers do – most instead choose to use their existing third-party accounts.
Netflix is the world’s most popular paid video application. Netflix's surging subscriber numbers have led to closer partnerships between the streaming service and operators. For operators, providing end-users with Netflix content through set-top boxes keeps users on their platforms, helping to reduce customer churn and increase customer satisfaction. It’s worth noting that this approach doesn't offer a strong source of revenue. Operators typically get a 5 to 15 percent share of monthly subscription fees, but most subscribers will already have a Netflix account. From a cost perspective, telcos need to ensure that their CDN infrastructure meets Netflix's QoS standards. However, adding Netflix to an operator's video content library has a positive impact on operator KPIs and promotes the growth of ARPU as a whole without compromising operators' performance. Going forward, carriers adopting the content aggregation business model should explore how to monetize user assets through integrated data analysis.
TV UX and multiscreen innovation: Operators can provide users with cross-platform, feature-rich video services through experience innovation. The provision of multiscreen services is an important part of this service innovation strategy. Multiscreen allows users to experience video services anytime, anywhere. Direct monetization of the multiscreen strategy has proven difficult, however, and obtaining the required additional content rights drives up costs for operators. But enhanced user experience through techniques such as better recommendations can increase subscriber spend on paid video, so experience can be monetized this way.
Deutsche Telekom (DT) launched Entertain TV 2.0 in May 2016, touting experience as its core competitive strength. A consistent focus on user experience has helped DT maintain the appeal of its service. It doesn’t hold rights to the most popular sports programs, but instead focuses on distributing Sky TV's premium sports channels. DT also brings together Netflix and local content, turning itself into a super content aggregator.
TV unbundling and cross-border expansion: A new trend in video strategies among leading operators is to use OTT video to quickly expand into new markets and drive growth. Through streamlined packages, operators can offer end users greater choice and flexibility. This strategy of using lightweight OTT services to capture the young subscriber demographic is a direct response from operators to competition from OTT services.
America Movil is Latin America's largest pay-TV operator. In the face of competition from Netflix, America Movil acquired DLA (Digital Latin America), a company with VoD credentials and close ties with Hollywood studios and content providers, and launched its own service – Claro Video. Claro Video applies several business models, including subscription, pay-per-view, and free-to-view content, and is either offered as a supplement to pay-TV or sold separately.
In many cases, the video strategies we’ve talked about can supplement each other, as long as telcos consider local market conditions, network strengths, content strategies, and experience.
Telcos can use their core strengths to deliver superior video experiences anytime, anywhere, develop content investment strategies, and embrace aggregation. In terms of product strategy, they can consider bundling existing services or launch their own standalone video services. If they have a strong content offering, either bought or aggregated, they can quickly expand into new markets via OTT video offerings to attract young subscribers.
But, when calculating ROI, it’s crucial to consider both the direct and indirect value that video services generate.