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MIP – Politecnico di Milano

TV 3.0 The TV meets the Web 30° International MBA 28 June 2010

Partner: Fastweb Spa

Author:

Michele Antoci

MIP Tutor:

Giovanni Toletti

Company Tutor:

Marco Xodo


Index Executive Summary ............................................................................................................................ 1 IPTV ........................................................................................................................................................... 2 Global and Italian IPTV Market Overview ............................................................................. 2 Business Models............................................................................................................................... 3 KSF ........................................................................................................................................................ 3 Content Distribution Network ............................................................................................... 4 Devices ............................................................................................................................................ 4 Content Producer ........................................................................................................................ 4 Customer base and propensity to consume...................................................................... 5 Value chain ......................................................................................................................................... 5 PROs & CONs ..................................................................................................................................... 6 OTT/TV 3.0 ............................................................................................................................................. 7 External analysis .............................................................................................................................. 7 Porter’s diamond ......................................................................................................................... 7 STEEP............................................................................................................................................... 8 5 Forces model ............................................................................................................................. 9 KSF ..................................................................................................................................................10 Scenario analysis .......................................................................................................................11 Internal analysis.............................................................................................................................11 Vision and mission statements ............................................................................................11 The value chain ..........................................................................................................................12 Core competencies....................................................................................................................12 Portfolio Analysis ......................................................................................................................13 SWOT ..................................................................................................................................................14 Conclusions ......................................................................................................................................14 Appendix ...............................................................................................................................................16 TV market in Italy ..........................................................................................................................16 Italian consumption and rental market ................................................................................16


Executive Summary This report has the objective to describe the internship project regarding the new TV3.0 as evolution of the IPTV service delivered by Fastweb. The project was to analyze the TV3.0 and all the impacts on the company, both strategic and marketing and financial; the information gathered and analyzed are strictly confidential so in this report is presented only a qualitative strategic analysis. This document is structured in three main parts: 

IPTV – As Is – in this chapter I gathered first all the information regarding the current service thanks to the meetings I’ve made with key figures inside the company, both technical and marketing and financial. The second stage was the analysis of the information and its reorganizations in order to have a clear picture with PROs and CONs which would be very useful for the second part of the project. In this chapter is reported the analysis of the Business Model, of the Key Success Factors (KSFs) and the Value Chain related to the traditional IPTV service.

TV3.0 – The evolution – The first phase was the collection of information and trends about the new technologies in the TV market, the analysis of its potential was done by the SWOT analysis, which required a strong study of the external and internal environment in which this system should work. In this part are underlined how the new proposition could overcome the barriers of the current IPTV service.

Conclusions – There is summarized the shifting of the strategy with some insights and open questions which don’t have found an answer yet.

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IPTV The official definition approved by the International Telecommunication Union focus group on the Internet Protocol Television (IPTV) is as follow: “IPTV is defined as multimedia services such as television/video/audio/text/graphics/data delivered over IP based networks managed to provide the required level of quality of service and experience, security, interactivity and reliability.” It happens that there are some misunderstandings between IPTV and WebTV, main differences are: -

IPTV is based on the same network of the operator that owns or directly controls the last mile to the consumer premises, this implies that quality of service (QoS) has a guaranteed level unlike to WebTV that can be watched regardless the ISP provider of the user.

-

TV services are delivered through a set-top-box to the TV set instead of WebTV that is usually watched using a PC;

Global and Italian IPTV Market Overview The IPTV market is constantly growing and at the end of 2009 it accounts for more than 24 million subscribers all over the World; Western Europe is the most important region with 11.4 million and France is the leading country worldwide with 6.4 million. The distribution of the service is very different country to country and is due to the following key drivers and impediments critical to IPTV growth: 

National difference in communication infrastructure;

Level of competition;

Pricing;

Regulation and Broadcasting;

Pay TV culture.

In this scenario Italy is the eighth country worldwide for number of subscription (about 750k) but this data must be analyzed in deep for better understanding. Italy was the first country in the World in implementing the IPTV service, Fastweb was the only player for several years because its infrastructure was the lonely able to support this new service; low level of competition was due also to the old Italian communication infrastructure and the regulatory problems in the policy of the unbundling of local loop. Currently Telecom Italia has about 400k subscribers, Fastweb 250k, Infostrada and Tiscali together has less than 100k; these data must be analyzed carefully because at the end the 2


two main players has 200k each of active customers, that is more than 80% of the total active market, but the most important aspect is that these values are quite flat over the past years.

Figure 1 - Distribution of Italian IPTV customers

Business Models The aim of the entire system is to leverage brand in order to offer attractive bundled products and increase the customer loyalty. The business model adopted by the Telco Companies is well known as “walled garden�, this term explain in a very good way the closed and exclusive service provided to the customers because of the availability only on the network owned by the operator. The model supposes a subscription fee, used to cover the marginal capex for a new customer and the view of free channels, and the availability of several other types of contents which can bought pay-per-view or in bundle. Because of the pay-model and the small customer base (CB) the advertising is not considered as source of potential revenues in the first phases.

KSF In this type of market there are some KSF which should be achieved all together to lead the player to success, the exclusion of only one of these will lead the player to lose in such a competitive environment.

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Content Distribution Network The Content Delivery Network is the IT infrastructure that is used to deliver the contents to the clients, it was developed to overcome the problems related to a centralized system and to distribute the load on the network in terms of allocated bandwidth. The concept of this system was born in 1994 at the MIT of Boston and only in 1998 was founded Akamai, the first company that provided this type of service in US. In Europe the idea was used by the Telcos to develop proprietary systems with huge initial investments and operational costs in term of maintenance and development. Because of this internal CDN the Operators have provided guaranteed QoS for the IPTV on their own network. Devices The television service delivered through the IP network to the client needs an additional device to connect the TV set, this is called Set-Top-Box (STB). Its main feature is to decode the video streaming signal and to provide a two way communication channel. Each Player has developed its STB without any sort of standardization, because of the proprietary development, which lead to high production costs for this devices. Content Producer Agreements with content producer are key to win, since we’re considering mainly movies there are some rules, that the Majors defined, that must be respected in order to not cannibalize their revenues. These rules are related to the timing the movies are available, even if some rare changes can be possible during the negotiations the standard sequence is the following:

Contents producers are used to consider a revenue sharing model (in a range near 50%) with a minimum guaranteed level, which sometimes is not exceeded by the Telcos if the CB is not so large.

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Customer base and propensity to consume The customer base, like in every type of business, has a very big importance, but for the one that is considered, it is bigger because the cost model assumes a huge set-up investment for the Telcos. A peculiarity of the IPTV market is that the customers have to be also broadband ones, so the TV service can be sold only as an add-on. This cost structure and the low propensity to consume in most of the Countries affected the very slow development of the IPTV market, so slow that the only big success case in Europe is Orange, a France Telecom Company, in which the penetration on its broadband CB is close to 50%, much bigger than the one present in Italy where Fastweb has 15% and Telecom Italia 10%.

Value chain The value chain in the walled garden is strictly vertical oriented, this is due to the development of proprietary systems and the desire not to disclose any information with external partners. The following figure shows the primary activities in the value chain.

Figure 2 - Value chain for IPTV

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PROs & CONs From the previous paragraphs we can summarize the PROs and CONs of the IPTV.

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OTT/TV 3.0 The evolution of the IPTV model is the so-called OTT (Over-the-Top) which allow the view of video contents also outside the network of the Telco Operator. The TV3.0 is an OTT system which can guarantee the QoS (Quality of Service) for the on-net clients.

External analysis Porter’s diamond The framework of the Porter’s Diamond is shown in the following figure and described below:

Figure 3 - Porter's Diamond

Strategy - Considering the new TV 3.0 market we can see that the company’s competitors can be other Telcos and content producers, but the last don’t have a proprietary network on which guarantee the quality of service. A big problem for Telcos is that the TV service is not part of the core business of the company, so the development can be very slow due to the low commitments of the internal IT department. Factor Condition – Fastweb was the first mover in Europe and has the skills and competences to be successful in this market. Demand Condition – In the last years we’ve seen an increase in the consumption of media contents through the web and the TV 3.0 proposition would be the right way to provide the web experience on the TV. Related industries – CE manufacturers has started this year (2009) to sell connected TVs and connected devices; some big CDN service providers are approaching the Italian market and a partnership with the local Telcos will be a strong asset for them.

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Government – the switch-off of the analog TV system could be a very good moment to attract new customers. Chance – In the last months a sort of consortium of Telcos started the project of the new NGN (Next Generation Network), based on FTTH (Fiber-To-The-Home) it would deliver 100Mbit/s at the clients, media and video will be of course the primary content, for this reason it’s very important to be the first mover in this phase of the TV3.0 signing agreements with content producers and Majors.

STEEP The STEEP is used to understand the macro-environment in which the Company works. Social – There are no particular social changes except for the increase of people watching video contents through the web, thanks also to YouTube and the emerged social networks like Facebook, Twitter and so on. Technological – New possible partner are available in the Italian market and this imply the possibility to adopt a buy model for the first phases, which avoid the initial capex and moves the cost structure towards a variable one. Economic – this is a tough moment after the financial crisis, consumers are sensitive to prices like never before, this new model can erase the old monthly fees and expensive STB in favor of a simple pay-per-use. Ecological – there aren’t ecological constraints in this case but the use of commercial CDN, which has a high efficiency on their systems, will decrease the impact on the power consumption that is one of the biggest costs for Telcos operator. Political – There are not political issues at the moment in Italy, but the company is under investigation because of a tax fraud made by some current and former employees, politicians and criminals.

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5 Forces model The 5 forces model of Michael Porter is the most important for the external analysis, the framework used is shown in the following figure.

Figure 4 – Michael Porter 5 Forces

1.

Suppliers – in this business there are several types of suppliers with different bargaining power: 

Content Producer: they have a very high bargaining power, especially if there is a small customer base, because the guaranteed minimum revenues for each movie can be very hard to be reached.

TV manufacturer: the bargaining power of this type of suppliers is not very high because the new TV3.0 could be a good driver to increase sales, of course the agreements with main manufacturers (Samsung and LG) are very important to reach a significant potential customer base;

CDN Service Providers: they are important in order to deliver a service with a high QoE, but the presence in the market of the main players (Akamai and Limelight) which are entering the Italian market can maintain quite low their bargaining power.

2.

Buyer – the new TV3.0 provides a high bargaining power to the customer which can move through the different players with no switching costs;

3.

New entrants – The TV3.0 eliminates the entry capital requirements needed for an IPTV system, so other players are looking to enter (Content producers – Mediaset).

4.

Substitutes – in this category we can count a lot of alternative services: satellite PayTV (Sky), DTT PayTV (Mediaset Premium, la 7), VOD services on Game Console 9


(MUBI from Sony and Zune for Xbox) and WebTV. Unfortunately there is also an illegal substitute that is related to the piracy of the movies. 5.

Existing Competition – the competition is very high and the two main players (Sky and Mediaset) own most of the VOD market share, critical will be the choice of the business model to be adopted in the following years (subscription against pay-perview) and the communication of the service differentiation to the market.

6.

Complements – Producer of services with widgets can be complementary, because of they can reduce distances between the users and their TV, this will lead to an increase in the usage and a change in the way videos are watched.

KSF Content Distribution Network The business is moving towards the introduction of Commercial CDN Service Provider which are leveraging on the standardization of the formats, the scalability of the networks, the economies of scale for those types of contents which imply large bandwidth consumption and the distribution of the loads avoiding peaks problems.

Figure 5 - TV3.0 Architecture Scheme

Devices There is no need of expensive dedicated STB, widgets can be loaded in the connected TV and in the other connected devices, such as Blue-ray readers and game console available on the shelf. In a second phase video contents would be available also on portable devices with Wi-Fi connectivity (iPad, iPhone, tabletPC, …).

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Content producers The problem of the minimum level of guaranteed revenues for the Majors can be overcome enlarging the CB, which will be a consequence of the fall of the entry barriers. Customer base and propensity to consume The new proposition has the goal to make watching movies easier, this can increase the propensity to consume reaching mainly video rental clients which are now shifting to other markets1. The whole catalogue is going to become bigger and bigger in order to offer any content required, with the objective to increase the average number of transactions per user.

Scenario analysis As previously introduced there is the chance to implement the NGN in Italy in the following years, so video contents would be the main ones that can exploit the new technology.

Internal analysis Vision and mission statements Fastweb in the most innovative Telco in Italy, was the first mover in the world in the IPTV market, for this reason they chose as slogan “Fastweb a step ahead� which summarize the company vision for the future. The TV3.0 also can be a driver to increase the CB of the broadband service because the QoS guaranteed.

1

See references in the Appendix

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The value chain The value chain for the TV3.0 is different and focuses the attention to create a competitive cost advantage choosing between make or buy.

Core competencies The TV3.0 proposition introduces a problem in terms of core competencies because many activities would be outsourced to external partners. It is clear, looking also at the value chain, that the skills should move from fully technical to technical/marketing, the objective is to provide an extraordinary QoE to each customer.

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Portfolio Analysis Fastweb is a triple-play Telco company with additional services, the best tool to analyze them is the BCG Matrix.

Figure 6 - BCG Matrix

The dog is in the worst position in the matrix, it is a cash-trap and should be moved in the upper part of the diagram, TV3.0 has the potential to become a star and then a cash cow.

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SWOT The SWOT analysis is reported in the following scheme.

Figure 7 - SWOT Analysis

Conclusions The TV3.0 proposition is going to shift the Fastweb TV strategy from Focus to Differentiation.

Figure 8 - Strategy Map

Some risks have to be taken into account in the implementation and in the long-term: 

Cost differential with low cost competitors/substitutes can become too great;



Imitation narrows perceived differentiation

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There are also some other problems related to the fall of the entry barriers for the market, in this case it would be very important to create a loyal customer base with an extraordinary QoE.

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Appendix In this appendix are reported some useful information about the Italian market.

TV market in Italy Data and projections reported by Grow for Knowledge in June 2009 show that the TV market in Italy is in a steady grow state, the switch-off of the analogue transmission system is a good moment for customers to buy flat High Definition TV. In the following chart is evident the macro-trend and the distribution of the technology for the flat TV market in Italy.

Figure 9 - Italian flat TV Market

Italian consumption and rental market The Italian Consortium of the Audiovisual Producers2 in its 2009 report underlined some interesting trends that can be useful for the TV3.0.

Figure 10 - 2008 Market sales

2

Unione Italiana Editoria Audiovisiva

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2004

2005

2006

2007

2008

DVD

44%

12%

-6%

-8%

-27%

BLUE-RAY

0%

0%

0%

0%

20%

-40%

-63%

-40%

-96%

-30%

8%

-3%

-8%

-13%

-27%

VHS TOTAL

Figure 11 - Distribution of rental market

HD Contents delivered through Blue-ray are compensating the loss of market of the other supports. There are also changes in the whole Media market, the Osservatorio New Tv and Media of MIP, the b-school of the Politecnico di Milano, has identified in its 2009 report this trends which are summarized in the following schemes.

Figure 12 - Digital Vs Non-Digital Media

Figure 13 - Digital Vs Non-Digital Market Share

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Figure 14 - New TV market

It is clear that consumers are moving towards digital contents and the NewTV, which count each type of TV different from the old analogue one, is growing steadily.

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Pw_fastweb