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INSIGHT - Linear Satellite IPTV Fails Audience Test
by Carlos Placido, Analyst, NSR

Citing difficult market conditions and slow adoption of IPTV by small U.S. telcos, SES Americom announced it will cease IP-Prime operations by July 31, 2009. While SES has made progress in the number of telcos using the service (37), the number of end subscribers totals 10,000, implying (on average) single-digit TV service penetration in the telco markets.

As IP-Prime has been leading wholesale linear satellite IPTV offerings, and has always provided a positive outlook for the service, the announcement surprised most in the sector, most notably SES clients that now need to make other plans. NSR does not view this service disruption as shadowing the market for telco-satellite hybrid offerings or the viability of other HITS offerings, but rather as a sign that the combo of satellite C-band and DSL delivery for telco-packaged live video channels fails to pass “the audience test” necessary to justify the underlying costs of such a two-tier distribution approach.

Healthy 4 P’s in a non-saturated market
The IP-Prime fall does not appear to be the result of intensifying competition nor marketing mix issues. Despite EchoStar recently increasing competition by joining SES and Avail Media as providers, the pool of U.S. telcos wishing to add IPTV is far from saturated, leaving room for growth. SES has had a feature-rich offering, distributed via good partners, to a dispersed, fragmented and satellite-receptive Tier 2/3 telco sector and with a good value proposition.

That was then, this is now...
In 2004, the conditions for satellite-delivered IPTV in North America looked promising and unique. C-band capacity was abundant in time for a MPEG-4/DVB-S2 technology leap. Early successes of telcoTV in Europe set IPTV expectations worldwide; telephone companies were facing an eroding telephony business and needed ARPU/churn enhancing service diversification. A forward-looking assessment in 2004 suggested that U.S. telcos would embrace IPTV.

With a unique base of over 1,500 small telcos, conditions looked good for turnkey super-headend solutions that would lower entry barriers to television for small telcos via a CAPEX-for-OPEX value proposition. In anticipation of such an opportunity, the Intelsat Technical Labs started exploring the satellite play for IPTV in 2003 and, after a few false steps, both SES and Intelsat launched their respective wholesale IPTV offerings. As a result of the fusion of Broadstream and Telesat-hosted Auroras TV, Avail Media later became Intelsat’s IPTV key partner and developed its own network of distributors and integrators including Falcon, Nortel and Motorola.

Fast forwarding to today’s environment, the situation is quite different. While now IPTV is a fast growing business, especially in urban areas with high broadband penetration, it remains small in the overall pay TV picture and has fallen short of expectations on a worldwide basis. Even in France, where Orange leads the European IPTV market and is the world’s second largest player (after China), less than 30 percent of Orange’s DSL users are eligible to receive TV via DSL.

Part of the satellite-IPTV problem is that while the satellite distribution is easy to do, end-to-end system integration became more difficult than anticipated. The drivers for telcos to enter IPTV have not changed, but the long run of DSL lines in rural America limits the number of DSL lines with the quality and speed necessary to support bandwidth-hungry TV, particularly for HD as DTH competition intensifies.

Technology, Service Expectations and Capacity Opportunity Costs Diverge
The U.S. HDTV boom might also have contributed to SES’s decision, raising the opportunity cost on satellite space segment. Although there is no capacity shortage in North America, the divergence between IPTV service expectations and opportunities to pursue less-risky and less operational-intensive services might have weighted in the decision.

Additionally, one cannot ignore the ever-growing dis-intermediation threat of the Internet. Between 2004 and 2009 “over the top” (OTT) Internet offerings have proliferated. Just like Vonage and Skype challenged the telephony business, broadcasters are increasingly putting their content online, and the emergence of OTT-TV offerings like Hulu and Netflix contribute to more challenging conditions for telco IPTV. Although possibly a differentiating opportunity for telcos, Internet TV poses real threats fostered by higher broadband speeds, advancements in video compression, PC progressive downloads, empowered consumers and the net neutrality / non-discriminatory principles of the Internet.

Finally, technology continues to evolve at Moore’s Law speed, and the CAPEX differential between core headend equipment and edge processors tends to erode, slowly diminishing the advantages of an outsourced super-headend. Due to this, HITS players attempt to reach the largest possible audience regardless of last-mile technology, blurring the boundaries between cable-HITS, telco-HITS and DTH (especially in Ku-band).

Even some of the latest IP-Prime announcements such as the Comcast HITS offering illustrate this confusing scenario. Last-mile transport characteristics of DSL, coaxial cable and DTH are distinct, but HITS players will tend to focus uplink signal packaging toward the largest target segment and extending reach via edge processing to handle last mile transrating, transcoding and transport adaptation issues. Band neutrality discussions for HITS/DTH in India, Telefonica’s (apparent) intentions to leverage its DTH platform in Latin America for white-label B2C/B2C video distribution and IPTV Americas’ shift to cablecos are other examples of this HITS “hedging” trend.

Viability In Jeopardy
The IP-Prime case makes one wonder “what’s next” for IP-Prime competitors. NSR believes that, while at first glance, this means less competition to Avail Media and EchoStar, it also brings an overall negative effect on the sector, raising questions about the long-term viability of satellite-delivered IPTV for linear (live) content.

Avail Media and EchoStar will likely pursue further differentiation by focusing on a distinct converged distribution approach. After acquiring ViewNow, Avail has the advantage of VOD, having recently reached one million subs. With IPTV results negligible for a multi-billion dollar revenue generating company like EchoStar, it might find value by seeking a broader cross-platform play, possibly with Sling place-shifting, DVR and set top box (STB) manufacturing in the spotlight.

Satellite-IPTV naturally brings a higher risk-reward element than capacity leasing for operators. NSR noted in the past that North America was a testing ground for satellite-delivered IPTV and that players would first validate such offerings before devoting resources elsewhere. With more ways to access media and service providers adopting pragmatic moves across traditionally competitive platforms, TV distribution is becoming less platform-bounded, and any distribution enhancing platform will need to consider these trends as well as the dis-intermediation forces of the Internet.

Video demands high bandwidth, and satellite broadcast remains an excellent medium for video transport provided such distribution passes “the audience test” with an aggregate number of consumers justifying the hybrid food chain expenses. IP-Prime is a prime example that bottlenecks in rural America’s DSL access, among other factors, have made satellite IPTV fail to pass this test.

About the author
Carlos Placido has more than 12 years of progressive experience in the areas of consulting, program management, research and engineering in telecommunications and entertainment. He has carried out independent business development, technology assessment and management activities, including market research studies for NSR, assessment of regional business potential for vendors and project management at Telefonica. Until 2004, he led a development team at Intelsat in Washington, D.C. where he was responsible for identifying and validating emerging video and data technologies for their potential applicability to new and existing services. Mr. Placido’s development efforts at Intelsat included advanced video networks, IP television, satellite multicasting and broadband, spearheading satellite IPTV, and improving Internet via high-speed satellite LAN-to-LAN.gineer at Impsat Fiber Networks.