01 June 2004

Traditional pay-TV operators are increasingly feeling the breath of competition on their necks. European cable operators are starting to emerge from the financial ashes, but the transition is still a work in progress. Meanwhile satellite pay-TV operators on the continent have been busy consolidating, which should make their businesses stronger.

They are going to need all the strength they can get because the telecom companies are gearing up to get into the pay-TV game. Once there is a robust broadband connection in place to the home, the telcos can start to offer IPTV and compete with cable, digital terrestrial and satellite-delivered pay-TV. According to a report by Screen Digest, even with cable's slow start to launch on-demand TV services in Europe, IPTV will trail cable video-on-demand (VOD) services in Europe by 2008 but only by a couple of million connections: eight million cable VOD subs versus six million IPTV subs.

Both France Telecom and Telefonica have launched VOD services on their phone lines, which include TV services from other pay-TV providers. France Télécom's Ma Ligne TV service also offers channels from satellite pay-TV providers Canal Satellite and TPS. Meanwhile, Deutsche Telekom is also offering a combination package of DSL and free-to-air digital satellite TV services.

So is a combination of VOD and TV and broadband the winning proposition? There are success stories, notably Italy's alternative telco provider eBiscom. However, in the UK, the two alternative network video-on-demand services have had their fair share of troubles. The Kingston Communications VOD service in Hull was built with a high spec and very expensive VOD infrastructure that made the service too expensive to run profitably. Last year the content side was taken over by Blockbuster and recent figures paint a much better picture, albeit for a service that is available in a very limited area in East Yorkshire.

The London VOD player Video Networks (VN) has had a similarly difficult past. By early 2002, having spent £250m (€376m) to attract only about 15,000 subscribers, Video Networks looked pretty much dead. But its staunchest backer, Chris Larson, an ex-founding member of Microsoft, decided to take one more stab at making it work. With a new executive team, a new business plan, and £60m in new funding, VN re-launched its Home Choice VOD service in London last month with the slogan "See it and believe it".

There's a new electronic programme guide, 1,000 VOD movies and 60 channels of digital and on-demand programming (including Disney, Discovery and MTV), a 1-2mbps broadband service and broadcast TV, with set-top boxes and remotes made in China. This time around subscribers also must take a bundled service of VOD, TV and broadband with a minimum monthly subscription of £35. Management says that breakeven is 100,000 subscribers; after a major clearout of uneconomic subscribers over the last 18 months, Hone Choice has 4,000 subs today.

VN has a chance thanks to regulator Ofcom and its view on local loop unbundling. This year, BT has cut the cost of shared LLU by 35%, and this should reach 70% by the end of the year. However, at present, BT's rental for a fully unbundled loop is still around 38% higher than the EU average. Shared access is important for alternative providers, but only full unbundling allows them to offer more compelling services.

But there are still a lot of hurdles ahead, not least of which is tough competition from BSkyB and BT. As of the beginning of June VN did not have a content deal with Sky. The companies are talking but Video Networks is also talking to BT.

As an aggregator of content VN finds itself in an interesting position. On one hand it is easy to see the company getting squeezed by both its rivals. BT is also eager to put together a TV service to be delivered down its phone lines much like its peers on the continent. To do that it must put together a compelling content package, including Hollywood movies, a skill that VN already has.

Meanwhile, Sky is considering its options. When digital terrestrial TV got its second wind through Freeview, Sky made sure it was part of the consortium behind the re-launch. That said, Sky has put very limited content on Freeview, preferring to continue to go after the higher margin satellite pay-TV business. The same thinking is likely also at play vis-a-vis VN: keep an eye on it while building your own business.