01 Oct 2006

Rupert Murdoch and John Malone are at it again. The long-running boxing match between the two media heavyweights seems to have reached a pivotal moment. Over the years, they have both delivered and taken some pretty heavy punches. Now, however, they seem to be in the middle of the ring, locked together, catching breath.

The reason for this bout is the changing nature of the media. The outcome will have an impact on how they tackle the next round.

The emergence of IP as the distribution highway of the future has created opportunities for new players at the same time as disrupting the future roadmaps for the traditional big guys. While upstart video-sharing site YouTube is streaming 100m videos a day and courting valuations near the $1bn (€0.8bn) mark for a business that doesn't make a penny, the biggest telecommunication and media players in the world are struggling to keep up.

IP and the web have not just changed how the biggest companies distribute their programmes and services, but the emergence of two-way, always-on systems has changed the way people consume, view, purchase and interact with media.

In this brave new media world the idea that content companies need to control distribution systems too is looking less credible. As more and more online opportunities are emerging, closed distribution systems look less necessary. This is particularly true for satellite-based ones that lack cable's ability to bundle video with broadband and telephony in one pipe.

In addition, the telcos' mad dash to upgrade their networks looks necessary if they are to compete - but maybe this is just too little too late. For telcos pushing to make their networks video-capable so they can get into triple and quadruple-play services, two issues emerge. first, getting the technology right for these all-singing, all-dancing IPTV networks has proven harder than originally imagined. At the recent IBC trade show in Amsterdam, IPTV equipment providers reported a slow down in deployment. The problem - at least short term - centres on Microsoft's IPTV solution, one that has been taken up by most of the biggest telcos, including BT, Swisscom, Deutsche Telecom and AT&T.

Getting the IPTV systems up and running on Microsoft's commercially unproven platform should be do-able over time, and, with some more money.

The second issue for telcos is more intractable because it has to do with creating a retail offer that can compete in an increasingly crowded playing field. After spending billions getting their networks up to speed, then more money securing content that will attract consumers, the new IPTV offers may not look all that different from those of cable, forward-thinking satellite operators and the open internet.

To match cable's offering, satellite operators such as DirecTV and BSkyB need heavy investment or a merger. In the UK Sky has purchased ISP Easynet and is moving into broadband provision. In the US, Murdoch senior is contemplating a wireless broadband play to beef up his DirecTV asset and he is also considering selling a very large stake in the US satellite service to Malone.

This possible sale is interesting because Murdoch fought tooth and nail to secure control of DirecTV to complement his US media empire. Granted, Murdoch is keen to "neutralise" Malone's 19% stake in News Corp and so far Murdoch has been unable to get Malone to trade it for any of his assets, but Malone might go for a stake in DirecTV. The bigger point is that Murdoch may be realising that owning distribution networks is no longer as key as it once was.

So although IPTV subscribers will continue to grow from an estimated 6.5m subscribers at the end of this year to nearly 37m by 2010, according to UK-based research outfit Understanding&Solutions, it will be a "long time" before financial success comes to most IPTV rollouts. "The slowdown [in IPTV rollout] is starting to undermine the credibility of the concept and this is undermining the confidence of content owners," says Graeme Packman, principal consultant at Understanding&Solutions.

Understanding&Solutions predicts that by 2010 IPTV revenues will be just 10% of total pay-TV revenues of US$42bn (€33bn). Not that $4bn is nothing, but it's small relative to the investments being made by the telcos and the growing importance that moving beyond voice has to the future of their bottom lines.

While addressing an IBC audience, Nick Fielbert, CTO and chief architect for Europe and Asia for Scientific Atlanta, said that "the business case for IPTV is not always clear" except as a defensive strategy against falling voice revenues: "Triple-play strategies will not be profitable for incumbent telcos for five years." In the heavyweight fight ahead, the telcos have got to be asking: is churn reduction enough and, if it's not, what should they do? This is at least one reason why Murdoch watching is to be highly recommended.