01 Nov 2003

The leading French TV channel, TF1, is planning what amounts to a coup d'état. It plans to deliver its channels over souped-up phone networks by Christmas. The news has thrown its competitors and the French government off balance.

The project, originally dubbed Dream TV, will challenge cable operators and, perhaps more importantly, will test a new business model for TF1 and its satellite-delivered pay-TV service TPS. TF1 plans to launch an IPTV service in conjunction with France Télécom in December, starting in Lyon, with a commercial rollout across large parts of France, including Paris, next year. The company will invest €60m over five years in IPTV and believes it could sign up 500,000 subs. TF1 ran a trial of IPTV on LD Com, a rival telco to France Télécom, earlier this year in Paris.

In addition to stealing a march on Canal Plus and its Canal Satellite pay-TV service, the TF1-France Télécom deal has also sent a warning signal to the government about its plans to roll out digital terrestrial TV.

Patrick Le Lay, the CEO of TF1, has said in no uncertain terms that the current plan for DTT in France is "too expensive" and "too regulated" to work on a commercial basis.

Although Le Lay's public criticism of DTT may not kill the project, it has certainly dented it. In fact TF1 and TPS plan to be included in the DTT offer when it launches, possibly next year, but there is little enthusiasm.

TF1's IPTV project also delivers a well-aimed kick in the behind to Canal Satellite, the Vivendi Univeral-owned pay-TV operator and rival to TF1-backed TPS. The leader in French pay-TV, Canal Satellite also plans to launch an ADSL service sometime next year, but has yet to sign an agreement with France Télécom or any other network.

In fact, Canal Satellite has already tested IPTV with Monaco Telecom, but although the technical trials went well, there were doubts about the economic model. Since then Canal has put IPTV to one side, having been preoccupied over the past couple of years with the empire-building ambitions of Vivendi Universal's former CEO, Jean-Marie Messier. Since the ousting of Messier, Canal's new management has been focused on turning around its core French business. Through the sale of Telepiù in Italy and the Nordic pay-TV business, the sale of its technology businesses and a few other cost-cutting measures, this has largely been achieved. Canal Plus posted an Ebit profit for the first half of this year, the first time the company has been in positive financial figures since 1996.

The flagship Canal Plus channel may still be losing subscribers, but Canal Satellite outflanks TPS by some margin, counting 2.6m subs to TPS's 1.2m (as of June 2003). Clearly the IPTV project is a way for TF1 to take a run at Canal and add a new distribution channel for its over-the-air TV business.

The plan, code-named TPS-L, will allow real two-way services, unlike the satellite-delivered service. It is interesting that the first city to roll out the TPS-L service will be Lyon, where Canal Plus owns the local cable TV network, Numericable. Cable has experienced problems in France, including a rule, now to be revised, that prohibits the consolidation of systems into groups with coverage of more than eight million homes.

So far TPS and TF1 have not released any information about how the TPS-L service will be priced, but it is a fair guess that TPS will transfer its current aggressive pricing strategy onto the phone networks. In August TPS launched a low-priced satellite service of eight channels for just €11 a month, well below Canal Satellite's entry level price.

France Télécom's move into IPTV also allows it to stand out against its peers. Like other former monopoly telcos across Europe, Télécom is in danger of seeing its traditional landline business eroded by new competitors, and new technologies like voice-over-IP. CEO Thierry Breton said on the day the deal with TF1 was announced that "image transmission [is] an area which offers substantial growth potential, particularly for fixed-line telephone services."

Although, in the initial stages, broadband growth causes cannibalisation because people who sign up often cancel a second telephone line, the growth of Wanadoo, the dominant French ISP, is clearly sending a strong signal to Breton and his lieutenants. Wanadoo's third-quarter sales were up 29% and broadband subscribers, with a higher average revenue per user, are now 23% of Wanadoo's overall customer base. In France, Wanadoo has 4.363m subscribers while in the UK it counts (via Freeserve) 2.604m subscribers.

There are rumours flying that Breton is thinking about buying out the 29% of Wanadoo that he does not already own. More evidence that France Télécom sees the potential of broadband to help shore up its traditional fixed-line business.