IPTV roundtable. Stephen Farmer - IPTV strategy & business development, Motorola Home & Networks Mobility

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1 IPTV roundtable Goran Nastic chaired CSI s second roundtable on the subject of IPTV, where delegates discussed key issues facing the technology, including business models, over-the-top video, standardisation, QoS and how smaller players can source content and enter the market more easily. Graham Craddock - CEO Digital Head Ends Networks and Integration Solutions, Thomson Graham is responsible for a wide range of head solutions, including advanced video encoding and compression, video processing, network management and testing solutions for both fixed and mobile networks. Prior to Thomson, Graham worked for Tandberg Television Asia-Pacific. Prior to Tandberg, he worked at NTL for the creation of the first digital terrestrial receiver and at NDS. Graham holds a Masters in Electronic Engineering from Southampton University. Alan Delaney, IPTV Business Development Director, EMEA and APAC, Tandberg Television In his role, Alan is responsible for building and maintaining the company's relationship with telcos, operators and content owners in order to further the deployment and adoption of IPTV. Alan joined from Pace Micro where he spent five years as IPTV product manager. He holds an MSc in Computer Science and Applications from Queen's University, Belfast and a BA in European Business Studies from the University of Ulster. Stephen Farmer - IPTV strategy & business development, Motorola Home & Networks Mobility Stephen leads Motorola's IPTV business, and is responsible for the development of key strategies and customer initiatives in the region. Stephen joined Motorola in January He previously held a role managing the IPTV business at Scientific Atlanta, and his background includes four years at Pace Micro, and five years working at BT. Stephen has a Masters in Electronic Engineering from Aston University and an MBA. Mike Furby - systems engineering manager, Redback Networks Mike is responsible for delivery of technical sales advice and network design services for regional accounts. He also consults on mobile network design and the integration of mobile solutions between Ericsson and Redback. Prior to Redback, Mike worked at Ericsson UK, where he was responsible for major aspects in the design of mobile core network transport, specifically all layer 2 services, over MPLS networks. Mike received his PhD from Southampton University. Simon Cothliff - New business development manager, IPTV, ADB Simon is responsible for managing IPTV business development at ADB. His work includes identifying and securing business from new and emerging markets for the delivery of IPTV and on-demand content. Prior to joining ADB, Simon worked with Tandberg. Prior to this, his background was in management consulting where he served clients from the entertainment and media industry on strategy and research. Simon holds a degree in Business and Economics and a postgraduate education in Corporate Strategy. page thirty two Cable & Satellite International sept-oct 2008

2 Chairman (Goran Nastic): At last year's roundtable, a combination of business models, content and ecosystems was seen to be delaying IPTV rollouts. Have things changed at all? Alan Delaney: Looking at where IPTV has come in the last year or two, it has developed tremendously. If you talked to the cable guys a couple of years ago they did not take IPTV seriously, whereas now it's impacting some of their revenue and taking subscribers away. The silicon, set-top boxes and middleware have all matured, and so have deployments; France Telecom (FT) is approaching 1.5m customers, for example. The continued growth we are seeing is a sign that the technology is maturing and also that the business models are robust enough for operators to be able to seriously compete in the market. It's still very much '1.0' in terms of the initial TV solution that's being offered - there's a lot more to come in terms of twoway and personalisation and advances. But in terms of getting the core subscribers it's definitely at a point where they can say it's a serious platform that can now stand on its own two feet and compete in the market. Mike Furby: From my point of view, it's about infrastructure. Countries like France are a lot more advanced than the UK in terms of the infrastructure to homes, businesses and so forth. As we begin to see IPTV services rolled out in the UK we'll begin to see some pressures to copper to the home and potentially having to start to provide more QoS-enabled type of infrastructure to make sure services can be delivered in a quality users can expect. From the end-users point of view, they won't know if it's a fibre connection or what benefits such a connection will give them, all they will care about is whether their TV service works. We are starting to see things like BT 21CN rolling out, ADSL2+ enabling up to 24Mbps to the home, which will be a key change to enable things like HDTV, assuming users are close enough to the exchange of course. Simon Cothliff: I think IPTV still remains very much a defensive play as far as most telcos are concerned. If one looks at the IPTV business model overall then there is no question that it can work and the numbers can sparkle. However, I always encourage operators to think not only about how they deal with the denominator, ie, cost of ownership, but how they deal with the numerator, ie, revenue. This is the best way for telcos to deal with the competitive requirement to introduce ever more onerous levels of personally allocated bandwidth. How do they add more services that increase revenue? This is where things like ad supported revenue models from the sensible and controlled integration of Web 2.0 content and social networking, personalisation, interactive advertising, video on demand (VoD), home networking and certainly HD can really help. They start to make a difference and offer a real advantage for IPTV over cable and satellite. Now, as a counterbalance to this, what we are also seeing, of course, is that the satellite guys are now looking at the market and thinking they also need a return path so they are now looking at hybrid networks and hybrid boxes as a way of opening new revenue streams. So there's a continuous competitive dynamic within the industry. Graham Cradock: There are still a lot of players that have yet to make a full service offering into the IPTV market. Purely linear TV has been in place for some time now and operators are starting to introduce new services that lead to a lot of pressure on bandwidth, especially if it's HD. In fact, as a lot of those services are personalised, it means we are delivering bespoke bandwidth essentially to those users, and the scale of that bandwidth is quite different than traditional telco infrastructure providers have been offering so far. So what that means is that we need to focus on how we can ease that pain point. There's a clear transition after about three years of running an operation where the key cost factor for an operator changes from being the DSLAM aspect and the CPE to a core network issue. This is happening as the subscriber growth is increasing and personalised services like VoD become the most bandwidth demanding application. Most of the operators started off as a direct cable lookalike offering linear TV not requiring that much specific bandwidth for each consumer but as you add on these personalised services then bandwidth in the core is becoming stretched and that's what we need to help through various compression techniques and using hybrid systems to solve the problem. There are challenges ahead, but it's looking rosy. Steve Farmer: One of the best ways of trying to encapsulate the state of IPTV is consumers buying it. There are 7-9m IPTV subscribers in Europe right now, depending on the estimates. When you look back at Motorola's history we bought a company called Kreatel that has been making STBs since We acquired them two years ago and in March last year announced the one millionth IPTV box shipment. So that's nine years to get to 1m. Now in September 2007 we announced the two millionth box and in May 2008 we announced 4m. That's a very noticeable hockey stick that's reflecting that the market has arrived. Going forward there are two things that will drive growth: one is the ability to supply high bandwidth and more services, and the other is consumer demand, as people become more aware of the difference between interactivity versus a linear broadcast, that will have a viral effect similar to the PVR phenomenon, where nobody Cable & Satellite International sept-oct page thirty three

3 There's a clear transition after about three years of running an operation where the key cost factor for an operator changes from being the DSLAM aspect and the CPE to a core network issue. could describe what it did before it arrived but when it did it changed people's lives. The same will change with IPTV when people begin to understand the proposition. Chairman: The numbers in Europe are equivalent to BSkyB's base in the UK, although growing admittedly. But one problem is that the ARPU isn't there because the IPTV element is offered as a free service as part of a bundle. Wasn't video supposed to the premium component? How soon before IPTV starts seeing larger revenues? Steve Farmer: One of the key things is that a telco is entering a mature TV market and the ability to deliver the more advanced IPTV services is not here yet so they have to find a way of competing with a 'me-too plus' offering in a mature market. Therefore prices are a part of that in this land grab mode. Bundling in itself is good for the consumer but not for operators because it's all about price reductions. It reduces churn but at the expense of overall revenue. But if you find a way of VAS and pulling those services together cross-platform then you can start to generate more revenue. The strategy seems to be to get broadband penetration up there, which then becomes a platform on which to sell IPTV services. Get the basic me-too services out there and then start to roll out VAS that will create profitability. Alan Delaney: I think if you look at people that have done this in the past, like BSkyB, they did the basics well, got to 4-5m subs with a standard box before deciding to do something more difficult like PVR, HD and multi-room. The rough figures I've seen for IPTV would be 10-15% of the broadband subs base so they need to get the basics right, they need to increase the broadband base and need to be able to segment that audience to derive IPTV revenue. You can't go to the studios today and say 'I want to give you some money, not too much and I want to get some fantastic unique content'. Content is a low-margin business, you need a lot of subscribers. It's difficult as they are growing to get a strongly differentiated offering so they are growing organically. FT this year has nearly 1.5m subs and they are going to spend a few hundred million euros on content so once you get to the large subs base you can start to generate additional revenues and sell slots for advertising, but until you get to that point you have to understand your subscriber, your network and your proposition and how you compete with everybody else. IPTV tends to do well in areas that are less cabled up. So it's an evolution and the advantage of having the two-way network and the ability to have a one-to-one relationship is that when you get a sufficiently large subs base you can then start offering a lot more innovative services. Like Steve said, over the next coupe of years we'll see people starting to offer something fundamentally different that satellite and cable will struggle a little bit more to compete with. Graham Cradock: Another one to put in parallel with FT would be PCCW in Hong Kong. Almost an identical approach: the marketplace has an incumbent paytv operator, albeit a fairly basic one in the form of the cable company there. But what PCCW, FT and all these major incumbent telcos always bring is an immediate scale so they have an ability to access a large number of customers. As PCCW built up subs they were able to bring in exclusive partnerships with the likes of ESPN and StarTV. That improved relationship with content providers was only driven by a growth in the subs count. Today new entrants can see more of a 'big bang' opportunity because both FT and PCCW were fairly slow in bringing on new and different services but today there are ways to get there a little more quickly. One would be a case like Reliance in India where they are able to run on multiple networks - a hybrid satellite and an IPTV solution - in order to target multiple parts of the customer base. Another way is a Big Bang approach on the services, such as Smart Telecom in Ireland, which within a period of three months deployed from scratch multi-channel TV, VoD and first stage telephony integration with things like caller ID on screen. Increasingly as we move forward I don't think new entrants are interested in long and protracted trials, which was the way of the past. To some extent, it is still a defensive play but the new entrants and smaller players need not to go out in a full attack and be able to offer these additional services very quickly. Chairman: How do the smaller players do this? Especially with things like acquiring content if they don't have the scale? Mike Furby: I think whoever's trying to offer content has to offer something that people want to buy. The big example we page thirty four Cable & Satellite International sept-oct 2008

4 have in history is Sky, which really only took off when they acquired the rights to the Premier League. That really was the start of TV that people were prepared a lot of money for. What we have at the moment is fixed-line operators like Orange and BT trying to catch up. When it comes to small operators entering, I'm not sure how they will do this. It's difficult for them to enter and differentiate themselves when there are such big incumbents out there. Steve Farmer: I think there's an alternative. Exclusive content is one approach, but differentiation with personalisation is another. We have something we do with AT&T, which essentially allows you to provide a personalised bundle of services at the individual level. What this platform enables you to do is really personalise what people see, so I switch on the TV and I see stuff that's relevant to me. It's a bit like walking into a supermarket and everything that you want to buy is there on the first aisle and there are marketing offers that are really relevant to you alongside it. It's things like being able to create a service bundle that isn't just sports or movies, but PPV movies and channels of your football club, combined with mobile phone minutes, promotions of videos that are relevant because they are related to my purchase history or my friends' recommendations. It's linking tangible with virtual goods; for example, AT&T would put a code on the back of a football ticket so when you get home you can type it and watch the highlights for free. Simon Cothliff: I would agree with only some of what has been said. We have several customers who will report positive EBITDA on their operations in Some of them did not see TV as a stand-alone profit generator, but as part of a one-stop The rough figures I've seen for IPTV would be 10-15% of the broadband subs base so they need to get the basics right, they need to increase the broadband base and need to be able to segment that audience to derive IPTV revenue. shop for information, communication and entertainment. If one takes an evidencebased look at the numbers, there is no doubt that TV helps to reduce churn, Telefonica being a good example. Another very recent one is Telecom Austria. Here is an operator which maybe falls into the category of operator you are talking about, Goran. These guys are attracting about 1,000 new customers a week to their AONTV service and recognise the importance of niche content and working with local content producers. I have observed first hand the first-mover advantages it has got from combining HDTV services with this local content. In fact, with a technical reach below two million of its three million addressable market, the biggest challenge it faces is on the compression and network side to grow the availability of these services. The thing with IPTV is that everybody has their own stream and what operators have seen is they can deliver a lot of very localised content. Integrating internet TV is another form of differentiation available to some of the incumbents. I've seen evidence with some very major operators with whom we are working on groundbreaking projects, where they are looking to collaborate and integrate internet TV and other Web 2.0 offerings into their service offerings and even create ad-driven portals. Graham Cradock: The area I disagree on is that any form of personalisation, such as advertising, depends on scale. And to go back to the question about how you enter this business, most small players are entering with a small number of broadband subs in the first place so their target market is small to begin with. AT&T is clearly not in the same category as those we just discussed. One of the things we've been trying to do to help the industry in this area is through our services division, Technicolor, which is able to pull together content, act as a content preparation and sourcing function - a wholesaler of content if you like. Using that model, we can convert the big negotiation and upfront costs of dealing with content providers directly, we can take that problem away and turn it into a pay-as-you-grow model whereby you are paying based upon your subscribers, which on day one is zero. On the other side, and I agree with Simon's point about playing with OTT, it is to make sure smaller operators can have an open platform so they can franchise out parts of their middleware. Smaller regional players may wish in some instances to trade off the visibility of their own brand name to accommodate packaging of well known channels or brands into their offer, in order to attract more subscribers. Similarly, if they wanted a Web-based iplayer type solution that attached to that then that would be a good value add because it would keep people within their operational domain. And when you then bring in the upsell opportunities, such as telephony, then I think that's a very good package for Cable & Satellite International sept-oct page thirty five

5 smaller operators, enabling them to start very quickly. To give one example of this: the TVB pay vision service in Hong Kong struggled for a long time to launch their own IPTV service and in the end they found the best route to market was to access the 700,000+ subs on the PCCW network. The key thing for equipment providers is to make sure that the software infrastructure that is delivering those portals and enabling the consumer experience allows this kind of multiple portal approach. Simon Cothliff: I agree with Graham's point but with one proviso. You can integrate data and those services into TV but it can't be dominant. It's still a TV service and it's important to remember that video is the central element of this. Chairman: The surveys I've seen reinforce the view that video is still king and show that consumers are most interested in videorelated aspects of a service. The question is how telcos, and other operators, monetise OTTTV rather than just see it as a threat? Alan Delaney: I think it has to be part of a broader portfolio you're offering. It's like trying to offer just IPTV today as a standalone service from scratch, which is very difficult to do. But if you have a broad range of portfolios and you can segment and go after the audience for HD, VoD, mobile, PC, then it becomes easier. Even the CEO of Google says he's struggling to make money out of his acquisition of YouTube, which is the clear market leader in online video. The operators certainly wouldn't be looking to derive a lot of revenue because you are going to end up spamming your audience in trying to make some money out of click-throughs on the OTT type services. But if you embrace it and offer it as a complimentary service to what's going on elsewhere, the more stickiness you create the better. Even though users viewed 11 billion YouTube videos in one month alone just in the USA, the average viewing time was only 2.8 minutes, which is less than an advertising slot today, so you're struggling to do that. But if you look at what people like BSkyB do they've had a P2P service, where the PC service mirrors your TV service. It's inherently less secure (it doesn't have the NDS CA in there), but you can for example offer a complimentary service when you are on the road. Steve Farmer: It is a threat and the 145 billion downloads in 2007 is the reason - a telco pays for the network to deliver that but gets no money from it. So almost all the operators we talk to ask if it's relevant to put internet TV on the TV set and if so how they monetise. And if people's expectation is that it's for free then you can't charge for it but you have to make investments in the network and the STB to deliver it. So it could be the case that it becomes a me-too service they have to deliver because people are attracted to it and it becomes part of the service bundle. Having said that, there are ways to interface to YouTube and create your own advertising model around that. That's one of the ways operators are looking at; saying 'let's just try and replicate that advertisingbased model but on a TV set'. Simon Cothliff: Well, 145 billionn downloads in one year is a big number, but that can mean a big opportunity, as well as a big threat. You wouldn't need to work that market too hard in order to generate a revenue stream, if it is possible. Maybe the opportunity for operators is to enhance third party internet-based content and bring it into a lean forward proposition. On the STB side, we can enable the display of many different video formats beyond MPEG-2 and MPEG-4. The next logical step would be to either produce or manipulate video below 1Mbps and display it on a big TV in decent resolution. I think the key to broadcasters opening the door to Internet TV is making sure the environment into which it is introduced is TV 'quality approved'. This means getting approval for security and the quality of content. I can certainly foresee a new market in aggregated web content emerging. I think, to reference two great novels, that the brave new world will be one where all internet content is equal, but some is more equal than the rest. Mike Furby: There are a couple of things we've touched on here, mainly the fact that the operators are not yet making money even though they are delivering a service. So there is a debate to be had on how to build the network, is it in the STB or do you have to distribute content closer to the subscribers? We see that VoD will probably be the big bandwidth driver. How do you do that: do you distribute it; do you build a dumb network and centralise it; do you use something like deep packet inspection (DPI) to get some kind of service awareness and charge for that? All these questions have to be answered now because networks are being built now and could be obsolete within a couple of years if we don't build them to scale correctly. Talking about OTTTV, there are two forms it takes. There's live TV you can watch or a catch-up service like the iplayer. The difference with these is they are persistent streams compared to YouTube. That's a big change addressing a different type of audience. Our customers are becoming very aware that their backhaul is being saturated by this traffic and they don't know what to do with it. Steve Farmer: There's a crunch point about to arrive that will have an economic page thirty six Cable & Satellite International sept-oct 2008

6 impact; supply and demand will drive experimentation with new charging mechanisms. Ultimately they can't carry on doing it for free or the networks will start to choke up. It will be interesting to see if it is too little too late to affect the big Tier 1s which have essentially all deployed the same solution. Chairman: That's the problem, why would anyone try to improve the QoS if they can't monetise it? Simon Cothliff: I suppose if anyone can monetise it it's the telcos, given the infrastructure, call centres and billing systems they have. The question is whether it will make commercial sense to do so. There will either be a scenario where consumers will pay for premium web content and service providers, OTT providers and the associated ecosystems will partner and thrive through added value services. Altenatively, content will be accessed all over the place and no one will expect to pay for it. Alan Delaney: The US Net neutrality debate, which hasn't really made its way to Europe yet, is an interesting one. Do you just treat everything as equal or protect the industry to allow them to offer their services ahead of everybody else and effectively put a competitor's offering into a second rate service over their network? Operators are getting into the content space and near-live content puts a different load on the network that wasn't there before, so operators' business model evolution of buying content is impacting on network infrastructure, where they now have to provision for near-broadcast. Chairman: Let s finish with standards... Alan Delaney: There are some propositions in the marketplace that are more open than others. Some operators that buy into these will be constrained in not being able to customise the UI, roadmap etc. That's why Ericsson are helping to drive the Open IPTV Forum, to ensure an operator won't get locked into a service and can go and do an RFQ for a second source for an STB or VoD pump and not get locked in like cable incumbents, which OCAP and tru2way is trying to get them out of. Graham Cradock: Free in France has adopted an open source approach. They own the portal for regular linear TV, then they have outsourced portals for multiple vendors on VoD, so French channel TF1 has its own VoD portal on top of the platform. There's a pure OTT portal. There's also the ability, in an open source sense, to download onto my PC a Linux player which I can completely customise and it's accessible from the STB to give me visibility to any content that's on my PC. As in many operator cases, picture quality still needs to be optimised. I agree with Alan on open solutions, but it will be interesting to see if it is too little too late to affect the big Tier 1s which have essentially all deployed the same solution. We have to think about what's happening next, which will be more about the different applications and personalisation - and making sure those can be deployed on Tier 1, 2 and 3 hybrid systems - and so on. I'm sure there will be questions whether the large Tier 1s wrapped around Microsoft's platform can go out into the wider supplier base and get a new VoD pump or application to run on top of that. It will be interesting to see what happens next and whether the open approach will be able to start to drive towards that. For our part, we are supporting organisations which are driving greater convergence between home and operator networks, such as the DLNA and the Open IPTV Forum. Simon Cothliff: I add my voice to that. We can do clever things with home networking using UPnP and DLNA, but there needs to be some sort of unified approach and standardisation for DRM and security. Chairman: Will the standardisation efforts mentioned at this table drive down the STB BOM (bill of materials)? Simon Cothliff: Of course the BOM will fall in time, but the value of the STB supplier is not just in the hardware it's in the level of driver integration. We've had examples where services like network PVR have not been able to be delivered because of the existing middleware platform limitations, but we've been able to do clever things to enable that. The IPTV STB supplier needs to be able to develop added value solutions from push VoD and P2P distribution of content, through to stored and cached and community-based web applications and innovative EPG design. Chairman: How much easier would the integration be if we had standardisation? Simon Cothliff: The STB industry like other hardware industries works on the basis of return on investment. If there was an agreed standard for middleware, for example, then the lead-times and integration times would be a lot shorter. However, standardisation can have disadvantages leading to over-fragmentation of the user environment. CSI Cable & Satellite International sept-oct page thirty seven