For the better part of the last decade, people have scoffed at the idea that communications service providers could compete head-to-head with entertainment service providers such as cable and satellite and win. Justification for this attitude ranged from the perceived bandwidth constraints of the communications network, to the challenges of content access, to speculation that the mindset of communications service providers, not to mention their investors, was just too stodgy and conservative to seriously allow such competition. To summarize the traditional pervasive collective opinion—we will believe telcos can succeed in entertainment services when we see it.

However, over the last year RBOCs have committed billions of dollars to IPTV, they have hired top-flight Hollywood and cable executive talent, and over one hundred independent operating companies around the U.S. are successfully competing today in the entertainment services market across the communications infrastructure. As a result, the skeptics have had to reevaluate their position. IPTV is happening. To summarize the current pervasive collective opinion—IPTV seems viable, but can it be successful?

The good news for communications service providers is that, despite that fact they are competing against two well entrenched competitors in Direct Broadcast Satellite (DBS) operators and Multiservice Operators (MSOs) with over 90 million subscribers, over 90 percent market penetration, and $85 billion in yearly revenues between them, numerous proven success recipes exist for staking claim to their customers. Indeed, in many markets where communications service providers have competed head-to-head with DBS and cable using IPTV, they have quickly been able to establish significant market share.

For example, Verizon’s fiber-to-the-premises (FTTP) Fiber Optic Services (FiOS) deployment in Keller, Texas, has captured more than 20 percent market share within its first six months. Independent operating companies (IOCs) using both pure fiber and hybrid fiber/copper deployments can often achieve more than 30 percent market penetration within a few years. In doing so, they become the predominant providers of entertainment services in their communities, overcoming the incumbent status of DBS and cable.

How have providers achieved this success against seemingly daunting competition? Not every communications service provider delivering IPTV has been able to achieve success in the same way. However, the variety of ways in which they have found success provides powerful examples that others can use in developing their own entertainment services strategy or optimizing an existing one.

A Different Approach to Market

For anyone doubting the ability of communications service providers to capture market share from cable, the entertainment services market-share leader, they need look no farther than DBS. Systematically over the course of the last decade, DBS has captured nearly 25 million subscribers—the majority of whom were historically cable subscribers. Despite ugly dishes protruding from rooftops and patios, challenging installation issues, and stream constraints, DBS has leveraged a wider variety of focused niche content (think national sports and ethnic programming), value-focused packages, and superior customer service to deeply penetrate the cable market.

Recently, however, cable has proven that it can successfully fight back. After a $100 billion dollar infrastructure upgrade, cable is today stemming these losses and successfully recapturing customers from DBS through improved programming, improved customer service, and a host of new services enabled by the upgrade, including video on demand (VOD) and service bundles that incorporate high-speed data and voice. Interestingly, although this competition has made both DBS and cable stronger, it has also exposed key flaws in their market approaches and provided insights that communications service providers will be able to leverage in their quest for entertainment services success.

Leveraging the Local Advantage

The two major DBS service providers, DirecTV and Dish Network, are national service providers. Their advertising, customer support, and content packages are consistent throughout the United States. Their business model is one of scale and ease of access, dependent on capturing as many subscribers as possible within the line-of-site of their orbiting satellites and leveraging those subscribers to aggregate audiences, both mass and niche, for their aggregated programming.

The cable business model that has emerged over the last 30 years of consolidation has surprising parallels to DBS. Like the DirecTV/Dish Network duopoly, a handful of operators now control the majority of households that formerly were served by thousands of independent operators. Scale has brought cable efficiencies and leverage in negotiations with content providers.

However, these parallels also highlight a clear Achilles heel—unlike most communications service providers around the U.S., both DBS and cable are extremely detached from the communities that they serve, especially in rural areas. For example, although DBS now touts local channels, only 65 percent of the 210 designated market areas (DMAs) around the U.S. as defined by Nielsen Media Services are supported by this optional service. Cable is shackled by a similar constraint, as cable subscribers near the edges of DMAs receive programming emanating from headends hundreds of miles away—translating into sports and commercial advertisements that may have limited local relevance to subscribers near the periphery. To add insult to injury, subscribers to both DBS and cable often have to travel significant distances for customer service and may be funneled through call centers in different states.

Communications service providers, on the other hand, have retained their local roots even after consolidation. Thanks in part to regulations that continue to emphasize emergency services requirements and subsidies for universal services, these providers continue to offer local services and remain deeply integrated into their communities. The result is an ability to develop and package services that reflect the true needs and interests of their communities, and a grassroots infrastructure well suited for driving market penetration through service demonstration, targeted marketing, and word-of-mouth.

Powerful examples of how communications service providers have leveraged these advantages abound. Many have taken advantage of the mismatch between service and service area by providing programming from both their required DMA (federally mandated “must carry” broadcast requirements) as well as the adjacent DMA. As a result, they provide relevant local newscasts, weather, or even local sporting events that large regional cable operators often do not. This source of differentiation has proven even more pronounced when competing with DBS operators, which are required only to provide local programming relevant to the DMA associated with the consumer’s address.

Dakota Central Telecommunications is a company that has optimized its competitive service offering to reflect local needs—and is reaping the benefits as a result. Situated on I-94 midway between Bismarck and Fargo North Dakota, Dakota Central’s Jamestown serving area is nearly 100 miles from either of these cities, yet is considered part of the Fargo DMA. As a result, residents subscribing to cable or paying for DBS services with “locals” receive primarily Fargo broadcast programming, complete with Fargo-specific news, information, and commercials. Dakota Central saw an opportunity to leverage local need as important as any in North Dakota—the weather—to create a more market-centric service offering and to create clear service differentiation. With weather primarily coming from the west, Fargo broadcast stations 100 miles to the east are often behind the times and inaccurate. Dakota Central uses specialized equipment to provide a truly local weather, complete with local radar and a targeted five day forecast updated every 5 minutes. Complementing this programming with additional community-focused content like the local school holiday pageant, valued programming like Speed Channel and ESPN2 not available from the local cable operators, and marketed to the community by locally-born sports hero Jim Kleinsasser (Tight End for the Minnesota Vikings), Dakota Central delivers differentiated value proposition that DBS could never match and the incumbent regional cable operator is not interested in providing. As a result, Dakota Central is able to provide a service with significant local value and clear differentiation, contributing to IPTV service penetration of more than 50% of homes passed over the last 18 months.

Similar differentiated content opportunities that fuel penetration exist in other programming areas. Relevant ethnic programming, local church services, and community events can stimulate tremendous grass-roots marketing for IPTV service adoption. By looking at a community as the sum of a number of distinct market segments, extremely compelling and differentiated programming line-ups can emerge.

Capitalizing on the Disadvantages of the Incumbents

Often, communications service providers fear that they will have to engage in a channel-quantity war with cable and DBS service providers. Instead, just as they can outmaneuver cable and DBS by creating channel lineups that address local needs not reflected by DMA boundaries, providers can also take advantage of incumbent business practices that promote service upgrades at the expense of customer value.

The average cost to the consumer for expanded basic programming offered by cable providers has increased an astonishing 77 percent over the last decade (source: National Cable & Telecommunications Association [NCTA]). However, these price increases are only partially attributable to increased content acquisition costs. Much of the increase is attributable to pricing practices aimed at driving subscribers from analog cable programming tiers to digital cable programming tiers by minimizing the incremental cost of upgrades to the subscriber. To achieve this goal, cable operators have been systematically removing highly desirable sports and children’s programming from analog tiers and placing it in digital tiers. A powerful example of this practice is the movement of programming such as the Speed Channel from analog tiers to digital tiers throughout the Southern U.S. (a region that religiously follows car and motorcycle racing) to encourage digital adoption.

This form of “digital extortion” creates tremendous opportunity for communications service providers. Unencumbered by legacy customer bases or pressure to transition customers off of analog platforms, providers can instead develop basic service tiers that exploit cable’s weaknesses—services that are both value priced and that carry content that encourages service adoption. Thus, the provider is able to address what is often seen as its largest liability—its position as a latecomer to the video services market—as an opportunity to reset the competitive playing field on its own terms.

Service providers like Canby Telephone Association in Canby, OR have used this approach to their advantage. Reflecting a local market that is nearly 20% Hispanic, Canby Telephone has incorporated the most common Latino content into its “Economy” service tier, and introduced a special Latino service tier for an incremental $6.95 that, unlike its cable competition, reflects the Mexican and Central American roots of its local population. In contrast, its cable competitor, practicing a form of “digital extortion”, requires a digital tier upgrade for its customers to access Spanish language content that, incidently, is South American and European in origin. The net financial impact to the Latino consumer—a savings of over 50% for Canby Telephone customers and content much more valued by the local population. By not playing games with its customers and focusing on the true needs of the community that it services, Canby Telephone’s recent IPTV deployment has seen service penetration well ahead of its projections. Its biggest challenge to date—how to keep up with demand.

Selling the Concept of a Superior Platform

Just as there are a multitude of opportunities for communication service providers to take advantage of the “digital extortion” tactics of DBS and cable operators, there exist substantial opportunities to leverage the technology limitations of the video incumbents. Cable subscribers who predominantly receive analog services find the video quality and interactive features of their service are inferior to the 100 percent digital features of IPTV. In addition, because IPTV systems are inherently digital, premium services such as HBO, interactive programming guides, pay per view (PPV), VOD, and digital music are available to every customer—even those subscribing to the most basic service levels.

In fact, analog cable subscribers often pay more for premium channels than digital cable subscribers, despite receiving just a fraction of the premium content (usually one channel versus eight channels). Analog cable subscribers, who represent between 60 percent and 80 percent of cable subscribers in most markets, must also pay additional fees for the equipment necessary for premium and interactive services or subscribe to higher-priced digital tiers. DBS providers cannot provide services such as VOD over their broadcast infrastructure. Communications service providers can emphasize the technological superiority of their services and the value of IPTV, and translate this value into compelling reasons for customers to switch to IPTV.

Resetting the Competitive Playing Field

Contrary to conventional wisdom, it is precisely because communications service providers are not the entrenched incumbents in the video services market that they may have the greatest long-term advantages in sustaining entertainment services success. The infrastructure that supported the predominantly broadcast services of the past is giving way to entirely new ways of consuming information, communication, and entertainment (ICE) services. On-demand services will continue to proliferate. HDTV will become a basic services requirement. Interactivity and services integration will continue to grow in importance as content becomes increasingly searchable, available, and personalized.

Each of these trends challenges the traditional DBS and cable legacy infrastructures and business models. Although the incumbents also present significant network and equipment capacity challenges to the communications service provider network, the emerging IP network is best suited for supporting new services. The fact that providers can address these service needs with little worry about legacy issues such as millions of deployed set-top boxes, orbiting satellites with limited capacity, and predominantly broadcast-optimized infrastructures provides a clear advantage. Nevertheless, communications service providers still face a significant challenge in convincing existing DBS and cable customers to leave their incumbent entertainment service provider and adopt IPTV. In making their case, providers have the opportunity to use the unique capabilities of their networks and their close proximity to their customers to redefine the competitive playing field on their own terms.

Can IPTV be successful and woo subscribers away from the incumbent DBS and cable service subscribers? Absolutely. However, IPTV will not the last battlefield on which service providers will vie for consumer allegiance. The next likely battle will likely be the integration of ICE services across multiple devices and networks. In this ongoing battle, the winner will again be the service provider that can most nimbly mold its network, support infrastructure, and business model to deliver these services efficiently and effectively.

Geoff Burke is IPTV Marketing Director for Calix.

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