Brussels, May 17, 2004

Brussels, May 17, 2004

TV & Video over DSLLatest Perspective from the Battlefield

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KEY MESSAGES

European Telcos need to capture “new” broadband revenues to get back on the growth track

In Europe, TV / Video-over DSL is moving from trial to commercial stage

Profitability is challenging “stand-alone” but TV/VoDSL can create value for a Telco primarily through protection of core voice/internet

Local market dynamics will drive near term opportunities for telcos

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Average European household telecom spending

As a % of GDP

MAKING A SUCCESS OUT OF BROADBAND IS A MUST FOR EUROPEAN TELCOS TO GET BACK ON THE GROWTH TRACK…

Early 90s(Fixed Telephony)

1.6%

3.1%

>3.1% ?

Late 90s(Fixed + Mobile Telephony)

Early XXI Century

Mobile revolution

BB revolution

?

Key challenges for incumbents:

• Secure market share in broadband (competition likely to intensify)

• Protect voice revenues (expected rise of VoIP)

• Manage fixed-to-mobile substitution (voice value increasingly migrating from fixed to mobile)

• Capture revenue from new services (through access and/or entering new industries)

1

2

3

4

43

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Creating a home eco-system…

Enabling compelling content

and applications

ContentMusic, Video, Gaming, Education, SportsBusiness Information

CommunicationsEmail, Instant Messenger, Click2Call, VoIP, Call Management, SMS

PlatformsPayment Engine, Content Distribution/Management, Rights Management, Security, Authentication, Storage, QOS

Enabling thenetworked home/office

ComputingBroadband enabled PCs

NetworkingIntelligent Hubs, WiFi, Mobile to Fixed

MonitoringAlarm Monitoring

Digital EntertainmentStreamed Music, Video, Pictures, Games Consoles

Broadband access

Complete service assurance

GOING FORWARD, TELCOS SEEM TO BE CONVERGING ON A RICH VISION OF SERVICES TO THE HOME IN WHICH VIDEO WILL BE A CENTRAL PIECE

Source:Presentation by T. Breton and P. Danon to Idate, December 2003

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Broadband at Home : A multi-services connexion

New broadband services

Steadily increasing bandwidth

Better performing CPEs with interopaerability

Wireless network at home

Services for the Home

HomegatewayHome

gatewayBroadband access

TV

Voice over IP

Interactive games

Internet

Visiophony

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Security

Domotic

cv

A change of paradigm

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KEY MESSAGES





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TV OVER DSL IS NOW MOVING FROM TRIAL TO COMMERCIAL PHASE

Country Player

Services tested / offered

TV VoD Short description

• Launched "TPSL" in December 2003 in Lyon in a joint offer with satellite bouquet TPS

• Extension to Paris and other big cities in 2004

• Launched Free television offer in December 2003• Available in 175 cities, including Paris

• VoD streaming offer available since 2002/03 (PC based)

• Soft commercial launch of true VoD November 2003 (Fujitsu-Siemens set top box)

• Fastweb TV service launched in 2002, initially based on FTTH, now both FTTH and ADSL

• Coverage: Milan initially, extending to top 10 Italian cities

• Broadway project• Small in-house trials of video-over-DSL• Announced Fiber-to-the-Cabinet ("VDSL-ready") local

loop upgrade• Investigating hybrid model of satellite/ADSL for TV

• Offering Stream-it, PC-based VOD + thematics bundle, with goal of 10,000 subscribers by end 2003

• Announced wider TV-based roll-out in combination with 1 billion CHF network upgrade

Commercial offer

Trial

STATUS AS OF JANUARY 2004SELECTED EUROPEAN COUNTRIES

France

Germany

Italy

Belgium

Switzerland

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IN FRANCE, THREE COMMERCIAL OFFERS ARE OUT SINCE APRIL 2003

2003 2004 2005Q4 Q1 Q4

2 video channels per line (MPEG4 deployment)

18/12 Q2/04 2005

Since December 2003, 2 TVoDSL commercial offers accessible to >20 million pop.Since December 2003, 2 TVoDSL commercial offers accessible to >20 million pop.

01/12

Extension to Paris

Q1/04 Q2/04

Q2 Q3 Q1

Phased deployment

Phased deployment

Phased deployment

TVoDSL commercial launch in Paris

TVoDSL commercial launch in Lyon

TVoDSL commercial launch

(175 towns)

Forecasted commercial launch

in Marseille

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FT AND FREE HAVE RADICALLY DIFFERENT GO-TO-MARKET APPROACHES…

*Free national calls**e.g. 0,49 €/m: Weather Channel, MTV Base; 0,99 : Sailing channel; 2,99: TéléMelody; 5,99: pack Cine Box, pack AB (incl. adult movies)

ProductProduct• TV: 50 channels available

• VoD: catalog of films

• TV: 32 channels available - >100 channels announced

• VoD: not launched

PricePrice

• Basic TV– 37€/month excl. internet or telephony, i.e.

16€/ month for Ma ligne TV (DSL line) + 21€/month for TPS L (50 channels incl. TPS Cinéstar, RTL9, Eurosport, ESPN)

• Basic TV– 29,99€/month tax included, includes:

• Broadband internet (1 Mb)• Free telephony*• 23 Free channels (e.g. France 2, RTL9,

Fashion TV)

• Additional TV Options– Pay per channel for a monthly price of 0,49 /

0,99 / 2,99 / 5,99€ depending on the channel**

• VOD– VOD programs available for 0,5€ to 7€ / view

(VOD content from Movie System, TPS, TF1, …)

CoverageCoverage• In all zones where Free proposes unbundling

(175 cities, >20 millions pop. coverage claimed)• Lyon city and suburbs i.e. or approx. 450.000

households

DistributionDistribution• Direct ordering via the Internet• Available through FT agencies and

hypermarkets

AS OF JANUARY 1, 2004

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FASTWEB PROPOSES A FULL-FLEDGED OFFER SINCE Q3 2003

2002 2003 2004Q4 Q1 Q4Q2 Q3 Q1

Gradual deployment of DSL service. Migration of DSL customer to fiber infrastructure when possible

Q3

Launch of video telephony over

DSL

Launch of TV over DSL and PVR service

Launch of VOD service over

DSL

(Launch of DSL service in Q3

2001)

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FASTWEB CURRENT COMMERCIAL TV OVER DSL OFFER

ProductProduct• TV: 30 channels available today• Video on Demand: catalog of 3 500 films

PricePrice

• Basic TV– 30 €/month*, VAT included, includes :

• Pay-as-you-go 2Mb/s internet access• Pay-as-you-go voice line• 8 digital channels• Remote PVR service

• Options– RAI Click, access to RAI program on demand, pay per view of full

access subscription for 6,9€ per month– Various digital TV packages from 6 to 15€ per month (including

CALCIO, other sport, premium cinema)– VOD : 3 500 films

CoverageCoverage • Fastweb covers the 10 main Italian cities via its fiber and ADSL networks

DistributionDistribution • Available through their website and shops

AS OF JANUARY 1, 2004

*Currently promoted at 25€/month ; plus one-time installation fee of 95€

Source:Fastweb company website

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IN ITALY, FASTWEB TV AND VIDEO OFFERS ARE A COMMERCIAL SUCCESS

Fastweb TV

• TV streaming of Sky and RaiClick

• E-mail and internet surfing in broadband

• Remote PVR

Mega Internet

• Access to internet up to– 10 Mbit/s (FTTH)– 4 Mbit/s (DSL)

330 600

~3,80040 300

176 100

2000 2001 2002

Videocomm.

• Videocommunications from TV (requires FTTH) or from PC (FTTH or DSL)

• Videomessaging

Residential clients EoY

Telephone

• Free phone calls among Fastweb clients

• Possibility to close Telecom Italia subscriber line

• Number portability

• 70% of new clients request TV/video services

• Average VoD ARPU 10 €• Average Pay-TV channels

ARPU 12.5 € in Sept. up to 17€ in Dec. 03

15% of clients requested video telephony

ARPU increased from 56 €/month in 2001 to 65 in 2002 to 72 in Q3 2003

2003

Source:Fastweb company website,e.Biscom analyst presentations

Of which 97,000 TV clients (incl. 35,000 on ADSL)

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KEY FINDINGS FROM LATEST TVoDSL DEVELOPMENTS

• Wide variety of go-to-market approaches and no clear emergence of winning combinations (offer, price, bundling with other services...) ; still, more early positive signs on all-inclusive offers (Fastweb, Free) than on TV single play offers (France Telecom)

• DSL not yet as economically competitive as cable/satellite but cost going down very fast, and emerging strong case for core business protection

• Technology is sufficiently mature to move to commercial launch (it works and it works well) – however, it remains a limitation in terms of reach (distance to central office) and convenience (home configuration if PC/TV not in same room in house)

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KEY MESSAGES





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THERE ARE 3 SOURCES OF VALUE FOR TELCOS BEHIND VIDEO

• Direct value from video services, i.e. present value of services direct cash flows– Cash in: subscription revenues, one-time revenues (pay-per-view, installation

fees)– Cash out: incremental investments, operational costs, content costs

• Value from protecting telcos’ core business– Gain in broadband acquisition market share– Reduction of churn (broadband and voice)– Gain in voice market share (video customers returning to telco’s voice)

• Economies of scope and scale– Shared broadband acquisition costs (economies of scope)– Improved broadband business case due to accelerated take-up (economies of

scale)

• Shifts of value due to unforeseen changes – Technology major improvements– Increase in advertising revenues– Much higher penetration than expected today

Definition

Direct ValueDirect Value

Indirect ValueIndirect Value

Option ValueOption Value

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WE HAVE MODELED VIDEO OVER DSL ECONOMICS TO ASSESS DIRECT / INDIRECT / OPTION VALUES… IN FRANCE

• 24 million residential lines• Broadband coverage 79% of HH

by end 2003, 90% by end 2005• 10 million broadband HH by

2007

• TV enabled DSLAMs only in large towns, resulting in addressable TV market of 60% of DSL subscribers by end 2007 - ~6 million HH

• Pay-TV penetration already high at 34% of HH end of 2003

• Expected pay-TV penetration of 9 million HH by end 2006 (37% of HH) without DSL

• Growth boosted with DSL (reaching 40% of HH in 2007)

Key assumptions

AddressableBB market

AddressableBB market

Addressable TV market for DSL

Addressable TV market for DSL

TV market specifics

TV market specifics

Source:Company website, analysts reports, McKinsey analysis

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VIDEO (OVER DSL) CAN BE PROFITABLE AS AN “INCREMENTAL OFFER”

Potential total value of video for telco and content aggregatorNPV; EUR Millions

*For combined offering; lower for thematics only (~100 EUR) and VOD only(~25 EUR)**Penetration of addressable TV households i.e. 10 million lines x 60% TVoDSL coverage x 40% pay-TV penetration x; no increase after 5 yearsSource:McKinsey video-over-DSL model

ILLUSTRATIVEREFERENCE CASE

• Combined offer of premium pay-TV, thematic pay-TV and VOD

• Monthly ARPU of 46 EUR for combined offering, 15 EUR for thematic only and 11 EUR for VOD only

• Gross margin on content of 50% for combined offering and VOD, and 60% for thematic only

• Acquisition cost of 130 EUR per gross add*; no set-top box subsidy

• Penetration by 2007**: 10 % for combined offering, 10% for thematic only and 10% for VOD only , i.e. around 720.000 users

• Churn of 11%

Direct value

Key assumptions

~250

PRELIMINARY

Equivalent to an NPV of 300 EUR per user but only 10 EUR per

residential line (on the basis of 24 million lines)

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STILL INDIRECT VALUE IS THREE TIMES AS BIG AS DIRECT VALUE


Source:McKinsey video-over-DSL model

Upside on telco's

core businessDirect

value

Indirect value

Preservation of existing business• Broadband churn reduced

from 15 to ~6% amongst video subscribers

• Voice churn reduced from 3 to ~2% amongst video subscribers

Upside on existing business• 30% of video subscribers

would not have taken broadband from telco

• 50% reduction in broadband subscriber acquisition cost (at 115 EUR per gross add)

• 5% of video subscribers come back to telco for voice

Key assumptions

~400

~350~250

Preser-vation of telco's core

business


PRELIMINARY

Equivalent to an NPV of 40 EUR per residential line (on the basis

of 24 million lines)

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Preser-vation of telco's core

business

Upside on telco's

core business

Direct value

Indirect value

400

350250

VIDEO PROVIDES AN OPTION ON POTENTIAL ADDITIONAL UPSIDE


*Excluding positive interaction between the different sources of option valueSource:McKinsey video-over-DSL model

Unfore-seen

techno-logical

improve-ments

Unforeseen technological improvements• Addressability increases by 15

percentage points (over 5 years)

• Technological costs decrease faster than foreseen (additional 10% per year)

• Coverage increases by 50% (from 50% to 75%) as improved addressability makes it interesting

Advertising• Television advertising amounts

to 160 EUR per household• Video offering captures 25%

(over 5 years) of this amount for households subscribing to the service

Higher penetration• Penetration of addressable

households increase by 10 percentage points

Higher consumption• ARPU increases by 100%

0-600

Higher consum-

ption

Higher penetration

Adver-tising

revenues

Option value*

Key assumptions

0-300

0-700

0-100

0-1700

1000


PRELIMINARY

Up to 100 EUR NPV or more per residential line (on the basis of

24 million lines)

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KEY MESSAGES



Profitability is challenging “stand-alone” but VoDSL can create value for a Telco primarily through protection of core voice/internet


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LOCAL MARKET DYNAMICS WILL LIKELY DRIVE TELCO STRATEGIES

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

0 20 40 60 80 100

Italy

Potential upside in broadband

Proportion between narrowband and broadband penetration (index)

Defensive value of video

Market share of competitors in broadband internet access (%)

U.K.

France

Germany

Belgium

Netherlands

Spain

Sweden

Switzerland

Source:McKinsey analysis

"Preemptive defense"• "me-too" offer at low price point, to

maximize penetration• pre-emptive roll-out

"Fight like a lion"• innovative offer at low price point, to

attract new video subs• pre-emptive roll-out

"Fast follower"• watch rivals and offer innovative

bundle at moderate price point• slower roll-out

"No hurry"• watch rivals and offer "me-too" bundle

at moderate price point• slower roll-out

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AND TELCOS STILL HAVE PENDING QUESTIONS, FOR INSTANCE ON BUSINESS MODEL…

Range of options

Distributor: Telco only distributes

existing bouquets and co-brands (e.g., FT)

Mixed : Telco distributes

aggregated content + designs own bundles (e.g.,

Noos)

Content aggregator: Directly deals with channels

(e.g., Fastweb, Free)

Telco has no exclusivity

Telco is the exclusive distributor of Media-co channels on DSL platform

Telco is the exclusive distributor of Media-co channels

Media-co exclusive

provider of content to Telco for all content

One or several exclusive content

providers for specific categories

(e.g., sport)

Telco is not tied up to any

exclusive contract

Role vis a vis content partners

Role vis a vis content partners

Should telco seek exclusive deals?

Should telco seek exclusive deals?

• No clear winner• Gradual approach

possible (e.g., start with distribution to move to mixed)

• All models require new skills for telcos

• In-going position in pay-TV market will, in most cases, be detrimental to telco –

• A possible ambition, however, may be to get exclusivity on DSL platform

Early thoughtsQuestions

Today ?

Target ?

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…OR ON CAPABILITIES

ValueValue

RevenuesRevenues

CostsCosts

Cost of contentCost of content

Other costs (distribution/co-

mmercialization)

Other costs (distribution/co-

mmercialization)

• Ability to attract customers:– Branding– Pricing– Distribution

• Ability to retain customers / up-sell– Time watching TV– Satisfaction with

program

Value drivers in Pay-TV Skills required

• Branding• Consumer marketing• Product marketing• Distribution sales

• CRM• Advanced consumer

marketing

• Ability to buy at best price

• Ability to manage cost of distribution

• Negotiation• Legal

• Sales & Distribution

The nature of the product and the

importance of buying require skills telcos do

not have

TV specific

Brussels, May 17, 2004

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Transcript of Brussels, May 17, 2004