Content pressures. March 2007, for Global Telecoms Business magazine, written under name of Sue Norris.

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Telcos that insist on entering the content market must recognise their limits, says Sue Norris

If ever the traditional telco had an identity complex, it is now. The mobile threat continues to grow, while the pressure to move into the foreign field of content provision is now substantial, leaving many operators wondering what on earth their future market focus should be. Should they be working with content studios and piping IPTV services over their networks to secure future customer loyalty and new revenue streams?

Clearly, some players, such as BT in the UK, are frantically trying to cover all bases, for fear of losing even more revenue to aggressive competitors - from entertainment giant Sky at one end of the spectrum, to the myriad of challenger operators, cable companies and Internet service providers with competitive Internet-based service bundles at the other.

Others are retaining focus and perspective and using strategic partnerships to fill any gaps. Finally, there are operators such as Cable & Wireless, which have learnt how to set themselves boundaries and say No to opportunities that will almost certainly distract them from the niche they have carved for themselves (if they are lucky enough to have one that's still growing - for C&W, this is the wholesale market: ie providing the means with which other service providers can do all the exciting, consumer-facing stuff).

In August 2006, an international survey by Frost & Sullivan explored the priorities of Tier 1 and Tier 2 service providers in the US, UK and Canada for 2007, and found that IPTV, digital TV, video content and VoIP (voice over IP) were expected to be the top products and services over the year ahead. As a result, spending on network infrastructure for these three areas was projected to increase significantly - by 77%, 81%, 71% and 76% respectively.

The survey (of 200 telcos, cable MSOs, satellite TV providers, wireless operators, MVNOs, VoIP providers and ISPs) also pointed to an expected increase in merger and acquisition activity among service providers as they strive to bolster their digital offerings. A third of respondents expected their company to merge with another in the next year, with broadband cable companies the most likely to merge, at 53%.

The reasons behind this flurry of activity are clear. Traditional communications providers have seen profits and new revenues dry up; now they are seeing new, more dynamic players from other markets erode their territory with creative new communications service bundles that take the customer experience to another level. Held back by the legacy infrastructures and stalwart revenue streams they have to date sought anxiously to protect, service providers have now had to accept that the future of communications looks radically different to even its recent past, and that they can no longer afford to resist change.

"Quite simply, the telcos, even the smaller ones, are being forced to have an interest in content and newer services," notes Tony Lavender, MD of Analysys Research. "Their traditional markets are declining, and consumers now just expect more - exciting service bundles, video, music, the ability to store photos, and so on."

But are they in the best position to provide such services?

"Not all the telcos that try this will be able to follow through," Lavender says. "If they don't have the brand, they won't get the audience, and many simply don't have the necessary internal skills."

Consider the logistics of content supply, for example. If telcos are serious about controlling the broadcast of film content, this means sourcing the movie from a studio like Paramount, storing it in the optimum location on the network, and delivering it at a few seconds' notice to the customer. To ensure that no one is left out of pocket, there will need to be a clear audit trail for the revenue share back to the rights owner, while both the originating studio and the end consumer will need guarantees about quality - so that the consumer doesn't try to reclaim his £10 PPV fee because the output was poor.

Grappling with such challenges is beginning to oppress major operators such as BT, AT&T, Deutsche Telekom and TeliaSonera, while horrifying smaller competitors that may be expected to provide similar services despite having a budget and skills base that's the fraction of the size of a large player's.

Today, broadband-related complaints are already a huge issue for consumers and their providers, and complaints to the UK's communications industry watchdog, Ofcom, about poor service are at an all-time high. If the main providers can't get the basics right, how are they going to cope when sensitive, premium-rate content is being piped over their networks - especially when they are responsible for the content quality as well as the mechanics of the line?

"For the telcos to be successful in the triple play/IPTV market, they'll have to address several network-related considerations to maintain their brand, contain costs and consistently generate revenue," Ciena's Rathod notes.

For many major telcos with their own infrastructures, bringing their networks up to scratch technologically is at least as much of a challenge as drumming up new sources of revenue. That's why Cable & Wireless has decided to confine its activities to the wholesale market - making sure its infrastructure remains at the cutting edge, so that other service providers (with more experience in delivering consumer content and managing customer relationships), can roll out the latest content and services to end users.

Alex Holt, head of media for the company, with a global remit, feels that other telcos that insist on monopolising this end of the market too are spreading themselves dangerously thinly. "BT is busily writing large cheques for content, but it's really just a defensive move against companies like Sky," he comments. "Now that consumers can get broadband for free, they no longer attach any value to it, which left BT with two choices - to become a wholesale-only provider or to bundle content with broadband."

Concurring with Lavender of Analysys, Martin Creaner, president of the TeleManagement Forum, believes becoming involved in content provision or delivery is not something telcos can afford to take lightly, given the huge additional burden this brings to the table.

Unsurprised that no providers were willing to be quoted on this subject (those approached included BT, France Telecom, Deutsche Telekom, Telefonica and AT&T), he, like Analysys's Lavender, believes this is because many refuse to accept the magnitude of the challenge.

"This is a big deal for most telcos, who will have to make significant investment to enable them to offer advanced content services," Creaner says. This investment is both in terms of the IT that will be needed to support complex, high-quality content handling, he notes - to keep content producers and customers happy - but, very importantly, also in terms of people resources. "Telcos are primarily made up of people who are interested in providing an excellent network over which services can be transported," Creaner notes. "To be an excellent content player, they need to have a significant core of people who view the content as being king - not the network."

But the problem space is not contained solely within the telco environment, he adds. "Offering advanced content services involves a whole value chain that includes the telcos, but also includes the content providers and (increasingly importantly) the device manufacturers."

Managing the end-to-end provision of those services is going to be very difficult, he says - due both to the complexity of the services and the fact that there are so many different players involved in the chain.

"When my IPTV service doesn't work, who do I call? Is it a problem with the network, or with my home gateway or set-top box, or with the head-end content encoding? Even if the SP takes responsibility for the service as a whole, what tools does he have to 'manage' the end-to-end delivery so that he can offer a meaningful, measurable and manageable service-level agreement relating to the service?"

Creaner notes that the TMForum is committed to defining how to manage this end-to-end service fulfillment, assurance and billing challenge, a subject we are likely to hear much more about over the coming months.

While large incumbents like BT heave themselves into a position where they can begin to take advantage of new markets, other, more nimble service providers are happy to show them what's possible.

Italian service provider FastWeb is often held up as a paragon of all that customer's are demanding, as is FREE in France. So what is it that these players have got so fundamentally right, where others are still struggling so badly, other than a freedom from legacy business models?

"Much of it is the packaging," comments Nick Holland, a senior analyst in communication, media and technology at Pyramid Research in the US. "FREE, whose subscriber base is doubling each year, offers everything - unlimited voice, IPTV and broadband - all for 30 euros a month. The incumbents just haven't been able to compete with that.

"FastWeb, on the other hand, realised that not everyone wants full triple-play services, so has unbundled its offerings so that consumers can mix and match broadband with VoIP, or buy broadband with IPTV on top. Its strength has been keeping individual pricing competitive enough to blow away the competition."

Keeping the customer squarely in view is critical, Holland notes. When Pyramid surveyed the consumer market in the context of media hype over quadruple-play (fixed line, broadband, TV and mobile) services, it questioned whether subscribers were really hankering after anything other than was already available. Noting that triple-play services are already proving challenging enough for service providers, Pyramid's research found that surprisingly low numbers of subscribers had taken up more than two services from a single provider. These were typically a combination of phone and the Internet, or TV and the Internet.

"There is no evidence of compelling loyalty just because of the benefit of having a single bill," Holland comments, as a warning to telcos seeing a cross-market assault as the key to future customer stickiness.

"There are three lessons that can be learnt from what we know so far about triple-play [broadband, Internet and TV]," he says. "These are the importance of segmentation, innovation and individually compelling services."

In addition to the runaway successes of FREE and FastWeb, he holds up cable operator VTR in Chile as a model of what can be achieved through effective market segmentation. "VTR offers a triple-play bundle, but has different price brackets," Holland explains. "Its 'Lite' offering is $33 less than the standard triple-play package. VTR has realised that one size does not fit all, and is gearing its offerings to varying demographics and consumers' budgets." (VTR's revenues surged by 48% and subscriber numbers by 42% in the year following the launch of these bundles.)

"If the incumbents want to compete with this, they have to be able to innovate," he says. "They need to outgun the new players with research and development, to produce really compelling services that consumers want, such as softphone applications that allow a laptop to be used as a VOIP phone over broadband, or caller ID-type services on the TV screen."

At a mobile level, where telcos are justified in being worried about losing fixed-line customers to mobile or mobile VoIP, the case for content isn't quite as clear. While consumers are crying out for more simplicity and consistency in the way they communicate at home or on the move (for example, having a single number and service that follows them), advanced gaming and video content don't appear to be as high up the typical user's priority list as providers would have us believe.

When network backhaul provider Tellabs recently teamed up with mobile research company M:Metrics to survey 22,000 mobile subscribers across UK, Italy, Germany, Italy and Spain, the results weren't quite what the mobile content community expected.

The study, which polled consumers about their views on mobile TV and video services, found that ex-users of mobile video services outnumbered actual users by more than 19%.

45% of European mobile video and TV users cited pricing issues as a factor causing them to switch off the services, while almost a quarter (24%) of users who had tried mobile video and TV stopped using the services due to concerns about service quality and reliability. "If services fall short of user expectations on quality and reliability, all that investment could be wasted," warns Pat Dolan, Tellabs' vice-president for EMEA.

So how should telcos approach the mobile market, if they want to compete seriously?

"The convergence of content and services and the widespread adoption of 3G and broadband networks are collapsing the barriers between fixed and mobile communication systems, creating both opportunities and threats for operators," notes Michael O'Hara, general manager for the communications sector at Microsoft.

"It breeds disruptive business models that can marginalise the role of traditional service providers. For example, applications such as music distribution and peer-to-peer voice reduce the role of the service provider to that of broadband connectivity provider."

To get the most out of this market, forward-looking operators are positioning themselves as the point of aggregation for new services, O'Hara notes. (Naturally, Microsoft has just the technology to make all of this possible.) "Service providers must be able to develop and deploy new services quickly and cost-effectively. Partnering with companies from the web world needs to be at the heart of a telco's strategy to thrive in this services-based world."

As an example, he highlights the partnership between France Telecom and Microsoft, which has produced the Orange Messenger by Windows Live service. This mobile IM service enables 135 million France Telecom customers to interact with 240 million Windows Live Messenger users.

"Microsoft provides the operating platforms upon which service providers can create, launch and manage such new services," O'Hara explains. "We also have fully developed services such as Windows Live Messenger that can be directly implemented to deliver revenue - today and into the future.

"The industry is still searching for the right mix of services they can leverage to drive new revenue streams, attract new subscribers and reduce churn," he notes. "Subscription-based and ad-funded business models are emerging and we see a future where a variety of different models exist, all defined by a wide-ranging mix of services, not by minutes used."

Other Microsoft partners that are making good progress include Vodafone and France Telecom, which are delivering enhanced instant messaging that can be accessed from both the mobile and PC, allowing users to see whether the people they are trying to contact are available to be reached on either device. Meanwhile, BT is using Microsoft Connected Services Framework to deliver exciting new consumer services such as BT Vision (based on Microsoft TV IPTV Edition software), as well as hosted services such as email, calendaring, contacts and collaboration tools for businesses.

To maintain market momentum, Microsoft recently launched Connected Services Sandbox, an initiative to create 'ecosystems' (mutually beneficial partnerships) between software developers, systems integrators, network equipment providers and telecommunications service providers to bring new services to market quickly.

"This is exactly the kind of ecosystem that telcos need to have in place to promote the possibility of new services and find the right partners for future collaboration," O'Hara says. "We see the merging of traditional telecommunications services such as voice, text messaging, with Web 2.0 services, as the future for operators. It will be a challenging transition, but already we are seeing operators embrace a partnership model with Internet players that had previously been considered as threats to the industry."