Catching up with European pay-TV developments

Just over 12 years ago, the dreaded spectre of pay-TV slowly began to materialise and with it the associated fear that the days of traditional ‘free-to-air’ broadcasting were numbered.

Most audiences in Europe - and throughout the world - ‘enjoyed’ the output of incumbent state broadcasters and usually one or two commercial channels. Effectively, consumers received their TV for free at the point of consumption. However, competitive levers depressed in the US broadcasting market led to the proliferation of cable TV networks and the explosion of a myriad of new TV channels. These new proprietary technologies instantly gave broadcasters more power as gatekeepers of content, and suddenly the idea that people would actually pay for TV became reality.

The commercial possibilities of cable TV - or any other proprietary controlled broadcasting system - meant that it was not long before US companies were hungrily eyeing up the 300m TV viewers across the Atlantic in Europe. As it happened, when the US cable industry did arrive in Europe, it did so at the same time as European satellite TV broadcasters began to emerge.

This situation immediately precipitated a debate over which system would rule - much the same as VHS and Beta video systems in the 1980s. One (cable) was more efficient and provided a better quality picture, but the other (satellite) enjoyed better marketing but, more importantly, could be rolled out far quicker.

Dog eat dog

As with all new industries, no sooner had the embryonic pay-TV market emerged in Europe, there was a shake-out. This left those companies with the deepest pockets free to pursue their goals, including BSkyB in the UK, Canal Plus in France and Kirch Group in Germany. Yet some were quicker off the mark than others.

In France, Canal Plus soon established itself as the leading pay-TV broadcaster until TF1, the largest French broadcaster, became the major backer of Television Par Satellite (TPS). TPS is now the largest pay-TV operator in Europe with 9.3 million homes.

Meanwhile in the UK, TPS’ equivalent broadcasters, Granada and Carlton, launched pay-TV channels on the Sky platform before working together to launch a digital terrestrial service, ONdigital. Having started much later than BSkyB in the UK, ONdigital is only now beginning to acquire a respectable audience size. It passed one million homes earlier this year but, as in most of Europe, the story of pay-TV has been one of struggle as well as success.

As well as pay-TV broadcasters are also able to capitalise on interactive TV developments

Both the set up of pay-TV and its commercial viability have stretched even the best business brains in Europe. When Rupert Murdoch put his Sky Television service head-to-head with British Satellite Broadcasting (BSB) and its ‘squarial’ in 1990, his pay-TV operation in the UK was on the brink of bankruptcy. Now, however, Sky has grown to be the dominant pay-TV operator in the UK and, following its transition from analogue to digital, is in a strong position to benefit from the ‘interactive’ future.

Cable falls behind

While satellite services have moved ahead in Europe, cable TV systems have had a much tougher time. In the UK, financially-prohibitive restrictions that forced cable operators to bury their plant for aesthetic reasons - coupled with a franchising system that created a patchwork of companies with no real scale - handicapped the industry until 2000. Build-out was slow and valuable time was lost before the government would allow the cable companies to consolidate into a few large companies.

Today, there are only two cable operators in the UK, Telewest and NTL, with only Telewest owning any programming assets, the Bravo channel and UK Living. However, cable TV operators have been overtaken by regulatory events within the industry.

Having basically missed their window of opportunity to significantly benefit from pay-TV, they are now attempting to capitalise on their ability to offer the ‘triple play’ of cable TV, telephony and Internet access. Thus, UK cable operators are generating only 25% of their revenues via pay-TV services.

On the continent, early cable operators were local utility companies, for example, gas and electricity suppliers - such as Compagnie Generale Des Eaux in France - who either upgraded their lines to offer television services or built new ones. Cable development is different in every European country. Thus in France, for example, the government considered the laying of cable to be no more than a simple utility project. It lacked a commercial driving force, which explains why today cable penetration is so small in the country.

The biggest cable market in Europe is Germany whose cable assets have, until recently, been under the control of incumbent telco Deutsche Telekom (DT). Moves are now occurring that will see DT divest its cable plant to other operators. Callahan Associates and Liberty Media have bought into Germany and are now beginning to put money into upgrading the systems to carry more channels and more interactive services.

Respect is earnt

While the pay-TV market has been slowly developing, its commercial acumen has slowly begun to rub off onto its broadcasting cousins in the public sector. In the early 1990s, when pay-TV began to offer reasonable levels of content exclusivity and could deliver audiences numbered in millions, European public broadcasters lost their contempt for the medium and recognised that a new era had begun.

For example, in the UK, the BBC lost a series of live sports events including: Premiership football, Ryder Cup golf and Test Match cricket to BSkyB. This was a defining moment in the UK because it reflected a shift in the balance of power between content and distribution. Unlike public broadcasters, pay-TV broadcasters could afford to pay millions to rights holders - the cost was simply passed down the line to the subscriber. Content had just become king.

Sports like football are driving the development of the pay-TV industry

The tactic for most public broadcasters was not to fight against this - it was futile - but to grudgingly join with the pay-TV stations. The smaller number of available hours in a public broadcaster’s schedule would always limit their amount of coverage, especially in sports.

Pay-TV had more hours to fill and more money to buy these sports. The best the public broadcasters could do was just to pick over the remaining pieces.

Additionally, public broadcasters realised that satellite and cable operators provided extra distribution channels for their content and thus provided another - albeit smaller - avenue for extra revenue generation.

The power base for the most sought after programming - particularly for sports - has irreversibly changed. For example, an agreement over coverage of the next World Cup football tournament in Germany has been reached, but only after the pay-TV company Kirch Group obtained the rights for both the 2002 and 2006 events.

Kirch eventually agreed to give Germany’s public stations, ARD and ZDF, the 24 top matches of the 2002 tournament in Japan and South Korea, including all games featuring Germany’s national team. The unconfirmed cost was around 118 million Euros.

The remaining 40 matches in the tournament would be aired on Kirch’s Premiere World platform. Part of the negotiation for Kirch was to barter the World Cup for rights to events usually exclusive to the public broadcaster, such as the Olympics and European Football Championships.

Public broadcasters are also moving into pay-TV, in part, as a result of the decision by European governments to provide their respective national public broadcasters a slice of digital terrestrial television (DTT) spectrum. Governments are interested in having public broadcasters move from their current analogue broadcast frequencies to the new digital frequencies because it will free up part of the bandwidth to be re-sold to other commercial entities, for example, cellular telephone operators.

In the UK, the broadcaster ONdigital utilises the DTT spectrum but an ONdigital set-top-box also provides access to the BBC digital channels for free. This model is likely to be followed throughout Europe where most countries are planning to launch DTT in the next two to three years.

Not all public broadcasters in Europe rely totally on a government subsidy as the BBC does in the UK. In France the public channels also carry commercials. So the big question - and one that is already causing much controversy - is how much of the government subsidy will be retained in the pay-TV world. Pay TV broadcasters argue that the meeting of public broadcasters and pay-TV broadcasters - under current regulations - in a commercial environment is unfair and a misuse of public money.

The Internet challenge

The advent of the Internet has created another distribution platform for information and, increasingly, entertainment services. Although video via the Internet is still dependent on the speed of the modem connection, the development of broadband connections will alleviate these problems and promises to make surfing the web a far less frustrating experience.

Broadband connections are essentially upgraded cable networks or phone lines, which use digital subscriber line (DSL) technology to ‘supercharge’ the communication. In the USA, high-speed broadband services like Excite@Home are being delivered on upgraded cable networks. But in Europe, moves to put together Internet services providers (ISPs) - using the same formula as the US - have been de-railed due to the dot.com bust, falling share prices and the overall slow-down in the technology industry.

Cable operators like Telewest in the UK are also trying to incorporate the Internet by offering high-speed access using their own branded portal as the entry point. And it is not just the cable operators. Satellite broadcasters like Sky and TPS are also attempting to create Internet-like services based on a ‘walled-garden’ (limited and proprietary content) around each subscriber.

A year ago, streaming services were considered to be a big threat to pay-TV companies (as well as traditional broadcasters), but the technology has been more difficult and expensive than first envisioned. However, there is clearly a move to integrate ‘Internet-type interactivity’ and streaming services into people’s entertainment menu.

Rather than opposing the threat of these new services, pay-TV broadcasters are attempting to incorporate them into their existing services. And one of their major advantages is that they already possess a captive audience of millions.

One consequence of all these changes is that, in the future, the phrase ‘pay-TV’ itself will become redundant because the types of personalised communication will bring more than just traditional television programmes to consumers. They will be able to choose between all kinds of services on all kinds of communications devices - including mobile phones and PDAs. When this happens, marketing departments will start to rub their hands with glee, as individual subscribers will be personally targeted.

A new revenue benchmark

This brave new world of personal media and marketing needs a new type of benchmark. Enter ARPU or average revenue per unit. The unit is the consumer, and all the pay-TV companies with their new interactive strategies, will need to have this information as it will form the basis of their marketing strategies and also of the amount of confidence they enjoy from the financial community.

Barclay Knapp, CEO of UK-based NTL, has set his company a target of raising its ARPU from its current 54 Euros to 90 Euros by 2005. This kind of thinking will dominate pay-TV and all other interactive systems over the coming years, as consumers have increasing opportunities to shop, bank, gamble, play games - as well as watching their TV-type device or screen.

The challenge for operators and providers of content, therefore, is to ensure that the services they offer via pay-TV platforms are compelling enough to attract the kind of ARPU they are expecting. One research company from the UK, the Henley Centre, believes that pay-TV’s optimism may have been misplaced.

Their most recent study says that 50 per cent of consumers only go to interactive services ‘when there is nothing else on TV’. It also states that only 25 per cent turn on the TV specifically to go to interactive services, while the other 25 per cent do so only during a commercial break. The Henley Centre concludes ominously that just because consumers can use the TV to shop, this is no guarantee that they will.

Yet this maybe mitigated by the introduction of broadband access. After all, we still do not know exactly how responsible a slow Internet connection is for subscribers reluctance to go online. Alternatively, is it the cost? Moreover, we will not know until broadband is readily available at low prices.

However, a recent experiment by UK cable operator Telewest might provide some of the answers. Already claiming to have the highest ARPU in Europe at 57 Euros, it believes it can improve this. In a test scenario, the company provided several thousand of its customers with broadband Internet access. After the appropriate billing cycle, it claimed that ARPU in this group had increased to 97.5 Euros.

For all the talk of the Internet threatening traditional broadcasting, this model remains to be financially proven - unlike pay-TV, which already generates billions of revenue. What is more, the relationship between a pay-TV broadcaster and its customers places them in a strong position to slowly initiate their customers into Internet use, which for the general public, still remains something of a mystery.