The number of households subscribing to new Television via Internet Protocol (IPTV) services offered by telecom carriers in Western Europe will reach 3.3 million this year and 16.7 million in 2010, according to new forecasts from Gartner Inc.

Despite the robust growth in users, Gartner said that IPTV will struggle over the next five years to become a mainstream revenue opportunity for telecom carriers. Competing against entrenched Pay TV and free-to-air terrestrial TV providers who deliver good quality programming for free, carriers will resort to low priced services and bundles to drive initial subscriber uptake. As a result, carriers' IPTV revenue in Western Europe during the period will grow from 336 million euros in 2006 to only 3 billion euros by 2010.

"While the short to medium term profits from IPTV will be modest at best, carriers can't afford to delay in the deployment of the IPTV platform," said Susan Richardson, principal research analyst at Gartner. "Those who delay too long will risk undermining their ability to be long term key players in the consumer infotainment communications business. This is because IPTV is not a single service; it is a new distribution platform over which many services can be offered eventually. Investments now have to be seen in the context of seeding the ground for the future."

Carrier go-to-market strategies and initial success with subscriber levels will vary significantly between countries, depending on the level of telecoms competition in a market forcing carriers to act and the strength of the incumbent Pay TV competition that carriers face.

France is currently way ahead of other markets in terms of IPTV adoption. Gartner predicts that by the end of 2006, almost half of Western Europe's IPTV subscribers will be based in France - a total of 1.7 million generating revenues of 141 million euros. By 2010, Gartner expects that the number of subscribers in France will reach nearly five million, just under one third of all IPTV subscribers in Western Europe and generating 682 million euros in total revenue. Gartner attributes IPTV's success in France to an aggressive (low entry price) push from competitive players including Free and Neuf as well as France Telecom, combined with the fact that all the major Pay TV services are willing to embrace new distribution channels.

"Despite the high subscriber base, the situation regarding IPTV adoption in France is not quite as straightforward as it first appears," said Ms Richardson. "Subscriber numbers are high but are based on the number of customers who have access to the service for free via their triple-play bundle rather than those who are actually using and paying for it." A recent Gartner survey found that only 39 percent of market leader Free's customers who have a Freebox actually use it to watch TV. Of the people who used the Freebox, 37 percent are paying a monthly subscription to the provider. Average revenues therefore remain relatively low.

Furthermore, Ms Richardson warned that because of Free's early entry into the market, the Freebox is quickly becoming outdated and that the company will need to replace its MPEG2 set top boxes to maximise the number of households which can receive its IPTV services, and to allow for HDTV distribution in the future.

The UK currently has one of the smallest number of IPTV subscribers in Western Europe with only 75,000 subscribers predicted in 2006. Although this is set to increase fairly rapidly to reach 1.9 million by 2010 with the introduction of services such as BT's BT Vision this autumn, Gartner predicts that the UK will remain a weaker prospect for IPTV. This is mainly due to the existing Pay TV landscape and dominance of Sky TV.

Germany has historically been a challenging market with low potential for pay TV, due to the large number of fairly high quality free-to air-channels. Gartner estimates that only 10 percent of households in Germany today pay for premium TV, a milestone that took 15 years to achieve and was largely driven by consumers' willingness to pay to watch football.

However, the market is on the brink of change as illustrated by recent announcements from Deutsche Telekom, with both Premiere and Microsoft. Gartner estimates that the number of households subscribing to IPTV will reach 47,000 this year and grow to 2.8 million by 2010, generating revenues of 465 million euros.

"People in Germany are just starting to get used to the idea of paying for premium services as small charges are currently being introduced for satellite TV," said Ms. Richardson. "If Deutsche Telekom can introduce some exciting new services, people are going to be more willing to consider it as they are no longer comparing IPTV services with a free offering." She added, “German consumers are price sensitive, which presents challenges for pay TV services. However, a key benefit of IPTV is the ability to be interactive. This makes it possible for telecoms carriers to make additional money through interactive services. For example, if Deutsche Telecom secures football rights, they can introduce additional services such as sports betting and make money this way, even if they give away football at very low cost.”