A report released by Forrester Research warns that low revenue opportunities and the high investments needed for broadband triple play could result in significant losses for Western Europe’s incumbent telecoms operators. Faced with combined competitive pressure and massive vendor hype, several operators have already started to offer Internet Protocol Television (IPTV), along with their voice and data services. However, the Forrester study shows that incumbents need to take a deep breath before proceeding further down the IPTV path, as the odds are stacked against telco success with TV services.

Forrester’s new, detailed bottom-up profit and loss model looks at the profit potential from 15 main revenue categories across 17 countries and shows that the vendor-recommended solution would be financial suicide. The model — which uncovers very different cost and revenue projections for each country — predicts an average cumulative per-subscriber loss of €3,742 in year 10. Incumbents in the UK, France, Italy, and Spain, face the worst situation, while Deutsche Telekom (DT) faces the smallest loss. Given this very negative business case, Forrester advises telcos to see TV services as purely defensive and forget about any potential revenue and profit uplift.

Lars Godell, Principal Analyst, Telecoms, Forrester Research said: “Creeping telecom and media industry convergence and increased competition between cable companies, telecoms operators and ISPs explain why broadband triple play is seen as the battlefield for future ownership of the consumer and the digital home. However, the poor revenue potential undermines this hype – and the big question remains: Will operators be able to make money from their push into IPTV? At the moment, the answer is no.”

Incumbent Telcos Respond To Vendor Hype And Competitors' Triple-Play Moves
Vendors are playing on incumbent telcos' fears of losing profitable fixed-line customers and missing out on "the next big thing." Some vendors claim that triple play will greatly reduce customer churn, double average revenue per user (ARPU), and attract 30 per cent of broadband subscribers, or deliver payback, all within five years. Forrester found that while incumbent telcos are critical of these promises, they do feel compelled to get into triple play themselves. Meanwhile, cablecos like NTL in the UK and ISPs like Free Telecom in France attack incumbents with full bundles and low prices.

The Triple-Play Dice Are Loaded Against Incumbent Telcos
According to Forrester, incumbents will struggle with triple play for several reasons. Few are strategically committed to triple play, but are distracted by issues like ongoing industry M&A activity, restructuring, and consolidation. Most lack a track record in innovation, especially outside their core business, and are not operationally and culturally prepared. Also, telcos seem to think that there's a pot of gold waiting in the (broadcast) content space (which Forrester believes there is not), and are taking a huge gamble that consumers will quickly change their TV viewing behavior.

Godell says: “It’s surprising to see how eager incumbents like Deutsche Telekom and France Telecom (FT) are to deploy very expensive fiber-backed solutions for delivering IPTV, which is exactly the main cost reason why our P&L model shows huge losses. It’s hard to see how DT’s planned €3 billion investment in fiber and VDSL networks can ever return a profit in a country where consumers enjoy up to 48 free-to-air TV channels and are used to paying very little for TV services. And FT’s plans to move aggressively into entertainment don’t stack up well against market data showing little or no growth in overall consumer spending on content services.”

In his report, Godell sets out a series of recommendations as to how incumbents in Western Europe can best improve the triple-play business case. “Keeping copper loops at today’s lengths and avoiding suicidal fiber investments represent the starting point for smart damage control.” He believes that incumbents should learn from BT, KPN, and Telefónica, which actively use digital terrestrial TV (DTT) in their triple-play strategies. BT and Telefónica have ordered or already use hybrid DTT/IPTV set-top boxes, leveraging the very cheap/free and widely available DTT distribution networks.

However, Godell warns there is no such thing as a single TV strategy that fits all incumbents, as national conditions vary greatly. “Given the bleak IPTV business case, there’s no need to rush into making potentially very costly mistakes. Telecoms operators could instead make fixed-mobile convergence a priority for churn reduction until their triple-play strategy and operational preparedness are in place.”

The report mentioned in this release, Incumbents' Triple-Play Profitability Crunch, is available to Forrester WholeView 2™ clients.

Methodology
Forrester conducted more than 70 interviews with telecoms operators, vendors, and content providers, including: Alcatel, Belgacom, BT, Cisco Systems, Deutsche Telekom, France Télécom, KPN, Siemens, Telecom Italia, Telefónica, and Telenor. The interviews were combined with Forrester’s European Consumer Technology Adoption Study data and extensive Web searches to create a bottom-up P&L model with more than 4,000 lines of cost and revenue assumptions.