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Tue 27 Jan 2009 04:00 AM

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Content end-game

By limiting their role in the value chain to the mere provision of traditional connectivity, telecom operators are posing a significant risk to their business: differentiation has become more challenging, with technology being largely commoditised and accessible to all players in the market. To address this challenge, many operators are increasingly eyeing telecom-media convergence to drive their expansion strategies.

By limiting their role in the value chain to the mere provision of traditional connectivity, telecom operators are posing a significant risk to their business: differentiation has become more challenging, with technology being largely commoditised and accessible to all players in the market. To address this challenge, many operators are increasingly eyeing telecom-media convergence to drive their expansion strategies.

While there is no silver bullet for success, operators that are able to move quickly and capture the currently underexploited content market will create a sustainable competitive advantage in their markets and possibly beyond.

Broadband technologies in both fixed and mobile networks enable operators to broadcast or stream multimedia signals to their subscribers. This means that operators can become a new broadcast medium for content - including games, video, news, sports, weather, and music.

A number of telecom operators in European markets have realised the strategic necessity of actively operating in the media space: Telecom Italia Group, for example, established a media arm known as TI Media, which provides video, gaming, audio, and textual content. While this convergence trend has not become very evident yet in the GCC, a number of market and technology factors will drive its acceleration.

The GCC telecommunications landscape is quickly reaching saturation levels. Four out of the six GCC mobile telecom markets have crossed the 100 percent penetration mark, while the remaining two markets are rapidly approaching this threshold.

As a result, operators have focused on customer retention strategies rather than customer acquisition. Additionally, operators are facing the challenge of declining voice average revenue per user (ARPU) and must find ways to reverse this trend.

Providing content services is typically among the areas most commonly cited by telecom operators as enablers of differentiation and ARPU enhancement, and all operators in the region have initiated some serious efforts in this area.

Etisalat has recently started testing its triple play service in the UAE, offering a bundle of voice, internet, and television services. Similarly, Saudi Telecom has been reaping rewards from the success of Abwab, its text messaging service, despite the service's rudimentary interface.

The success of H3G Italy is a case in point for demonstrating the remarkable potential of content services. Despite being the fourth entrant into a saturated market, H3G has managed to gain a significant share of the Italian mobile market by offering differentiated content services.

Within a period of two years, H3G captured nine percent of the total mobile subscriber base and achieved a data ARPU level that is more than double the market average.

All GCC markets are now considered liberalised, with Qatar being the last to join its neighbours in auctioning a second telecom license.

The resulting intense competition, especially as most of the markets are now saturated, creates the need for operators to differentiate themselves from their competition.

Again, content could be one of the key opportunities for doing so.

The emergence of disruptive technologies such as internet protocol (IP) telephony will place increasing pressure on fixed and, eventually, on mobile operators. The threat from cannibalising their core business is prompting telecoms service providers to find alternative revenue sources, including content development and delivery services.

The commercial challenge voice over internet protocol (VoIP) poses to traditional telecom operators is enormous. In Western Europe, for example, the number of outgoing VoIP minutes has been growing at a compounded annual rate exceeding 50 percent and is expected to exceed 10 million minutes by the end of 2007.

This trend is present across all customer segments, including enterprise and residential users. In the GCC region, the threat, though not yet evident, is nevertheless imminent.

VoIP is expected to experience exponential growth as broadband penetration continues to increase globally.

Proliferation of new technologies

Because content requires so much bandwidth, the limited availability of enabling technologies has traditionally been the main obstacle for the mass usage of content services.

This is becoming less of an obstacle in relatively advanced markets, such as those of the GCC. Fixed and mobile broadband technologies are becoming increasingly accessible with the phenomenal growth levels witnessed in the adoption of 3G and DSL services in the region.

End-user device convergence

Mobile handsets are increasingly converging with other multimedia devices, such as digital cameras, music and video players, and personal digital assistants (PDAs).

Similarly, customer premises equipment (CPE) for fixed telephony is increasingly converging with personal computers and television set-top boxes.

A number of set-top box vendors are becoming increasingly active in this space, including Scientific-Atlanta, Amino, Motorola, Thomson, and Humax.These manufacturers are driving rapid product development and increased innovation. Among the advanced features integrated into this new generation of equipment are high storage capacity, video-on-demand capabilities, digital video recording support, multiple format decoding, security support, and digital rights management.

This trend is a key enabler for telecom-media convergence, since it allows users to consume content beyond the traditional phone-only devices.

The TV media sector is highly fragmented in the Arab world. The number of pan-Arab free-to-air television channels has been growing at a compounded annual rate of 45 percent during the past three years and now exceeds 250 channels.

The total number of channels targeting the GCC region reached about 500 at the end of 2006, many of which are thematic channels focusing on highly targeted content.

This trend of targeted channels is gaining momentum and market share at the expense of the traditionally successful general interest channels; and while in 2002 five TV channels garnered 80 percent of the gross TV advertising spend in the GCC, in 2006 that percentage was shared by 28 channels.

Telecom operators must consider a complex array of issues when offering content services. The content itself can encompass information, entertainment, education, transaction, and communication, while the formats range from text, image, and audio to more complex content formats such as video, multimedia, and interactive service.

Delivery options are also varied, including broadcast, streaming, downloads, text messaging, browsing, and peer-to-peer. Telecom operators are faced with the daunting task of not only identifying the right content to be offered, but also determining the optimal format, technology platform, and end-user device. In addition, they must also determine the right language for each content service.

Such activities are new to telecom operators. In order to succeed, they must enhance their understanding of the content delivery value chain and decide what part they intend to play.

Traditionally, telecom operators have been adept at the marketing and service provisioning elements of the value chain. However, they have been less familiar with the broader aspects of content creation, acquisition, aggregation, and end-user terminal management, having outsourced most of these activities to specialised service providers.

To remain competitive now, they must develop or acquire some of these key components. Only by developing a clear understanding of the content value chain can telecom providers determine the best strategy for gaining a competitive edge.

Content creation and production

The first element in the content delivery value chain is the creation and production of content. Content creation is, as seems obvious, the activity of making new content, such as writing a book or taking a photograph.

Content production refers both to the commercial distribution of content as well as to postproduction activities such as formatting, editing, censoring, translating, and dubbing.

GCC telecom operators could become pioneers in adapting global content to local taste through "Arabisation," cultural adaptation, subtitling, dubbing, or other post-production activities.

Early movers could create a sustainable competitive advantage and then distribute content to other operators in the Arab world and hence generate wholesale content revenues.

Operators can also play a major role in adapting and channelling regional content.

Large telecom operators could have more financial capability to acquire expensive content (such as premium sports and movies) than traditional media players: the larger the customer base, the higher the negotiating power, especially when acquiring premium content.

However, it is critical that telecom operators focus on bridging the knowledge gap in content acquisition and management versus the experienced media players.

Should telecom operators aspire to use content as a key differentiator, such activities should be brought under their own control. Telecom operators should also invest in reliable digital rights management (DRM) software to avoid potential disputes with content producers.

Fortunately for telecom operators, they have been mastering the process of billing for years. It is a clear advantage that can be leveraged to extend into the territory of DRM, either alone or through teaming up and pooling capabilities with players from outside the telecom industry.

Billing systems and interfaces are critical for content transactions to work. Collection and revenue assurance systems are well established within telecom operators' IT infrastructures and are clear strengths upon which content management capabilities can be built.

An optimal content acquisition model is key to ensuring a balanced trade-off between risk and profitability and can be achieved using one of many possible content acquisition models.

Such models range from executing a simple purchasing transaction to forging strategic partnerships or possibly creating a joint venture with a content provider.

Content aggregation

Content aggregation includes activities such as content and programme scheduling, data feed monitoring, content updating, portal development, program guide development, and advertising management.

These are the core activities for TV stations such as MBC, LBC, and Rotana, as well as for internet portals such as Yahoo.Understanding customer behaviour and demand patterns is key to offering the right content in the best time slots or portal positions. This area is new to telecom operators, and they will have to commit resources to build capabilities.

In addition, telecom operators should develop expertise in handling time-specific content, such as news reports, as well as content with a short life span, such as novelty ringtones or blockbuster movies. Furthermore, telecom operators should aim to develop streamlined portals to facilitate the content purchasing process for the user.

This applies to content delivered on both mobile and fixed platforms.

Service access and delivery

Service access and delivery represent the core commercial activities of telecom operators. In other words, it is defined as providing the connectivity to end-users through the operator's network. The activities include access network design, deployment, and long-term maintenance.

Mobile operators in the region are starting to offer mobile TV and video-on-demand services over their 3G networks. While offering such services over a 3G network provides a mixed customer experience, early signs of customer acceptance have started to surface.

Etisalat, for example, offered a bundled "all you can view" TV package for a monthly charge of US$11; within two months, the service attracted 100,000 subscribers.

Customer terminal management

Designing customised end-user devices allows telecom operators to enhance customer retention and facilitate access to desired content and can mitigate the risk from device manufacturers, who have also started moving down the content value chain.

For example, Nokia is now moving beyond mere handset manufacturing to offer content directly to its users through its newly introduced WidSets service, which is a mobile aggregator of Rich Site Summary (RSS) feeds.

Similarly, new Nokia handsets include built-in Global Positioning System (GPS) services that aim at disintermediating the telecom operator and reducing its role to connectivity provision.

It is critical for telecom operators to carefully define the device technical specifications for each content delivery platform by collaborating with manufacturers. As mentioned earlier, the primary goal is to make the interface as simple as possible to encourage users to purchase content.

Providing customised devices (proprietary set-top boxes and mobile handsets) allows telecom operators to lock in subscribers and to facilitate customer access to content portals.

Obviously, the larger the telecom customer base, the higher the negotiating power vis-a-vis device manufacturers, as well as the ability to achieve economies of scale.

However, expertise in supply chain management and after-sales service is key, especially for devices with short lifespans, such as mobile phones. Due to the historical absence of handset subsidies in the region, telecom operators in the GCC are not used to dealing with these issues.

Content distribution

In order to achieve scale, operators may decide to resell their acquired content to other non-directly competing players across the Middle East. This could be facilitated by the relatively homogeneous preferences and cultures across the Arabic-speaking Middle Eastern countries.

Overall, the value of the content market will not likely exceed three percent of the overall revenues of telecom operators. Although the absolute value may indeed remain small, the role of content services should be seen as a means of creating a differentiated competitive advantage aimed at safeguarding core revenues and profits of telecom operators.

Content alone, however, is not expected to become a considerable source of revenue growth for telecom operators.

Unfortunately, there is no silver bullet. The key to success lies in the execution, and execution is indeed complex for telecom operators and will require significant capability development and joint activities with traditional media players.

Therefore, operators could choose between developing the required capabilities in-house or acquiring existing experienced entities. The difficulty, however, is in the level of fragmentation in the content delivery value chain. This means that the acquisition route could also prove to be a challenge, as multiple acquisitions may be required.

Alternatively, creating joint ventures with media players could be a solution for consolidating talent. It must be noted that telecom operators bring immense value to content producers as an alternative delivery channel and have a great deal to offer by way of expertise in billing and revenue assurance as well as customer life cycle management and insights.

In the end, irrespective of the method, one thing is certain: Value chain consolidation is under way, and telecom operators are well positioned to play a lead role in driving it, should they decide to expand their role beyond pure connectivity provision.

This is an edited extract from a recent report published by Booz&Co entitled "The Content End Game Capturing the Benefit of Media and Telecom Convergence in the GCC" and authored by Ghassan Hasbani, Karim Sabbagh, Hilal Halaoui, Mohamad Mourad.