Korean IPTV trio facing crunch time, but FMC could hold the key

By Tony Brown

To say that subscriber take-up of the full IPTV services launched by South Korea’s triumvirate of IPTV operators, KT, SK Broadband (SKB) and LG Dacom, has been underwhelming would be something of an understatement.

Since the operators began offering their full IPTV services with live broadcast channels in December, supplanting their previous VOD-based offers, they have added only about 250,000 subscriptions in total.

Their lackluster progress means they are nowhere near reaching the government’s target of 2 million full IPTV subs by year-end. At their current growth rate, they will be very lucky to hit even half that number.

Korea’s IPTV players have now realized that although it was relatively easy to create a 1.6 million-subscription base for their VOD-based IPTV services, luring subs to a full pay TV service is a different prospect altogether.

KT and SKB rapidly developed their VOD-based IPTV subs bases by giving away settop boxes to their broadband subscribers and allowing subs to graze as lightly as they wanted on the VOD-based services, at no minimum monthly charge.

Their introduction of live channels, though, has meant that the operators have now had to introduce full monthly subscription charges that are essentially forcing subscribers to choose between keeping their existing cable TV subscription and taking up one to IPTV.

Although the IPTV operators have all spent heavily on acquiring content, they are still unable to offer the same number of channels – or indeed the same quality of channels – that are available on digital cable platforms.

As a result, the vast majority of cable TV subscribers – numbering about 15 million in total and representing about 90% of TV homes – have opted to keep faith with their cable TV services and not take up full IPTV subscriptions.

Where to now?

The abysmal adoption of full IPTV services in the past six months has left all three IPTV operators in a tight spot – especially broadband market giant KT, which has spent large amounts of money on IPTV in the hope that it will replace its fast-declining fixed-voice revenues.

With its 150,000 subs at mid-June, KT has been the best performer in the full IPTV stakes, but it has been able to attract that number of subscriptions only because of the rock-bottom KRW8,000 (US$6.25)-a-month charge for its Qook TV service.

KT’s IPTV fees are less than half those charged by digital cable TV operators for their more extensive platforms. They are also KRW3,000 a month cheaper than SKB’s Broad&TV service and KRW5,000 a month lower than LG Dacom’s MyLGtv.

As a result of its low subscription charges, KT is already operating Qook TV at a heavy loss. Its losses will increase once it adds more channels to the platform, putting it under further pressure to raise its subscription rates.

But it is only by adding more channels – and high-quality channels at that – that any of the IPTV operators can seriously hope to compete with and begin taking subscriptions from the country’s cable TV operators.

At the moment, many of South Korea’s leading cable TV providers have refused to supply their channels to the IPTV operators – and have done so even though KT in particular has made some very substantial offers for carriage deals.

This is because these cable-channel providers generate huge advertising revenues from their access to 15 million cable TV homes and are terrified of being kicked off cable networks by cable operators if they sign carriage deals with IPTV operators.

As a result, IPTV operators are effectively fighting with one hand tied behind their back, because they cannot offer the same popular channels that cable TV operators are screening, which makes cable TV subscribers highly reluctant to defect to IPTV.

Despite making extensive efforts to acquire their own content from both foreign and domestic providers, the IPTV operators have little choice but to carry on pushing the reluctant channel providers into striking a deal and hope that their persistence pays off.

The problem is, of course, that the IPTV operators are in a classic chicken-and-egg situation, given that the channel providers won’t move to IPTV until the IPTV operators can offer a mass subscriber base from which ad revenues can be generated. But they can’t get that base until they have access to all the best cable channels.

Time to pay up to terrestrials

As if the IPTV operators did not have enough to contend with, they are facing the problem of the three major terrestrial broadcasters, KBS, MBC and SBS, banging on the door and demanding that the IPTV operators sign permanent carriage deals.

The broadcasters are threatening to withdraw their channels from the IPTV platforms if each IPTV operator does not agree to pay each terrestrial broadcaster US$30 million a year for carriage on their platforms.

This means that IPTV operators would each be paying a staggering US$90 million a year in carriage fees for terrestrial channels alone – a crippling burden for the operators that only KT is likely to be able to afford in the long term because of its huge financial resources.

Nonetheless, the IPTV operators also realize that losing carriage of the terrestrial channels would be a commercial blow: It would mean that their subscribers would also have to maintain a cable TV subscription in order to view the highly popular terrestrial channels.

No turning back now

There is little doubt that the IPTV operators find themselves in a tight spot, but their strategic options at this point remain limited, and they really have little choice but to keep going and hope for the tide to turn.

KT is clearly in the strongest position of the three IPTV operators because of its greater financial muscle and more extensive network infrastructure.

Although KT does need to match the content offered by the cable TV operators, it also needs and move the battle with those operators away from solely being about content. Instead, it should fight more on its strength in having both fixed and mobile networks at its disposable.

KT is best-placed to move into the fixed/mobile convergence era because of its extensive FTTH assets and its recent merger with mobile operator KTF. It needs to use these strengths to offer compelling FMC services to subscribers.

At the moment, the cable TV operators are able to use their hold on key cable-channel providers as a fig leaf to cover their weaknesses in offering FMC services, and KT needs to turn up the pressure on the cable operators by ramping up its own FMC services.

Of course, the FMC road map remains largely unknown, with operators all over the world struggling to work out how to generate revenue from FMC services. Yet for KT, this is really their trump card in persuading subs that they should migrate from cable and take up next-generation services that can offer them real value.

The IPTV operators have truly gotten off to a bad start in the full IPTV era, but the battle has really only just begun. And with all three IPTV players able to offer FMC services – although KT is in by far the best position – the key will be to maximize this advantage and put the pressure back on the content-rich but technology-poor cable TV operators.