IPTV VoD model falls short

Just as BT prepares to kick off a high profile marketing campaign for its Vision IPTV service, industry analysts have come out with a warning that the IPTV video on demand (VoD) business model falls far short.

Ozgur Aytar, manager of industry analyst Pyramid Research, said that VoD services over IPTV networks fail to offer an attractive business model in the medium term, because they are often based on unprofitable revenue-sharing agreements.

Pyramid notes that the most popular VoD asset is new movies, which account for 80 per cent of all US transactions. But Hollywood studios generally demand the bulk of the revenue and often offer minimum guarantees.

Because they have to pay almost all revenue back to the studios and generally have small customer bases, Aytar does not believe IPTV operators can achieve significant profits from VoD transactions.

However, Pyramid believes that VoD is a necessary evil for IPTV operators in order to differentiate themselves from other pay TV offerings.

The analyst sees the business model evolving in two stages: The initial stage is customer retention, with TV and VoD forming an essential component of a triple or a quadruple play package. Although Pyramid warns that premium VoD content cannot compensate for deficient voice and broadband offerings.

The second stage should be more lucrative but will take another 3-5 years to come into its own, the analyst said. By developing a multiplatform presence for their VoD content, IPTV operators will build larger audiences and grow profits. And the when the offering reaches an acceptable scale, telcos should expect to have more negotiating power with the studios and more opportunities with advertisers.

“For telcos to reinvent themselves in order to cope with diminishing revenue from voice services, they need to develop their overall content business, and VoD is a key part of that,” Aytar said.

France Telecom hopes to generate about Eur400m in 2008 from its content business, and as much as 22 per cent of that is expected to come from VoD services. The operator has already created mobisodes for mobile devices as well as exclusive content for the PC.

But developing a multiplatform offering will take time, Pyramid warns, largely because of copyright and licensing issues. While telcos such as Telefonica, Verizon and France Telecom are already pursuing the multiplatform opportunity, they still have to license content for each platform separately.

Indeed, telcos have reportedly found the content sourcing process to be more complex and time-consuming than anticipated. Content providers are interested in extending their reach, but they are also concerned about disrupting established advertising models as well as about piracy, Pyramid said.