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19 May 2006

Hard negotiating work comes before a content deal.

Hong Kong's PCCW might lay claim to the title of leading IPTV service provider in the world, but it is also quick to stress the difficulties for operators of launching services.

Executives at the operator have been on a world tour publicising their own project, NOW, and advising other telcos how they might implement their projects. In London recently, PCCW's board members were guests of BT's Paul Reynolds, the man charged with building the 21st Century Network (21CN) and making it ready for multimedia services.

This week the company was back in Hong Kong, headlining the Broadband World Forum Asia conference, and the message it brought was clear: the more complex your converged delivery network, the more complex - and more expensive - your content deals.

"We have three to four teams working in parallel just to get deals done," said Michael Fagan, deputy general council at PCCW Group. "You need exclusive contracts and need deals done quickly without leakage of plans."

Now PCCW plans to help other carriers emulate its success, taking content to other IPTV platforms, initially in Asia.

"We have had dozens of discussions with people wanting to emulate our IPTV service," said Alex Arena, Group CFO and executive director of PCCW, at Broadband World Forum Asia. "We will offer the business plan, the technology and the content, and will work with Star Group to offer turnkey content solutions."

Star TV, owned by News Corp, is the biggest cable and satellite broadcaster in Asia. "Telcos need to make significant investments," said Michelle Guthrie, chief executive of Star TV. "Pay TV subscribers pay a lot and expect a lot ¡K but can become good customers."

PCCW forecasts subscribers to its NOW pay TV service will grow from 560,000 to 750,000 by the end of this year, which would put it on a par with the local cable incumbent.

ARPU for NOW was HK$114 (about 11.5 euros) at the end of 2005. The success of TV has also driven growth in broadband connections, which have risen 20% in each of the last three six-month periods. Arena said NOW is on track to break even on an EBITDA basis for its content by the end of 2006.

One of the keys to this success is getting customers to buy more channels rather than the a la carte and mini-packs of content used to launch the service two years ago. "We now offer value packs, where for HK$388 customers can get everything," said Arena. Fagan said to be serious in IPTV you need to have at least 100 channels; PCCW now has 110.

Arena also unveiled plans to begin real-time mobile TV broadcasts to PCCW Mobile's 3G customers, using Cell Multimedia Broadcast technology newly developed by Huawei.

As well as carrying a home-grown, 24-hour business news channel, the 120,000 customers trialling PCCW's 3G service for free can watch the ESPN and Star Sports channels they already get on the carrier's IPTV service, and English Premier League football matches.

But while PCCW has made some headway, other operators have significant issues to overcome before they begin to emulate its IPTV success.

As television services become more sophisticated, content rights become more difficult to negotiate, particularly over multiple platforms.

"If content owners see further exploitation of their content, they will want more money for it," said Ringo Chan, vice president, greater China, at Turner Broadcasting System Asia Pacific.

John McLellan, a partner at legal firm Haldanes, highlighted some of the problems when navigating contract negotiations. "If you take television rights, do you also take 3G for football? And then web streaming rights are often done separately," he asked.

Telco lawyers are struggling to put these deals in place, said PCCW's Fagan. "Most traditional telco lawyers are out of their depth," he commented.

Fagan said it is important for legal teams to work closely with business teams to ensure they are clear what they are trying to achieve. "PCCW built a contract template for content negotiations which helps to distil the business model," said Fagan. "Sport is real time and therefore totally different - with bidding high risk and high stakes."

Craig Zimblus, president and chief operating officer of Anytime, a video-on-demand movie channel, said one option for telcos is to use content aggregators. "It takes away the pain of dealing with major content owners and studios. You know you are doing it legally and it is scalable," he said.

A report from the European Cable Communications Association, Economic Impact of Copyright for Cable Operators in Europe, said copyright collection societies can be effective but adds that they "may also cause market distortions since they have virtual monopoly positions in many EU countries".

PCCW produces its own business news channel, employing 100 people, which gets round the problem of cross-platform licensing. "Content licensing is the core foundation of the IPTV business," said Fagan. "Don't delay [securing content] as it will just shore up the incumbents."

Another contentious area is geographical rights: Internet-based distribution can often circumvent the national barriers that content owners have traditionally applied.

"More deals will be done on language or device, and geographical barriers will blur in the future," said Jeffery Soong, chief executive of Hong Kong based IPTV consultancy BNS. "The technology is already there and it's just a matter of reaching the necessary agreements."

Piracy is another major problem in Asia. According to Simon Twiston Davies, chief executive of the Cable and Satellite Broadcasting Association of Asia, losses to piracy for the content industry were around US$1.06 billion last year.

"The industry has shied away from a linear technology for security," said John Mederios, vice president government relations and regulatory affairs at CASBAA. "Instead we [CASBAA] have issued technical guidelines and a set of standards of what security and protection should do."

This also makes life harder for new pay-TV entrants. One delegate representing an Indian IPTV company said in his 20 years' experience no matter what measures were implemented, "the pirates always win".