Whitepaper: Making IPTV Work

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April 5, 2013

Table of Contents Introduction .................................................................................................................................................. 3 IPTV’s Growing Importance ..................................................................................................................... 3 IPTV Market Dynamics ................................................................................................................................. 4 Know Your Market Before You Launch .................................................................................................. 4 Operational Efficiency.............................................................................................................................. 5 Keeping Costs in Check ............................................................................................................................... 5 Shared Super Regional Headends ......................................................................................................... 5 Customer Support Costs ......................................................................................................................... 7 Growing Revenue ......................................................................................................................................... 7 Conclusions .................................................................................................................................................. 8

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Introduction The idea of telecom carriers offering video services as a competitive product first took serious hold about 15 years ago. There had been talk many years, even decades before this, but real traction with TelcoTV services began to take root in the late 1990’s.Today’s IPTV system uses Internet Protocol (IP) to enable carriers to provide triple-play IPTV services across DSL, PON, Cable, and Wireless access networks. Much has happened in those 15 years, with IPTV now a legitimate competitive offer to traditional cable TV and DBS services, giving telephone companies the much needed video component of a robust triple play offer. As the IPTV maturation process continues, it will no longer just be the domain of the telco industry. Many cable MSOs are already laying their own groundwork for a transition to IP video and conventional wisdom suggests that most, if not all video services, will be delivered via IP networks within a decade or two.

IPTV’s Growing Importance For telecom carriers, IPTV plays a very important role. It fulfills one leg of the triple play bundle, giving telcos the capability to compete with cable MSOs, who have been quite aggressive with their triple play efforts. But its importance goes beyond just competitive positioning. IPTV also plays a crucial role in helping improve customer satisfaction and grow average revenues per user (ARPU). “Premium television package subscribers are more loyal and more likely to purchase additional products from their television provider …” reports J.D. Power in their 2012 U.S. Residential Television Service Provider Satisfaction Study1. Customers who subscribe to triple play offers tend to be more satisfied with their provider than customers who only subscribe to single or double plays. Keeping customers satisfied is paramount for customer retention. Given the high cost of customer acquisition and the lifetime value of a triple play subscriber, service providers need to concentrate on effective customer retention strategies. Better customer satisfaction for triple play bundles may be attributed to the perceived cost savings by customers. “But customers’ assessment of value for money has become more favorable. The likely explanation lies in the industry’s ‘price bundling’ of services – such as internet, telephony as well as cable channel offerings. Since there are often price discounts associated with bundling, customers appear to view these offerings in a positive light," reports Claes Fornell of the American Customer Satisfaction Index2. By offering IPTV as a part of a triple play bundle, telcos increase the possibility of keeping customers more satisfied. In addition to customer satisfaction, growing ARPU is a desirable goal for telcos. Significant investment has been made by telcos in their video capable broadband networks, requiring a profitable return. By adding video to the product mix, telcos can grow ARPU faster than without it. “In fact, average monthly billing for triple-play customers, those subscribing to telephone, television and Internet service, climbed to $149.52 in 2011 from $140.90 in 2010,” reports J.D. Power in their

2012 U.S. Residential Television Service Provider Satisfaction Study, J.D. Power, http://www.jdpower.com/content/press-release/4jCpMOG/2012-u-s-residential-television-service-provider-satisfactionstudy.htm 2 Customer Satisfaction Scores, DSLReports.com, http://www.dslreports.com/shownews/74476 1

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2011 Residential Television Service Satisfaction Study3. J.D. Power also highlighted the growing incremental revenue opportunity from HD and DVR services for video service providers.

IPTV Market Dynamics For all its promise, IPTV is not without its challenges. High CAPEX and OPEX costs create a difficult business model, requiring service providers to be diligent. High capital investment in video processing headends create a challenging business case, while ongoing content costs continue to rise regularly, adding to the challenge. Service providers need to employ best practices that help lower their CAPEX and OPEX costs, while also maximizing all of their revenue opportunities.

Know Your Market Before You Launch First and foremost, telcos need to understand the unique nature of providing video services. Often times, telcos mistakenly treat video as just another service to add to their product portfolio, not unlike services they have added in the past. But video is a much more dynamic product with unique needs, requiring much more attention to detail and planning. The market for video services is also much more competitive, with at least two satellite providers, and generally one cable provider, in every market. Some markets have more. The planning and preparation process for an IPTV network launch is critical, and this process should begin well before the launch date. Telcos first need to gain a comprehensive understanding of their marketplace through market research. This market research should identify the following, at a minimum:      

The competitive landscape in terms of existing service providers, the packages (including pricing) they offer, and the satisfaction of their current customer base The current market opportunity, including number of TV households, and the current penetration rates of existing providers The current demand for basic TV services, as well as value added services like DVR and premium channels The desired channels or channel line-up of the market Perceived strengths and weaknesses of competitors by customer base Complete market demographics and firmographics

Service providers should consider using a professional research firm and system integrators, who can better analyze this data and offer findings and inputs for a more effective business plan. These findings will also help define a written marketing plan that best addresses actual market conditions. Due to the aforementioned competitive landscape of video, effective marketing is critical for success. A professional marketing approach is recommended and telcos should not be afraid to look

DVRs Fueling Video ARPU Growth, Telcos Beat Cable for TV Satisfaction, Telecompetitor, http://www.telecompetitor.com/dvrs-fueling-video-arpu-growth-telcos-beat-cable-for-tv-satisfaction/ 3

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outside their company for guidance if adequate internal resources are not available. Planning, writing, and implementing an IPTV marketing plan should only be done by marketers with video experience. The above referenced market research will provide critical inputs for this plan.

Operational Efficiency Due to the identified business challenges of IPTV, margins are thin, and therefore there is little room for error. Service providers must ensure operational efficiency and that requires planning. Telcos must get a holistic view of how to inject IPTV into their operations and their operational flow. Extensive operational flowcharts must be established that document the process from customer inquiry, to service order processing, to installation, to network and service performance management, and finally to billing and collections. Change will need to be embraced and flexibility will be required. IPTV providers must be sure their process flow can change and adapt to meet market demands and not assume the market will change and adapt to the needs of the telco. This operational flow must be supported by a robust billing and operational support system that can adapt to a dynamic marketplace. The competitive landscape of video drives significant and unpredictable change. IPTV service providers have to be able to adapt and react to competitor moves. This means having the ability to add new service capability, change pricing, promotions, product offers, and processes quickly and accurately will be required. Legacy billing systems are notoriously inflexible and should be addressed before launching IPTV. When implementing the interaction between IPTV solutions with OSS/BSS, the provisioning, alarm management, QoS management, inventory management, billing and customer care are essential to consider. Flexibility, adaptation, and efficiency will be required of all support systems for IPTV success.

Keeping Costs in Check Success in IPTV requires service providers to lower their costs without sacrificing quality to the customer. There are some best practices that when put into play can help achieve this most important objective. Both CAPEX and OPEX costs should be addressed and wherever and whenever possible, minimized.

Shared Super Regional Headends A headend represents one of the largest CAPEX expenditures. Headends process all of the video feeds, preparing them for proper transport to the set-top-box within customer’s homes. They also house all of the equipment that controls all the other functions of an IPTV service. A super headend serves these functions, to include the following: 

Video Acquisition – Video reception from Satellite and off-air – Video Receivers – Signal Conversion

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Encoding – High and Standard Definition

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Audio encoding MPEG-2, MPEG-4

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Video Processing and Aggregation of common video contents – Ad-Insertion – Multiplexing

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Middleware – Service Delivery Platform for Rich Media Services

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Video Management and Billing – Digital Right Management (DRM) – VOD Servers – Remote Operations

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CDN –

A common platform for packaging, content/service routing, caching & streaming, and providing analytics reporting

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Network Monitoring – Centralized monitoring to find and troubleshoot problems and maintain high QoE

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Customized Electronic Program Guide (EPG) for each participating IPTV operator – EPG, Operator logo, Local Channel, and Contents

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Adaptable OSS/BSS/Processes – Provisioning and Configuration – Billing

If not controlled, the cost of a headend to adequately address all of the above could sink an IPTV business model. Luckily, there are proven ways to lower these costs and spread the risk. Shared super headends allow multiple operating companies to share in the cost of building, operation, and maintenance of headend office. By sharing the cost, multiple companies can build the type of super headend that supports all of the necessary advanced IP applications that can help build differentiation for all participating companies in their separate respective markets. A shared approach also offers faster time to market, shared risk, and the ability to jointly launch new applications. The shared headend in the tier 3 telephone marketplace is a delicate balance between the local independence of the historic telephone company and the new requirements to operate as a cost conscious competitive video provider. The market for video services is evolving quickly. Customers have expectations for advanced DVR and VOD services, second screen and TV Everywhere access, OTT, and other interactive applications.

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Super headends enable these services and applications. Telcos - particularly smaller, rural tier 3 telcos - should seriously evaluate the shared approach to help lower their costs and risks, and improve their capability to meet growing customer expectations.

Customer Support Costs Lowering ongoing costs, or OPEX, should also be a goal for any IPTV operator. All OPEX aren’t easily controlled, namely content costs, but enough are within control. As discussed earlier, ensuring efficient operational flow can go a long way in keeping OPEX costs in check. While providing excellent customer care should always be at the forefront, there are inefficient and efficient ways to do so. Service providers should strive for the efficient way. Here are some goals to aspire to: Customer Premise Wiring and Installation – Doing installations correctly with proper wiring can prevent trouble calls for the future and go a long way in reducing costs. Empower Customer Service Reps – With the right OSS system, CSRs can handle many service calls remotely, preventing truck rolls. CSRs should be empowered to troubleshoot and fix problems. One truck roll can equate to two to three months of gross revenue. Reducing truck rolls should be of the highest priority. Customer Training – Whenever possible, particularly during installations, provide good customer training on how to use the system. Trouble calls can often be simple issues of how to use the remote control. Training customers properly can significantly reduce potential future troubles. Operational Flowcharts – Keep operational flowcharts updated and within easy reference. Give your support staff the tools necessary to address problems quickly and effectively.

Growing Revenue By offering IPTV, service providers are already attempting to maximize their ARPU opportunity. But that attempt shouldn’t stop with IPTV service alone. There are other opportunities to exploit as well. The challenging business case presented by IPTV demands investigation of all revenue opportunities. Here are a few to consider: IPTV Basics – Don’t take any of the services associated with offering video for granted with regards to revenue opportunity. In other words, don’t leave money on the table. Do your homework and ensure competitiveness, but also explore the opportunity to charge for installation ($40 - $250 in gross revenue), additional STBs/outlets ($3 - $10 in gross revenue per month), Whole Home DVR Services ($10 - $20 in gross revenue per month), In Home Wiring ($3 - $7 in gross revenue per month), among others. Local Ad Insertion – The television advertising business is a multi-billion dollar market, with video service providers given the opportunity to capture their share of it locally. Cable networks like ESPN, Discovery, CNN, and other blue chip channels make air time available to service providers for local ads. On average, 2 minutes per hour per channel are made available, which equates to 1,536 spots per day and over 560K spots per year. That is a significant revenue opportunity. Equipment costs have come down considerably, making local ad insertion within reach for even the smallest provider.

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Consider partnering with a turnkey provider of local ad insertion, who can manage the technical portion, as well as the actual ad sales. An added bonus of ad insertion includes giving service providers the ability to do their own advertising, significantly increasing their own marketing effectiveness. Digital Home Services – By offering IPTV, telcos are also delivering a robust broadband pipe to the home. As a result, layering other digital home applications across that pipe should be considered. One of the more promising is home monitoring and control services. These services, which offer traditional home security, bundled with the ability to remotely monitor and control home functions, can add anywhere from $15 to $50 per month in additional gross revenue (depending on services offered). There are other applications emerging, including managed home network/wi-fi offers, high bandwidth gaming tiers, tele-health services, distance learning, targeted advertising, and television commerce. Some of these applications may provide more revenue opportunities than others, but the important point is to explore and exploit as many of them as possible.

Conclusions IPTV networks are evolving to an application-aware, intelligent, full control infrastructure for seamless, blended, and personalized multimedia services. As a result IPTV can play a critical role in helping telcos retain and grow their subscriber base, while also improving customer satisfaction and maximizing ARPU opportunity. As telcos face declining revenues from legacy businesses, IPTV provides an excellent vehicle to address a troubling reality. Being successful at IPTV requires proper preparation and understanding of the unique requirements and architecture of video services. Comprehensive market analysis and the implementation of a welldeveloped marketing plan are a must. Additionally, employing a shared super headend approach lowers CAPEX and shares risk, while empowering partnering companies to deliver the advanced video products and services that customers now expect. Service providers must also inject operational efficiency, supported by robust B/OSS systems, into the workflow, which can lead to lower operational costs. IPTV is not without its challenges. But those challenges can be overcome and when properly managed, the IPTV tide can turn from a loss leader to a profit center. CHR Solutions has vast experience in supporting our client’s IPTV operations. We can help implement these best practices by identifying crucial technical and business issues before our clients expend time and resources creating IPTV solution. CHR Solutions helps our clients make IPTV work.

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About CHR Solutions CHR is the largest, single-source provider of business process outsourcing, engineering services, software solutions, and technology managed services to communications service providers across the globe. Our team of industry experts from multi-faceted disciplines helps clients grow revenues and improve operations. CHR’s local presence, national network and global reach provide the scale and skill to elevate your business. Our clients include: telephone, Internet, cable TV and wireless providers, and city municipalities. We employ more than 500 team members with eleven offices and two network operating centers in five states and two countries. For more information, visit www.CHRSolutions.com or contact us at [email protected] or by phone at 713.351.5111.

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