A business model for IPTV service: a dynamic framework

Harry Bouwman, Meng Zhengjia, Patrick van der Duin and Sander Limonard

Harry Bouwman is based in the Department of Technology, Policy and Management, Delft University of Technology, The Netherlands, and bo Akademi, Turku, A Finland. Meng Zhengjia and Patrick van der Duin are based in the Department of Technology, Policy and Management, Delft University of Technology, The Netherlands. Sander Limonard is based at TNO Information and Communication Technology, The Netherlands.

Abstract Purpose The purpose of this paper is to investigate a possible business model for telecom operators for entering the IPTV (digital television) market. Design/methodology/approach The approach takes the form of a case study, literature search and interviews. Findings The IPTV business model always has to adjust to the change of external factors and uncertainties in the exploration and the exploitation phase. The four scenarios presented in this paper explicitly address the demand, regulatory and competition-related uncertainties. The scenarios represent the different future possibilities in terms of regulatory environment, industry structure and consumer attitudes towards (IP)TV service. By choosing the right business model, telecom operators can sustain the market competition and deliver customer value and economic benets. In the light of limited resources, when balancing the requirement of IPTV business model design, telecom operators have to focus on the critical design issues in each of the scenarios. Research limitations/implications This is a one-case study, so no cross-analysis with other cases was possible. Practical implications The research does not stop when the critical design issues have been analysed, but takes them a step further to shed light on the viability of the business model in an exploration phase. This is done by integrating the business model framework analysis with scenario analysis. Scenario analysis indicates various future possibilities and provides a platform for analyzing the decisions regarding critical design issues that have to be made in an uncertain future environment. The competing views on future developments are helpful in reducing the future uncertainties with regard to viability and feasibility of business models for IPTV. Originality/value This is one of the rst studies that looks into the relationships between business models and scenarios. Also, the application on IPTV is quite novel. Keywords Business development, Telecommunications, Cable television Paper type Case study

1. Introduction
These days it is both technically and commercially viable to sustain multicast digital television systems using IP networks. Faced by erce competition from cable companies offering triple play bundling packages some 80% of all large European telecom operators have decided to investigate the possibilities opened up by deploying IPTV (www. Alcatel.com/tripleplay/graphics/19320_iptvworld_600.jpg, retrieved March 17, 2007). Telecom operators are entering the digital TV market but it is still not clear whether new IPTV business models will be viable. Many analysts believe that the huge potential of the IPTV market will give telecom operators the opportunity to develop this new market. There are, however, experts who have their doubts about telecom operators capabilities when it comes to competing with cable companies which, in many countries, have signicant TV market power. Since the days of telecommunication market deregulation cable companies have been steadily ltering into the data service sector and recently also into the voice

Received 1 October 2007 Revised 7 December 2007 Accepted 6 February 2008

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VOL. 10 NO. 3 2008, pp. 22-38, Q Emerald Group Publishing Limited, ISSN 1463-6697

DOI 10.1108/14636690810874377

service market thus making the communication industry landscape more complex and more dynamic. Hence the reason that it is vitally important for telecom operators to have a clear and comprehensive IPTV business model. The problem is that at the moment there is no template for dening the IPTV business model. Different market players emphasize different elements. Doherty et al. (2004), for example, focus on the right IPTV architecture and quality of services, while Liu (2006) is more interested in the nancial aspects of the new IPTV model. As yet, there is no shared business model concept. We dene IPTV as a broadcast or on-demand video service that makes use of the Internet Protocol (IP)and is streamed to a set-top box that can be connected to a PC or a television set. This involves the use of point-to-point networking infrastructure and the support of broadcast video using multicasting techniques. The TV services of cable and satellite companies are not included in this denition because they do not use IP-based networks and are not based on point-to-point architecture. We also excluded web-based television because, due to its different nature in terms of services, organization, service platform and revenue models, it had to be left out when the decision was taken to focus on telecom operators even though it is IP delivered (see for an overview of business models for digital television, Limonard and Tee, 2007). Of all the actors in the IPTV value chain, it is telecom operators that have a particular interest in developing digital television service via IP in order to compensate for falling revenues in their traditional markets. Leveraging their brand equity may enable them to offer attractively bundled products and create renewed consumer loyalty that is not solely subscription-based. Their assets can also be leveraged to turn multiple specialized networks into cost efcient networks in the process of upgrading of their networks in readiness for next generation networks. Telecom operators are the true digital TV market newcomers and their aim is to capture a fair amount of the market share. Let us therefore start by examining the pivotal role that telecom companies have in IPTV. The STOF business model framework, which was developed in 2003 (Faber et al., 2003), proved to be successful when it came to designing business models for mobile services (Haaker et al., 2006), for insurance intermediaries (Bouwman et al., 2005), for the analyzing of e-commerce business models (Bouwman et al., 2006) and in the describing of critical design issues and success factors (de Reuver et al., 2006). The business model concept in the STOF framework is dened as a blueprint of how a network of cooperating organizations can create and capture value from new innovative services. The STOF model consists of four domains, namely the service domain, the technology domain, the nancial domain and the organizational domain, each of which interacts with the others and is affected by market dynamics, technological developments and regulation (see Figure 1). Based on this general model we discuss in this study whether and quite how the IPTV service and business model can be structured. The four domains of the business model interact with each other and with external drivers during the exploration and exploitation phases (He and Wong, 2004). Exploration implies that the behavior of rms is characterized by search, discovery, experimentation, risk-taking and innovation, while exploitation implies that such behavior is characterized by renement, implementation, efciency, production and selection (Cheng and Van de Ven, 1996; March, 1991). In this paper the exploration and exploitation phases are used to describe the development of the IPTV business model. In the rst part we will consider the design issues in the exploration phase. IPTV developers are currently engaged in experimental projects and are exploring the new market. We will then go on to use scenario analysis to examine issues that may be relevant to future exploration phases. IPTV developers will inevitably focus on issues such as service (bundles) and the question of how to make marketing strategies more efcient. The objective of this paper is to identify the design issues that are critical when it comes to developing viable and feasible IPTV business models for telecom operators that deliver customer and network value and to, using scenario analysis, test the robustness of these choices in the exploration and exploitation phases.

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Figure 1 STOF model

In this paper we discuss the IPTV market, we take a look at the origins of business models and the STOF framework, and we address critical design issues and trade-offs between design choices in the IPTV domain (Section 2). We use scenario analyses to describe future developments in the eld of digital television (Section 3) and to test the robustness of the business models that will in future be characterized by a high level of uncertainty when entering the exploitation phase (Section 4).

2. IPTV business models

Starting with the STOF model, we shall begin by discussing the external forces that inuence the choices involved in the business model. These include the technology drivers for IPTV, market dynamics and regulatory conditions. We will then examine the elements of the business model in more detail. 2.1 Technological drivers Katz (2002) described the four technological developments that are crucial to shaping the new television industry. They are: an increase in effective distribution capacity, an increase in the ability to process user feedback, an increase in the storage and processing power controlled by viewers, and the separation of applications from transport. Increase in effective distribution capacity: with regard to the developing of video services one of the main obstacles for telecom operators is the last mile. ADSL capacity is insufcient to deliver streaming video services with a certain quality. Unlike in the case of small band services (e-mail, web-browsing, le-sharing, VPN), television end-users are sensitive to the quality of video services (Wang, 2001, Cisco, 2005). Recently, the capacity of the local loop has increased dramatically with ADSL2, VDSL and VDSL2 making the best possible use of the twisted line (Fijnvandraat and Bouwman, 2006).Meanwhile the maturity of ber cable technology has tremendously increased backbone capacity. Nowadays, a network that uses at least ADSL2 can provide IPTV services of guaranteed quality to residential areas. Increase in the ability to process user feedback: whereas watching a television program used to be a predominantly passive activity recent technological developments have made interaction in the digital home environment feasible. Return channels that carry messages

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from viewers to service providers make it possible to develop new, tailor-made and personal services for end-users, and new revenue models like interactive advertisements. Increase in storage and processing power controlled by viewers. In traditional networks, most of the intelligence is located at the center of the network. Todays network intelligence is increasingly being transferred to the edge of the network. Equipment installed in the end-users living room has increasingly large processing power and storage capacity. The introduction of the PVR (Personal Video Recorder) is just one example of such development. The separation of application and transport: the Internet layer model allows for the development of applications that are oblivious to the underlying transport infrastructure. This architecture allows innovation to occur separately in the application and transport layers. This means that technological innovations in the application layer are no longer affected by transmission bottlenecks. The development of IPTV gives telecom operators the opportunity to channel multiple specialized networks into a cost-efcient network. 2.2 Market drivers and conditions It is various demand and supply factors, such as competition and industrial structure, that determine the design perimeters of IPTV services and business models. 2.2.1 Market demand. Up until now Western Europe has been one of the worlds most vibrant markets of IPTV. France (MalIgne TV, Free and Neuf Cegetel), Italy (FASTWEB) and Spain (Telefonicas Imagenio, Jazztel and Grupalia) are leading the way, each with a considerable subscriber base in excess of 200,000 subscribers. IPTV is less visible in the remaining two major Western European markets the UK and Germany. Although there are many initiatives the impression is that most of them are still small scale. Other market forces include the rising popularity of on-line web TV. It would appear that time spent watching on-line video cannibalizes time spent in front of the television in broadband forerunner countries such as the Netherlands. 2.2.2 Convergence of the information, telecommunication and TV industries. Although the telecommunication and TV industries are converging, the television market is still dominated by traditional broadcasters and by cable, IPTV borrows the IP-based transmission technology from the IT industry and uses it to broadcast television content. IPTV Operators are neither traditional television providers nor IP technology providers, they are telecom operators. The decision by the telecom operators to provide video services has to do with revenue stagnation in the traditional business, i.e. telephony. Video program special offers are expected to generate new revenue sources that will more than compensate for any revenue losses from voice. 2.2.3 Competition. The provision of IPTV services is also an important way of matching the triple play capability of cable companies while holding on to traditional customers who may want to switch. It can be an effective business strategy, which is positively correlated to customer loyalty (McAfee et al., 1989, Ahn et al., 2005). On the basis of an expert and consumer survey, Wirtz et al. (2006) conrmed the importance of providing triple play. Most experts estimated that the penetration rate of triple play would surpass 50 per cent by 2010 and 70 per cent by 2015. According to the same survey the bundling of video, voice and broadband services benets consumers from the point of view that pricing becomes reasonable, conguration convenient and invoicing easy. 2.3 Regulation The regulatory climate in the telecommunication sector has switched from old rules to new policy. Technological developments have gradually transformed the world of spectrum scarcity, dumb terminals and natural monopoly by turning it into a world of abundant channels, intelligent terminals and unnatural monopoly (Galperin, 2004). Digitization means that spectrum scarcity is not an issue in the television industry. Instead, thanks to the inefcient spectrum use of analog TV (Peha, 2006), many regulators choose to eliminate analog TV. Owing to digitization, the distinction between the various service platforms is to a large extent blurred. As a result the distinctive regulations regarding the different sectors of

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telecommunications, cable and television are gradually disappearing. Already, the EU has made a distinction between regulations regarding distribution and audiovisual content in its recently approved directive on audiovisual media. Precisely what the impact of this directive will be once it has been implemented in each of the individual member states remains to be seen. 2.4 The IPTV business model Technological, market-related and regulatory developments dictate the conditions under which IPTV business models have to be developed. In this section we will discuss the IPTV business model in the exploration phase on the basis of the STOF model. We shall analyze the critical design choices in each of the four STOF domains, and specically the trade-offs and relationships between the relevant design options. 2.4.1 Service domain. Service domain design is dened as a description of a rms service provision for specic customers in particular market segments. A service design should at least match the requirement of the market segment, without exceeding the rms technological and nancial capability. The potential interest that users have in IPTV is dened as the expected value for customers. In connection with technical and nancial restrictions and the lack of market information, telecom operators are not always capable of delivering the expected value. Telecom operators have to clearly state their value proposition and furthermore indicate how they will realize that value proposition technically and nancially. It is important to conduct market analysis so that sufcient information about the market segment on which the rm has decided to focus can be collected as well as about the requirements and preferences of the consumers in that market. The rm should also leverage the design choices and resources to minimize the mismatch between the intended value and the value that will be delivered. The service components can then be designed in great detail in accordance with the match established during the above-mentioned process, for example, by adding more channels, adjusting tariffs, redesigning service quality level and improving user-friendliness. Many telecom operators position IPTV as a mass-market service that competes directly with cable and satellite companies. Telecom operators expect that they will be able to take advantage of their expertise and the consumer loyalty in the telephone and broadband markets, which they hope will give them a competitive edge. They have to leverage their resources which means to say that they will need deep pockets to increase the competitiveness of IPTV. The three possible types of leverage that can be distinguished are: the bundling of video services with broadband and telephone services, offering more value-added services (e.g. interactive services, Video on Demand VoD, and Personal Video Recorder PVR) or having an attractive service portfolio by focusing either on exclusivity or on a wide range of probably long tail niche channels. 2.4.2 Technical domain. The technical domain has to do with the choices that are made on the three different levels of transport, middleware and content. Transport layer design must make sure that the infrastructures meet the transmission requirements involved in providing video services. The infrastructures not only refer to the backbone or local loop network but also to the sophisticated network equipment. In addition to transport layer design, middleware and content design have to be given careful consideration because the service design requirements are vital in deciding what capability is required if specic service types (e.g. VoD) and value-added interactive services are to be offered. The middleware and conditional access components manage the CRM (Customer Relation Management), encrypt the video program and control the access authorization. The set-top box is used to decode the program on the end-users side. Different IPTV providers choose different video application components depending on service design demands and nancial considerations (see Figure 2). Since the transport, middleware and content layer solutions have been well developed by many equipment providers and software companies the technical issues are less critical.

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Figure 2 Technical domain designs

The real issue is how technical design is related to the other domains. Technology places certain constraints on service design, and vice versa. The main issues are bandwidth limit, quality of service and level of middleware capability. In the short term, bandwidth remains the major obstacle in IPTV development. Most local loops cannot provide for IPTV, which requires about 3.5 Mbps, without upgrading. Even the ADSL2 equipped local loop, which is sufcient for current video stream demand compressed under MPEG 2, falls far short of the capacity needed for HDTV (High Denition TV) video stream (16-18 Mbps). The telecom operators can choose different design approaches, either by adding large capacity immediately before launching IPTV or by gradually increasing the capacity. The former approach usually leads to an upgrading of a large portion of the infrastructure in readiness for ber optic cables while with the latter approach most of the distribution network will rst be updated to the ADSL2 standard. The trade-offs telecom operators have to make lie between choosing more advanced technology platforms and making a larger investment on the one hand, and adopting a more evolutionary approach on the other hand (Fijnvandraat and Bouwman, 2006). Quality of service is the second issue at stake here because video content is sensitive to signal quality. Although some loss of quality does not bother many when it comes to audio transmissions people do tend to be more demanding when the content is of a visual nature. To make sure that degradation in video quality resulting from the IP transport network is negligible from a subscribers point of view, IPTV providers only tolerate about one visible degradation every two hours (Cisco, 2005). Ways in which the quality of service can be improved include having better transmission infrastructure and encoding/decoding equipment, all of which requires higher investments. An alternative design choice is to offer different service levels to different customers. For example, the packages delivered to gold members may be placed at the front of the queue, which can partly satisfy some demand for high QoS. Middleware capabilities represent the third issue, particularly for the telecom operators that offer broadcasting, VOD (Video-on-Demand) and value-added services. Middleware is crucial when it comes to integrating platforms, enabling interactivity, conditional access and customer relationship management. Future interaction modes in particular are very uncertain, and telecom operators have to strike a balance between advanced STBs middleware enabling a wide range of interaction, and cost effective technology which is

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more stable and offers consumers easier interaction. Advanced middleware would also open the door to a larger number of revenue models, but whether or not the consumer is ready for this kind of lean-forward behavior and new revenue models remains to be seen. The choice also depends to a large extent on the QoS, since higher levels of interactivity involve higher risk of dissatisfaction. Subscribers who experience an outage cannot come back and continue watching from the same point when the outage is over. At the moment, part of the request for video contents at peak times would be rejected without spare video servers. Such experiences are certainly not attractive to most consumers. 2.4.3 Organizational domain. The organizational domain essentially describes the value network that is needed to realize IPTV service provision. A value network consists of actors who possess certain resources and capabilities and who interact to perform value activities to create value for customers while realizing their own goals (Faber et al., 2003). Typical actors in the IPTV value network are telecom operators, content providers, telecom equipment providers, middleware providers, advertisers and consumers. Telecom operators participate in the entire value delivery process. First they decide to either produce or purchase the video contents. They have to maintain the physical network as well as the hardware and software components of the video application together with equipment manufacturers. The telecom operators core responsibility is to distribute the video contents to customers. The middleware is of key importance to telecom operators, because it determines whether or not they can provide seamless service to the end-users. Telecom operators may try to work together with system integrators to establish a more efcient middleware solution. Furthermore, telecom operators can be involved in negotiations with advertisers to obtain revenue from advertising. Content creators and providers are located at the upper end of IPTV value network (see Figure 3). The content aggregator combines information such as news, sports, weather forecasts and reference materials from smaller content creators and sells that on to content providers. Big content providers often focus on content production and content aggregation. The advertising revenue from the IPTV value network is relatively small compared to that of cable and internet advertising. Telecom operators can, however, decide to add advertising to their services thus turning that into a source of revenue. An important issue in the organizational domain is the level of vertical integration or, in other words, the level of ownership and control over successive stages of the value chain. The telecom operators who develop IPTV usually have to decide to what degree integration with content production is appropriate. They may want to control or own the production and Figure 3 Value network of IPTV

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content rights or produce content themselves. As far as telecom operators are concerned, the benets of vertical integration lie in the reduced transaction costs, in being able to broadcast their own contents, in the externalities and in being able to raise the cost for competitors. The disadvantages attached to entering content production are also apparent and mainly dwell in the likelihood of failure due to a lack of resources, knowledge of and expertise in the new market. Careful cost-benet analyses thus need to be made before any decisions can be taken. 2.4.4 The nancial domain. Financial performance is essentially what emerge when costs and revenues are combined. The xed cost level of IPTV projects is determined by the technical and service design choices that are made. For example, high availability service requires substantial investment in the setting up of redundant servers to secure abundant video sources at peak times. Interactive services require nancial support so that network equipment can be upgraded and technical problems solved. Revenue models depend on revenue sources like, for instance, advertisement or at rate models and the relevant pricing model. In that way revenues can than be calculated by estimating the size of the market and the anticipated market share (see Figure 4). In the current IPTV market most telecom operators are adhering to the subscription model (at rate) and are slowly adopting pay-per-view and advertising models by providing VoD (Video on Demand). However, if more customized and personal services become available a exible pricing model will be more desirable and realistic in the future. Pricing results from the evaluation of many different factors including market competition, operational costs and company strategies. The pricing models and revenues of IPTV operators depend on all kinds of risks regarding technology, the availability of resources, competition, supplier and consumer behavior and political factors. Telecom operators must use a variety of methods to reduce uncertainties and risks. The critical design issues in the nancial domain are the revenue/cost sharing and the revenue model. Revenue/cost sharing agreements can be reached on the basis of tangible value objects (e.g. money, contents and services) as well as through intangible value objects (e.g. branding, scheduling and customer information rights). The advantages inherent in revenue/cost sharing are reduced investments and reduced risk levels. The disadvantages are coordination costs, abuse of market power and the risk of damaging a carefully conceived brand. What emerges from these analyses is the fact that designing business models for IPTV services is a complex undertaking which is technically complicated and requires multiple Figure 4 Finance domain design method template

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actors to balance different design requirements. There are critical interdependencies between service design, technical architectures, organizational arrangements and nancial performance. The critical design issues and trade-offs involved in the various design choices during the exploration phase of IPTV development are presented in Table I. Telecom operators have to balance the requirement in these domains and take the external factors

Table I Summary of critical design issues and tradeoffs

Service design issues Service bundling Service domain Triple play, quartet play Tradeoffs Other domains Complex organization arrangement Extra investment Risk of failure Requires cost-effective network and advanced middleware Complex organization arrangement Tradeoffs Other domains Large investment on infrastructure Critical design choice Choice at discount bundling level Choice of different products portfolio EPG PVR Other interactive components Platform exclusivity Channel exclusivity and distributor customer ownership

Value-added services (e.g. interactive) Content portfolio

New and unique service

Content only available through the platform

Technical design issues Bandwidth

Technical domain High bandwidth

Critical design choices

Quality of service

High QoS

Middleware capability

Extensive capabilities for interacting, conditional access, security, CRM

Adding large capacity (FTTx) with high investment Gradually expanding bandwidth capacity Large investment or extra Deploying FTTx and advanced customization quality guarantee equipment Gold, silver membership Large investment or low revenue Prioritizing the preparation for generation advanced Electronic Program Guide functionality, revenue models based on customer information such as advertising Prioritizing lower CAPEX and quick time-to-market in order to acquire installed customer bases

Organization design issues Vertical integration

Organization domain Vertical integrated rm

Tradeoffs Other domains Bundling service

Critical design choices Whether or not to become content provider How to enter the content production market Choice regarding the level of discount of bundling Choice regarding different product portfolios

Horizontal integration

Horizontal integrated rm

Cost revenue sharing

Financial design issues Revenue/cost sharing

Finance domain

Tradeoffs Other domains Horizontal integration Content portfolio Middleware capability Value-added services Content portfolio Vertical/horizontal integration

Critical design choices How to arrange revenue/cost sharing with other players Flat rate or more exible pricing model Price the service at an appropriate rate level

Revenue model

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and strategic interests into account when making if they are to make the appropriate decisions regarding the design of an IPTV business model. Furthermore, these decisions have to be sustainable when entering the exploration phase. When assessing the sustainability of IPTV business models scenario analysis can be used to gain an understanding of the trade-offs involved in the exploitation phase.

3. Scenario analysis
Scenario analysis is an effective way of reducing uncertainties and helping rms to formulate exible and sustainable strategies and policies. When employed as a tool designed to reduce future risks scenario analysis is fundamentally different from the more quantitative prediction methods. Instead of predicting, scenario analysis explores future directions from a diverging perspective. Scenarios reveal various possible developments and show a keener awareness of the uncertainty of trends (Bouwman and Van der Duin, 2003). The point of scenario analysis is to understand, capture and describe possible future development rather than to predict the future on the basis of a few selected variables. In the case of the IPTV business model, scenario analysis will be used as a tool to pinpoint the uncertainties that have a potentially high impact on the viability and feasibility of IPTV business models during the exploitation phase (Limonard, 2006). Uncertainties often include elements that are hard to quantify and model (Fijnvandraat and Bouwman, 2006). The results of scenario analysis help IPTV operators to develop a clearer view of the sustainability and feasibility of their business model. To construct the scenarios we used existing scenarios involving future digital telecommunication and digital television. There are three reasons for selecting these scenarios as reference scenarios. First, they have been created by institutes and experts specialized in futures study, which means that the quality of the scenarios is guaranteed. Secondly, each of the three studies was conducted in the telecommunications and television industry. Thirdly, the time horizon of each scenario is the same (2010). The scenarios used as a reference are: 1. The scenarios as published in 2005 by the European Monitoring Centre on Change (http://eurofound.europa.eu/emcc/publications/2005/ef0567en.pdf, retrieved in August 2006). This scenario analysis was designed to look at the future of the telecommunication services sector and take into account the rapid evolution of telecommunications and the technologies involved ve years from (2005). The study rst identied the three key dimensions of demand and usage, regulation and public policy, and technology and industrial strategy. On the basis of these dimensions, four scenarios were determined. 2. The scenarios created by the Bournemouth Media School and ITC (the former Independent Television Commission in UK), see (http://media.bournemouth.ac.uk/ research/documents/fullreport.pdf). Here, scenario analysis was used to assist electronic communication industries, especially television, to dene and deal with common future issues 10 years from 2002. The three dimensions constituting the scenario were the way consumers use media, economic developments and the characteristics of industry structure and competition. On the basis of these three dimensions four scenarios for British television industry in 2012 were then presented. 3. Drop et al. (2000) developed a set of scenarios at the KPN research center. The aim was to determine what ICT use in the Netherlands will look like in 2005. Although the scenarios originally had a time horizon extending up until 2005, experiences with other scenarios in all kinds of KPN projects showed that the basic assumptions and scenario axis could be extended to 2010 (Bouwman and Van der Duin, 2003). The two axes (dimensions) of KPN scenarios are individual vs. collective (the degree to which consumers let their own interests prevail above those of the group to which they belong), and active vs. passive (the degree to which consumers explore and change their environment rather than conforming to external inuences). Four scenarios were identied and validated. We identied, on the basis of these scenarios, consumer attitudes and regulation related to industry structure as the most important uncertainties. A distinction could consequently

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be drawn between sophisticated and standard consumers. Sophisticated consumers are those who are fully aware of the advantages of new media products and services. They are the ones who want to pay a reasonable price for customized and personalized services. Standard consumers are conservative when it comes to using new products. They are satised with conventional TV, they prefer an easy service conguration and they are price-sensitive. This means that this is a group of customers for whom bundling services with a discount is very popular. At one end of this spectrum the regulator and industry structure dimension discusses the hands-off approach of regulators and the domination of the market by telecom operators in the voice and broadband market. At the other end of the spectrum regulators fulll the interventionist role and restrict the dominant players in the market. There are therefore many players in the voice, broadband and television market. The two dimensions identied by us resulted in the four scenarios presented in the following section (see Figure 5).

4. The four IPTV business model scenarios

We shall now take a closer look at the four scenarios and we shall illustrate the kinds of critical design issues that become relevant in the exploitation phase of an IPTV business model. 4.1 Scenario 1: Telecom operators Mammoth Economic growth is modest. Competition between incumbent telecom operators, new entrants and cable and satellite companies continues to grow. The regulator has little doubt about market efciency and adopts a light regulation regime. Telecom operators are not bounded by tariff regulations and are free to afliate themselves to content providers. The younger generations of consumers quickly accept the affordable new services. Most of them like easily congurable digital TV, telephone and broadband services. Consumers show an interest in bundling. The most popular packages are the discount offers from the multi-service providers. Given the fact that consumers will value bundled services more than the total separated value, the bundling of complementary products will be an attractive strategy. Such bundles will not even require a discount. Telecom operators should avoid offering substitute bundling without justiable economic return. As a result, bundling services becomes the priority for telecom operators. Telecom operators are the only players Figure 5 Scenario dimensions, scenarios and critical issues

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capable of providing quad-play. Cable companies are triple-play veterans but nd it difcult to catch up with telecom operators. However, success does not come easily in a market where several cable competitors are capable of offering comparable services. The success of triple play is determined by factors like bundling type, pricing and content (Forrester Research, 2006). Telecom operators should make use of the preference on the part of simple users for easy and quick conguration and entice more consumers by introducing bundled products. They can decide to bundle the IPTV and broadband services. In most cases, these are independent products which can be made cheaper by bundling them but in some cases they become complementary and thus add value to end-users (see Table II). Just because service bundling is the key critical design issue in this scenario that should not diminish the importance of other design issues. However, in the light of limited resources, telecom operators have to focus on service bundling and the associated critical issues when they weigh up the requirements of IPTV business model designs. In the technical domain, bandwidth is closely related to the offering of service bundles. The combination of broadband and video services requires high bandwidth capacity (e.g. video service requires at least 2-3 Mbps and broadband requires around 1 Mbps. The total is about minimum 3-4 Mbps). This technical design issue regarding bandwidth will be the key enabler of bundling services. It therefore becomes necessary to upgrade such networks to ber or hybrid types. In the organizational domain, horizontal integration is important if service bundles are to be offered. One of the challenges facing telecom operators is that of how to coordinate the newly established video business unit and the traditional broadband voice business units in the back ofce if they want to be able to provide seamless bundles and an efcient billing system to end users. In the nancial domain, because of consumer demand for affordable services, it is vitally important to choose the right pricing and discount rate. Telecom operators have to balance technical and nancial design to control the cost level and to be able to offer a modest monthly rate to most consumers. This pricing strategy can be converted to a more aggressive approach by offering larger discount rates than those offered by cable operators and by taking advantage of economies of scale and scope. This can create a competitive edge and entice more consumers to enter into the convenient triple play conguration. The key phrases in this scenario are bundling services, the aggressive discount rate of bundles, horizontal organization integration and sufcient bandwidth. 4.2 Scenario 2: Head-to-head competition Economic growth is high. The regulators relax constraints on telecom operators and succeed in abolishing the regulatory differences between telecom operators and cable companies. The regulatory framework leads to fair competition between equally strong players creating an expanding digital TV market. Different players compete at national level and thus gain fair access to the content market. Competition facilitates innovation and strengthens the balance sheet of the digital TV industry as a whole. The market value of digital TV companies keeps increasing. A virtuous circle is created. Consumers become more sophisticated, which means they are more aware of the benets of digitalization and more experienced in selecting digital TV offers and programs. They prefer new services at affordable prices, are less interested in choosing from a whole range of options and like to create and share content. The victorious digital TV provider is the one that caters to the personal tastes of consumers and enables them to create, publish and share their personal stories. In this scenario telecom operators have several strong market competitors including Table II Bundling option
Nature of products IPTV and DVB-T IPTV and telephone IPTV and broadband IPTV/broadband/telephone/mobile Substitute Independent Independent/complementary Independent(?)/complementary Bundling strategy No bundling Bundling Mix bundling Mix bundling Synergy effect No No Yes Yes

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cable, satellite and content providers. End-users have at least two options between which they can choose. Most service providers offer mixed-bundling services at comparable prices. Bundling is hardly a winning strategy. On the other hand, sophisticated consumers search for the programs they prefer. Owing to the growing prevalence of personal choice, the content market is becoming fragmented. In a fragmented market, the most popular programs do not attract much attention. Most consumers pick their own content regardless of the preferences of other viewers. This leads to a large number of programs with small audiences, emulating a long tail for television (Limonard and Tee, 2007). The success of any business model depends on whether or not operators are able to satisfy peoples individual choices and tap into the value located in the long tail. In order to do that television operators have to establish extensive cooperation with various content producers, which also includes content generated by viewers and aggregators, so as to obtain as many diverse programs as possible while pursuing their own capacity to produce exclusive content. The key critical design issue in this scenario is the ability to create content diversity. In the technical domain, IP-based distribution technology provides a competitive advantage, as such technology meets the requirements of the long tail to become economically interesting. As the IP infrastructure makes it possible to interact and collect detailed information on user behavior a powerful asset is created giving telecom operators the opportunity to become an indispensable interface between the customer and content producers and advertisers To make this possible telecom operators should make full use of the advantages of IP-based transmission. The delivering of customized services requires additional investment in content production and distribution. According to Noam (2002), cable and internet TV operators face similar costs with regard to content production, although distribution costs through the IP platform are much higher. Individualization requires signicantly larger transmission resources and consequently larger investments. The business model key phrases in this scenario are content diversity, broad cooperation with various content producers, balance cost issue, full use of IP-based transmission and user-generated contents. 4.3 Scenario 3: Market deadlock Several large merger deals create natural monopolies. Regulators propose bringing back strict anti-trust policies. Telecom operators challenge the harsh regulations in court. Judges agree with regulators and rule in favor of cable and satellite companies. Telecom operators subsequently have to endure numerous procedures before they can receive TV franchise permits and they are actually blocked from content integration. Cable and satellite companies take advantage of the regulatory environment. They consolidate their businesses and become dominant and vertically integrated national players. In this scenario, consumers are already quite experienced with digital TV and they are interested in new services. It is hard to generate prot for telecom operators in a stagnating market. The key critical design issue has to do with providing new value-added services. To achieve satisfying penetration rates for IPTV services, telecom operators need to create a competitive edge by differentiating their services not by opening up the long tail to content, but by opening it up to value-added services, independent of content producers and aggregators using, for instance, PVR (Personal Video Recorder) and interactive services (TV email, TV internet and games). However, simply offering PVR or interactivity will not safeguard market success. Choosing this strategy inevitably involves conict with content-oriented rms. Service providers may decide to implement various forms of copy protection but history indicates that these measures will be defeated and consumers will be able to copy programs (Katz, 2002). Some value-added services give consumers the opportunity to schedule and edit the programs. This may threaten the ability of content packagers to rely on the sales of advertising (Loebbecke and Radtke, 2005). A notable choice example people have is that of being able to push the forward button to avoid advertisements when watching recorded programs.

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The key resources for television distributors revenues reside in the relationships that exist between content packagers and advertisements. The implication for value-added service is certainly not insignicant. Understating the attractiveness of value-added service and the possible loss of revenues helps telecom operators to select measures that are aimed at reducing the disadvantages of offering value-added service. One such measure is to embed advertisements in programs that consumers are willing to watch. The second strategy is to provide entertaining or informative advertising that consumers do not want to miss. Another strategy is to reward consumers who watch advertisements. In an IP-based network the time consumers spend watching commercials is monitored. Telecom operators can use the monitoring results to reward their customers nancially or to give them conditional access to premium contents (Katz, 2002). Telecom operators can also agree to tolerate consumers copying contents and avoiding advertisements if the value-added services manage to attract enough new subscribers. According to Myers (2002) and Mogg (2004) these two features are actually the biggest selling points for PVR. Telecom operators should allow the decision to be based on the balance between customer value and economic benets and they should ask themselves whether or not the value added service can attract new customers enough to offset the loss from advertisement and program reproduction and redistribution. Business model key phrases in this scenario are offering value-added services, weighing up service attractiveness and potential revenue losses, and exible pricing. 4.4 Scenario 4: Back to basics In this scenario, regulators adopt strict anti-trust policies toward the big telecom operators in the market. Cable and satellite companies take advantage of the regulatory environment and consolidate their business. Several vertically integrated and global companies dominate the television market. Most consumers are satised with the television services currently provided by cable and satellite companies. They are extremely hesitant to adopt new services. A wait-and-see attitude prevails. There is little demand for interactive services and internet TV. Consumers have decided to use bundling services for reasons of convenience and to facilitate easier conguration. In this scenario, regulatory barriers and consumer indifference make it hard for telecom operators to offer IPTV services. There are few new opportunities for them to develop the IPTV as dened in the exploration phase to become a successful service. Although bundling may still be an effective strategy, it will be difcult to persuade consumers to switch from cable companies to telecom operators. The potential market is limited. The content supply side is dominated by several vertically integrated global companies. It is difcult for telecom operators to enter the content market and compete with content providers. The more realistic option for telecom operators is to make better use of the existing technologies, services and resources that are there to support IPTV development. Firstly, they can create a fresh image as new entrants, which will provide a high level of QoS and service availability together with excellent customer service. Better program quality and customer service are compelling reasons for consumers to switch from cable and satellite providers. Secondly, telecom operators should leverage their customer base in the broadband and telephony market. Thirdly, they can create complementary programs and content on the television and broadband platforms. Ultimately though there is no dominant strategy encouraging telecom operators to select within this scenario. Business model key phrases in this scenario are QoS, leverage experiences and expertise from broadband to television, and synergy effect.

5. Conclusion
The IPTV business model always has to adjust to changes in external factors and uncertainties in the exploration and exploitation phases. The four scenarios presented in this paper explicitly address demand, regulatory matters and competition-related uncertainties. The scenarios represent the different future possibilities in terms of regulatory environment,

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industry structure and consumer attitudes towards (IP)TV services. By choosing the right business model, telecom operators can sustain market competition and provide customer value and economic benets. In the light of limited resources when weighing up the requirements of IPTV business model design, telecom operators have to focus on the critical design issues in each of the scenarios. The critical design issues are of eminent importance to the viability and sustainability of the business model under study (Faber et al., 2003). The analysis has revealed the critical design issues telecom operators have to focus on when faced with changing external factors. In the telecom operators mammoth scenario it is asserted that telecom operators should take advantage of the economies of scale and scope and offer more competitive bundling possibilities. The critical design choice to offer bundling is the key to satisfying the demand of standard consumers for convenient conguration and to helping telecom operators to establish a leading position in the television market. In the head-to-head competition scenario, the ability on the part of telecom operators to offer content diversity is important when it comes to matching increasing and fragmented consumer demand. In addition to possible integration into content production and into signing deals with multiple content providers, providing a platform for user-generated content is also an effective way of creating content diversity at a low cost. In the market deadlock scenario, telecom operators should focus on the critical design choice of providing value-added services. The interactive and versatile nature of IP-based networks suitable for carrying multimedia and interactive services should be fully explored. This will possibly give telecom operators a way of differentiating their IPTV from cable and satellites companies so that they can gain a competitive edge. In the back to basics scenario, it is relatively difcult to implement the IPTV business model due to the indifference of consumers and the presence of dominant cable companies in the market. The analysis emphasizes the synergy between the telecom operators broadband and television services. Telecom operators can leverage their advantage in the broadband market (e.g. through branding, a large customer basis and sufcient cash ow) to include the television market and increase value for both (see Table III). The design issues we found to be critical in each of the scenarios do not necessarily diminish the importance of other design issues. The fact is that telecom operators always have to balance design choices if they are to generate both customer value and economic benet for their shareholders. For example, content diversity design is closely related to the nance domain because the costs of producing tailor-made personal services are not minor. It is important to nd ways to control cost at a certain level (e.g. broadcasting user-generated content is one way of reducing cost). Providing value-added services brings with it the risk of losing subscriber and advertising revenue thus making the business model vulnerable if not enough new customers are attracted. Telecom operators have to decide to what extent they want to offer new services on the basis of market demand and cost forecasts.

Table III Summary of the critical design choices in different scenarios

Scenarios Domains Service Technical Organization Telecom operators mammoth Head-to-head competition Market deadlock Back to basics

Bundling Sufcient bandwidth Horizontal integration

Finance

Aggressive discount rate offers

Content diversity Middleware capability Partial vertical integration to enable cooperation with content producers (professionals and amateurs) Balance increased costs (CAPEX and OPEX) with increased revenues

Value-added service Bundling Middleware capability QoS Partnering/partial Consolidate integration with ASPs and OEMs

Balance content related loss with revenues and extra revenue from advertisers and price differentiation

Consolidate, focus on internal synergy effect in network

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The existing fund of IPTV business model literature is limited. There is an extensive body of research on IPTV technological development (Pfeffer, 2006 and Cisco, 2005) and there has been much discussion on revenue/prot generation capabilities (e.g. Liu, 2006). A systematic and balanced perspective on the various components of the IPTV business model has, up until now, been lacking. The only previous investigation in this area has been a working paper by Carney et al. (2006) who used Porters ve forces to assess the IPTV business models, and Limonard and Tee (2007), who focused on long tail business models using the STOF model. It would appear that the STOF model and, in particular, the critical design issues lend themselves to IPTV business model analysis. This conrms the initial ndings of Limonard and Tee (2007) to the effect that such results are conducive to the decision-making process involved in designing an IPTV business model. This research does not stop at critical design issue analysis but takes matters a step further so that light can be shed on the viability of the business model in an exploration phase. This was effected by integrating the business model framework analysis into the scenario analysis. Scenario analysis highlights various future possibilities and provides a platform for the analysis of decisions linked to the critical design issues that have to be made in an uncertain future environment. The competing views on future developments can aid the reduction of future uncertainties with regard to the viability and feasibility of the business models available for IPTV.

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Corresponding author
Harry Bouwman can be contacted at: W.A.G.A.Bouwman@tudelft.nl

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