DELTA Insight

The way we watch TV is evolving – and so

must Pay TV operators
August 2010

KEY HIGHLIGHTS

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purus. Fusce pretium odio vitae enim tincidunt consequat.

Jacobo Garcia-Palencia, Partner

jgp@deltapartnersgroup.com

Luis Cirne, Principal

lci@deltapartnersgroup.com

1 | Delta Partners | | August 2010

It is 9am and you are waiting for your dentist appointment. The sound of the dental drill
is already ringing in your head, although three walls separate your waiting room from the
dentist’s office. You need an urgent and intense injection of serious entertainment. You
pull out your smartphone and connect to ‘MyTV’, that shows you the TV series you were
watching in your living-room TV the night before, exactly where you have paused as your
partner fell asleep on the sofa. You put your headphones on and push ‘Play’. The drill
noise is soon forgotten as you mind refocuses on the program you were watching since
last night.

This is not the real world – not just yet. TV content providers have not reached this level
of cross-platform integration, but they probably must if they want to adequately adapt
to the changes in consumer behaviour and to the trends in the TV content provision
business.

Ubiquitous connectivity is here, an explosion of connected devices is taking place:

laptops, smartphones and tablets are becoming commonplace, leading to intense compe-
tition for our ‘screen time’. Surprisingly, the amount of time we spend staring at the
biggest and brightest screen in our homes, actually continues to increase. Based on
Nielsen’s global survey, time spent on watching TV has increased 1.3% from Q1 2009 to Q1
2010. Accordingly, Pay TV subscriptions have grown consistently to reach almost 600
million households globally in 2009 (source: iDate), representing a total of US$150 billion
dollars in subscription revenues, according to PWC’s latest findings.

So it seems Pay TV operators are set to reap the benefits of an increased consumption of
TV entertainment. Or are they?

We believe three major trends are threatening to redefine the current TV landscape, and
this may not favour traditional TV operators. In this assessment, we look in particular as
to how UAE’s IPTV operators (du and Etisalat) can react positively as to (1) grab a share
of the media growth pie and (2) maintain client control. Etisalat is currently investing
strongly in a national fiber-to-the-home rollout across the UAE while du has just
celebrated its first anniversary on its new IPTV platform. How will the rapidly changing
TV landscape impact their IPTV business?

Trend 1: TV is unlocked – Pay TV provider’s screen has become a window to

the web

In what seems to be an unavoidable trend, the TV screen is opening up to the web. For
years now, multiple players have been trying to merge TV and Internet into a single
screen and experience. Names such as Vudu, Roku and Boxee might ring a bell as first
attempts. More recently, key industry players have partnered to take over the TV inter-
face space and unlock the TV for good. Global brands such as Google, Sony, Intel and
Logitech have established partnerships to develop and support a TV interface that allows
users to enhance the overall entertainment browsing experience, content that are (i)
provided by the Pay TV operator, (ii) available on the web, or (iii) stored on personal
devices. What this means is that you can watch your favourite TV show as broadcast by

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devices. What this means is that you can watch your favourite TV show as broadcast by
your Pay TV provider (as you do today with Etisalat or du), or you can use the friendly
Google TV interface to easily select one of many online content providers (such as
Amazon, Netflix or Hulu) to stream it directly to your TV. Suddenly, competition for
content provision on your TV screen has just increased many folds.

Not surprisingly, with an unlocked TV, Pay TV subscribers are ‘cutting the cord’, cancel-
ling subscription-based TV services while opting for on-demand services provided by
online operators. According to the Convergence Consulting Group, an estimated 1.6
million American households are expected to have switched to online TV by end of this
year.

Although this is not an immediate threat for du and Etisalat, they will need to strategise
on competing with the vast content libraries, the on-demand convenience and the
relatively low priced offers by online providers.

The first differentiator is infrastructure ownership – IPTV providers actually own the
cable through which you get both your TV and the Broadband services. So if du or
Etisalat decide to discard net neutrality, you may find that the TV content you are trying
to access online is not performing as you would expect from your 50Mbps connection.
How long IPTV operators can suppress the bandwidth on content provisioning competi-
tors will be determined by the maturity of the competitive landscape (e.g. the
existence of an ambitious alternative broadband provider willing to offer net neutrality)
and the regulator.

The second differentiator for IPTV operators is content. Content such as live sports
continues to dominate viewership and can be the killer retention factor for operators.
In the US, the Super Bowl (the championship game of the National Football League)
holds 17 of the top 20 most watched shows in US TV history (source: Nielsen). du and
Etisalat were forced to negotiate with Al Jazeera for the broadcasting rights to the
recently concluded FIFA World Cup. While several industry experts believe the deal was
loss-making for both IPTV operators, it was an important inclusion in their IPTV content
portfolio/offerings. Not surprisingly, TV content providers are picking up on the
premium content strategy and as a result of increased demand of such content, the
price premium has risen substantially in recent years. For example, the seasonal
revenues derived from telecast rights of the English Premier League have more than
quadrupled between 2002 and 2010.

Several TV operators have also balanced premium content with highly targeted value
propositions focusing on specific segments (e.g. DSTV in South Africa offers a ‘Portu-
guese package’ for the million plus Portuguese Diaspora), beyond the ‘India – North’ and
‘India – South’ packages. Etisalat and du could adopt a similar strategy and provide
tailored content packages to multiple expat segments in the country. For example,

3 | Delta Partners | | August 2010

packaging UK-specific content such as the British FTA channels and key British programs
could be pursued. The reality in the UAE is that the underserved minorities will resort
to the satellite option to watch local channels of their countries, thus potentially hurting
Etisalat and du. The challenge for UAE’s IPTV operators is to structure the right type of
deals with content providers to ensure the benefits outweigh the costs, something that
online content providers have become very effective. The third differentiator is the view-
ing experience. Pay TV operators have consistently been first to adopt technological
upgrades to TV technology, as evident from the evolution to HD and even more recently,
with the introduction of 3DTV. For example, Al Jazeera Sports, broadcasted the World
Cup in HD and 3D through satellite and Pay TV platforms. Pay TV operators have been
instrumental in pushing penetration of HDTV. In particular, the US penetration has grown
from 16.6% in Q1 2008 to a staggering 47.9% in Q1 2010 (source: Nielsen). 3DTV is indeed
the next wave. Most IPTV operators have stepped up to offer 3D channels while reference
online providers such as Apple TV still have no 3DTV content in their libraries. So chances
are that if you just bought a brand new 3DTV, you will stick with your IPTV subscription
for awhile so that you can show off your new 3D goggles.

Trend 2: TV content watching will be ubiquitous: anywhere, anytime,

on-demand and available on any device

While we spend more time watching TV, our approach on watching TV programs is chang-
ing drastically. In the past five years, time-shifted TV viewing (as opposed to ‘live’ TV)
increased from 20% to 41% amongst the 8-18 year olds, predicting a significant change in
TV watching behaviour of tomorrow’s adult population. In addition, half of the time-
shifted TV viewing youngsters are doing it on devices other than the TV (source: Kaiser
Family Foundation).

This is boosted by an explosion of video supporting devices. Mobile phones with video
players have doubled from 1.3 billion to 2.7 billion units between 2005 and 2010 and new
range of devices such as tablets have proven to be a success – one iPad is sold every 3
seconds.

The implication for IPTV operators is simple: they will have to compete with online play-
ers not only for the TV, but also for other connected devices. Otherwise, online operators
will come out as the only integrated TV content service providers that enable seamless
broadcasting across multiple devices, televisions, laptops, tablets and other handheld
devices.

The ramifications are complex. IPTV operators will need to offer their own multi-
platform services with a competitive value proposition including vast on-demand TV
content libraries at very affordable prices. For example, Al Jazeera could offer a variety
of content on its own online portal and through iPhone and Android apps to provide seam-
less access to its TV content.. Comcast and Time Warner Cable, the largest US Cable TV
operators, have done just that; they have partnered and launched their own online

4 | Delta Partners | | August 2010

service that provides universal access to their content library, accessible only to their
TV subscription-paying clients. Du and Etisalat are ideally poised for this, as they are
already integrated providers of TV, fixed and mobile telecommunications services – if du
or Etisalat were to offer the possibility of watching their subscribed TV content on their
mobile devices, their TV subscribers would be less inclined to subscribe to a competitor's
mobile plan.

Trend 3: TV advertising will become highly targeted

Everybody knows Google is a clear leader in Internet advertising. And if you have a web-
site for your business, chances are you use Google Ads. What you might not know is that
Google has already taken significant steps to play the same role for TV advertising.

On the one hand, Google has created a platform for companies who want to advertise
on TV to easily select the profile they want to target, upload their TV ads and input how
much they are willing to pay to have their ads broadcast (very much like Google Ads).

On the other, Google has partnered with DISH Network (a US satellite Pay TV operator
with over 14 million subscribers) and 100 network channels to manage part of their
advertising inventory. Google collects comprehensive information about viewing habits
of DISH Network’s subscribers and, armed with that information, offers TV advertisers
the opportunity to target specific user profiles. Better targeting means higher returns
for advertisers, which allow content providers to charge higher prices for the inventory
space they are selling. As a result, you will watch ads that are probably more relevant
to you. So everybody wins. And naturally Google gets their share for increasing the value
of advertising.

This poses a significant threat for subscription-based Pay TV operators in general - more
valuable advertising means that advertising-based models (i.e. subscription-free
models) have better chances to succeed. You may not mind watching a couple of ads
tailored to your profile instead of paying US$2.99 to watch the latest episode of your
favorite TV show. You might even consider cancelling your TV subscription and watch
only advertising-based content providers.

IPTV operators should see this as an opportunity. If an operator is able to be in the fore-
front of this trend and take its advertising management to the next level, it can gener-
ate additional revenue it can pocket or transfer to its subscribers in the form of lower
subscription fees.

Whether this strategic move is driven by a defensive or growth agenda, IPTV operators
have much to gain from managing their advertising inventory space as effectively as
online players.

5 | Delta Partners | | August 2010

In summary

IPTV operators must carefully use premium content exclusivity (e.g. live sports), unique
service features (e.g. 3D) and net neutrality to get ready to compete with all range of
content providers, including online players – and across all sorts of devices: TV, laptop,
tablet or handheld. At the same time, they must become experts at managing advertis-
ing inventory space to grow their advertising revenues and strengthen their positioning.
TV watching is evolving – and so must Pay TV operators.

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Copyright © 2010 Delta Partners FZ-LLC. All rights reserved.

6 | Delta Partners | | August 2010