uk telecoms & tv june 2012

A Winning Partnership

Cirricom Limited 1

Cirricom Limited 2

UK Telecoms & TV

June 2012

1. The Market

• Substantial consolidation has taken place over the last five years and the market is now dominated by four main service providers BT, Virgin Media, TalkTalk and Sky. The market is split equally into those that have the majority of their customer with double-play (fixed-line & broadband) or triple-play (fixed-line, broadband & TV) services.

• With broadband subscriptions standing at 20.9M or 80% penetration the market is mature and with nowhere else to go has begun to evolve around new and converged services.

UK Broadband Market 2005 UK Broadband Market May, 2012

Other16%

BT23%

NTL18%Telewest

10%

TalkTalk1%

AOL12%

Pipex2%

Tiscali9%

Orange9%

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BT31%

Virgin Media20%

TalkTalk20%

Sky20%

O23%

Other6%

Source: Cirricom/Operators Source: Cirricom/Operators

2. Market Movement

• Churn and up-sell opportunities favour triple-play and Superfast broadband > 30Mbps providers.

• BT and Sky continue to dominate the net adds in the market, together adding 98% of total net adds this quarter versus 107% in Q3.

* Actual reported results show a +50k delta from the trend.

4

BTVirginMedia

TalkTalk SkyEverythingEverywhere

Telefonica02

Other

Q2 2012 136,000 46,000 -13,000 212,000 0 -3,000 -24,000

-50,000

50,000

150,000

Net Adds Q4 2011/12

BTVirginMedia

TalkTalk SkyEverythingEverywhere

Telefonica02

Other

Q1 2012 146,000 30,000 -43,000 166,000 0 -5,000 -2,000

-50,000

50,000

150,000

Net Adds Q3 2011/12

Source: Cirricom/Operators

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3. Why now?

• Over the last four years there has been a marked increase in convergence of the television and telecoms sectors, driven principally though bundled offerings from Sky, BT and Virgin Media, that today accounts for more than 30% of households.

• This coupled with the widespread availability of Over the Top (OTT) content and the rapid take-up of internet connected Smart TV’s, set top boxes, DVD/BluRayPlayers, game consoles and general consumer awareness is creating new opportunities for operators.

• Superfast broadband will further enabling the delivery of HD, 3D and multi-room services.

Source: Ofcom/Operators

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4. What’s driving it?

• Traditional pay-TV operators up-selling fixed-line and broadband to their bases as well as video-on-demand service improvements such as Virgin Media's TiVo middleware upgrade, Sky's launch of Sky Anytime+.

• Traditional fixed-line and broadband operators up-selling hybrid TV services such as BT Vision.

• YouView, due to complete late 2012, creating the standard platform on which broadband-enabled, Smart TVs and Set Top Boxes will be launched.

• Increasing availability and improvements to alternative video-on-demand devices such as Smart TVs, Mobile Phones, Tablets & Game Consoles

• Further distribution of Sky Sports 1&2 now available to resellers on regulated wholesale terms and Sky’s to be launched Now TV pay-as-you-go service.

• Customer awareness of OTT and changing viewing habits favouring on-demand and catch-up TV with content from domestic broadcasters available for free.

• Superfast broadband > 30Mbps availability to 48% of UK households today from Virgin Media and to 67% by 2015 from BT enables content delivery.

• Digital switchover (on going and due to complete at then end of 2012).

• Continued growth of on-line media and gaming services such as LOVEFiLM, Netflix, Hulu, Onlive, Spotify, Zynga and Playfish.

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5. Why is this important?

• The two sectors telecoms and televisions represent £40bn and £10bn of annual turnover in the UK respectively, or £62 (telecoms) and £27 (television) monthly household spend.

• The convergence of these two sectors creates the opportunity to reverse the recent trend of -2% annual decline in consumer household communications spending, stabilising or even growing over the medium-term.

• This will reduce direct pricing comparisons and reduce churn thereby acting both to stimulate price repair and enable lower SAC in the medium term, increasing revenue and margins.

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• The customer’s main selection criteria is generally driven by price then convenience followed by the quality of the service, with premium end content such as Premiership Football, HD/3D and Superfast broadband speeds > 30Mbps being key differentiators.

• Current double-play pricing is almost identical and the trend (line rental) is upwards. Therefore convenience and service favours triple-play and bundling.

6. What do customers think?

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7. Where is the value?

• Keeping customers is where the immediate value is for most of the traditional fixed-line

operators, although revenue generating opportunities do exist and given time and the right

regulatory environment competitive services and content offerings can be developed such

as:– Superfast broadband: favours operators that own their own network or where regulation enforces a cost plus

approach to wholesale pricing.

– Application services: opportunities exist for services such as AV/Email security, web filtering, online storage, photo-sharing, gambling, desktop support & information services.

– Hybrid-OTT: favoured by fixed-line operators that leverage Freeview channels and OTT content such as BBC iPlayer with additional content delivered over IP networks.

– Download-to-own: consumers pay a fee to download a permanent copy of a programme, film, music or book such as iTunes, Amazon and Google Play.

– Subscription: consumers pay a monthly fee to allow them to download or stream content, such as LOVEFiLM & Netflix, Now TV and Spotify.

– Free-to-view: advertising-supported free-to-view content, such as provided on ITV Player, 4OD and Five or services like blinkbox, MSN Video Player etc…

– Free wifi: wireless access like that offered by BT through Openzones/FON or Sky via The Cloud.

• Operators see increased margin from line rental increases of 20% coupled with a LLU cost

reduction of 4.5% (further price reduction by RPI-5.9% in 2013).

• Pay-TV operators see revenue increase from voice and broadband services coupled with

increased stickiness and therefore reduced churn.

• Cross-selling mobile phone services or wifi access is an opportunity to offer total

connectivity thereby increasing the value and convenience to the customer.

• Cross-subsidy allows the option of reducing price in order to gain market share.

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8. Up-sell/Cross-sell

Opportunity

• BT and Virgin Media have a clear advantage when up-selling and cross-selling Superfast broadband as these services are delivered over their own networks.

• Virgin Media is the price leader in Superfast broadband but BT also wholesales Superfast broadband through Openreach at an additional cost to current LLU charge that starts from £6.90 per month.

• With the strongest TV offering Sky has been very successful in cross-selling broadband and voice services to its 10M TV subscribers.

• BT’s TV service BT Vision has around 700K customer and having recently secured 38 Premiership football matches at a cost of £246m per season will launch (and offer on wholesale terms) a football focused TV channel.

• TalkTalk will struggle to increase margin on Superfast broadband or YouView given its price sensitive customer base and the limited amount of paid-for content in the current YouView service.

• Overall BT, Sky and Virgin Media are well placed to up-sell and cross-sell services with all three benefiting from the ability to cross-subsidies.

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Service Provider SuperFast Broadband Entertainment Service Incremental Revenue

BT Retail & Openreach Revenue BT Vision Up-sell/Cross-sell Opportunity

Virgin Media Retail Revenue (Own Network) Virgin TV Up-sell/Cross-sell Opportunity

Sky Additional Openreach Charge Sky TV Up-sell/Cross-subsidy Opportunity

TalkTalk Additional Openreach Charge YouView Price Sensitive Customers & Free Content Limit Opportunity

4

3

2

1

2

3

4

1

3

32

231

Opportunity Matrix


9. Customer Lifecycle

• As can bee seen on the right,

double-play services are typified

by a large SAC cash outflow at the

beginning of the customer

relationship, followed by high

gross margin revenues thereafter.

• The economics are far superior

when keeping a pre-existing

customer, as opposed to losing

one and gaining a new subscriber.

• Up-selling Superfast broadband or

TV services (contract renewal for

18 months) to an existing

customer increases the customer

lifetime value, even though

profitability is impacted at the time,

as can bee seen on the right.Cirricom Limited 11

-£150

-£100

-£50

£0

£50

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Double-play Revenue Lifecycle

Double-playRevenue

-£150

-£100

-£50

£0

£50

£100

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Triple-play or Superfast Impact on Revenue Lifecycle

Double-playRevenue

Triple-playSuperfastRevenue

Initial SAC

Triple-play or Superfast SAC

Line Rental Price Increase Customer Leaves

Content or Speed upsellCustomer Renewal


10. Complaints to Ofcom

• Voice: Ofcom received the most

complaints over the last three months

from customers of TalkTalk Group, with

2,928 complaints. The least complained

about provider in the same period was

Virgin Media, with 664 complaints.

• Broadband: As in previous quarters, the

data shows TalkTalk was proportionally

the most complained about broadband

provider in the period, generating 2,277

complaints over the quarter. Sky’s

broadband service attracted fewest with

579 complaints.

• TV: Proportionally Ofcom received the

most complaints about BT Vision, with

189 complaints. The figures for Virgin

Media and Sky were 263 and 308

respectively.

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Source: Cirricom based on Ofcom data and Operator subscriber figures

Ofcom Complaints TV Q4 2011 Q1 2012 Subscribers

Sky 312 308 10,268,000

BT 266 189 700,000

Virgin 301 263 3,760,000

TalkTalk 0 0 0

Ofcom Complaints Broadband Q4 2011 Q1 2012 Subscribers

Sky 657 579 3,863,000

BT 2,512 2,386 6,280,000

Virgin 747 706 4,152,000

TalkTalk 2,291 2,103 3,756,000

Ofcom Complaints Voice Q4 2011 Q1 2012 Subscribers

Sky 870 689 3,627,000

BT 2,584 2,696 11,233,000

Virgin 747 664 4,148,000

TalkTalk 3,171 2,928 4,066,000

11. BT Openreach LLU/GEA

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12. YouView Impact

• YouView offers a linear Electronic Programming Guide (EPG) integrated with VoD content,

provided through broadband from the likes of LOVEFiLM and Netflix. Many smart-TVs,

games consoles, and other set top boxes offer this capability today.

• YouView’s value-add is aggregating content from multiple portals onto the one platform.

This scale distribution is attractive to content owners, with 300 having expressed interest,

and STV and BSkyB’s new NOW TV among the first to go live this Summer.

• The key benefit for the content providers is a scale platform through which to deliver their

content. VoD from ITV, C4 and C5 will includes adverts.

• BT and TalkTalk customers will have a branded user interface with additional content

available in a separate portal. BT customers will be able to access content currently

available through their Vision service.

• For BT and TalkTalk YouView will be used as a churn reduction tool, a driver of broadband

adoption into the last 20% of UK homes, and as a broadband up-sell opportunity to faster

speeds and large data limits.

• In the short to medium term YouView will not be a major disruptive factor to pay-TV

providers such as Sky & Virgin Media, as ultimately content remains king.

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13. 4G Spectrum Ofcom

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14. SWOT Analysis

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Source: Cirricom

Netflix launch in UK

LOVEFiLMannounces 2M

subscribers

Sky announces Now TV

BT secures the rights to 38

Premier League matches for

£750M

YouView to finally launch

after the Olympics

Smart TV account for

more than 30% of TV sales

2012YouView launch delayed to 2012

BT Vision announce 600K

subscribers

Amazon buys LOVEFilm

NetFlixannounces UK

launch

Apple announces TV

launch

Google announces

launch

60% of UK consume catch-

up TV

2011Launch of BT

Infinity

Virgin Media launch TiVO

Sky launch Anytime +

Arqiva joins Project Canvas

BT secures access to Sky

Sports 1 & 2

Project Canvas rebranded

YouView

LOVEFilmlaunch

streaming service

2010TalkTalk buys

Tiscali

Channel4 consolidates

4OD & catch-up

TalkTalk

Channel4, Five & TalkTalk join Project Canvas

Virgin Media launch DOCSIS

3.0 Superfast broadband

2009iTV Player

Launch

Channel4 Streaming

catch-up

Sky Player Launch

Play TV DTT Launch PS3

iPlayer on Wii

BBC, ITV & BT launch Project

Canvas

2008Digital switch

over begins

Launch of Apple TV

iPlayer Launch

Tiscali buys Pipex

2007Launch of BT

Vision

Launch of Sky Broadband

Tiscali buys Homechoice

Pipex buys Bulldog

2006

15. The Timeline

• Below, is a timeline of key events insofar as the progress towards telecoms/TV convergence in the UK.

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Source: Cirricom

16. Where is this going?

• Sky has had considerable success pushing triple-play bundles to 32% of subscribers, growing its base organically to over 18% market share in just four years. Proposition leading with sports and entertainment content and with the launch of Now TV driving outside of its traditional satellite market and into the pay-as-you-go arena.

• Virgin Media is now making headway with over 68% of customers on a triple-play service and 15% on quad-play, coupled with the lowest price for Superfast broadband.

• BT is in a very strong position offering Superfast broadband ‘Infinity’ over it network and will continue to promote BT Vision which more than 10% of customers subscribe to with an aggressive pricing and bundling strategy. It has recently secured the rights over the next 3 years to 38 Premier League matches at a cost of £738M which should help drive demand. Distribution agreements with Sky and Virgin Media will add to revenue.

• TalkTalk continues to offer the most aggressively priced broadband while managing to improve EBITDA to 25% from 20%. This should improve by 5% with expected LLU price reductions in 2013.

• YouView launching in the next quarter will bring broadband connectivity to the television, enabling easier video-on-demand and interactive services on the TV.

• Smart TV and OTT services driving demand for Superfast broadband.

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17. What does this mean?

• Increased convergence and bundling is reducing churn across the sector, making any market share losses occur slowly. Increased bundling is also shifting competition more to quality and service, rather than price.

• The main motivation for YouView and hybrid TV entrants when launched will be to reduce churn of existing broadband customers, with the key target market being current Freeview customers.

• It is services, not the technology, that creates the medium term opportunities. Introducing new services such as OTT (either “free” or pay) to further differentiate from the competition pushes comparison even more towards service and quality, and away from price.

• Offering competitive Superfast broadband > 30Mbps will be a differentiator and service enabler. Although currently Superfast broadband is more of an upsell opportunity than a reason to change provider.

• STBs & Smart TVs coupled with Internet OTT services might disintermediateoperators as has been seen in the US.

• Convergence with mobile services will become more important as adoption of mobile PDA and tablet devices become commonplace an example would be Free’s introduction of a mobile offering in France resulting in 2.6M subscriptions in less than 6 months.

• Consumers will want to share information with multiple devices, through different networks and in varied formats.

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UK Hardware Opportunities

June 2012

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0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

2011 2012 2013 2014 2015 2016 2017 2018

ADSL2+

VDSL2

DOCSIS 3

GPON

LTE

1. Access Market

• The aggressive rollout of Superfast VDSL2, DOCSIS 3.0, GPON and

pending LTE access networks, coupled with the development and growth of

IP enabled OTT entertainment services as creating opportunities for the

sale of new access technologies and products.

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1. ADSL2+ routers and

Gateways with wireless

802.11n driving demand in

the low to middle market.

2. Operators pushing Superfast

broadband to customers with

VDSL2 bridges/routers &

GPON ONTs at the High-end.

3. Mobile operators pushing

LTE mobile broadband

services as an alternative to

fixed-line from 2013 onwards

(number reflects LTE

modems/routers and not

handsets).Source: Cirricom/Operators

Access Technologies

• With a growing number of neighbouring wireless network and an ever

increasing number of wireless enabled devices sharing frequency, coupled

with range and interference issue, Powerline makes for a fast, reliable and

complimentary alternative Home Networking technology to enable fast

connectivity and HD content delivery within the home.

2. Powerline Market

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1. 1Gbit, 500Mbit & 200Mbit

versions available enable

HD, 3D and Multi-room

IPTV propositions as well

as Superfast connectivity.

2. Multiple chipset suppliers

offer choice and

aggressive pricing.

3. Simple install keeps

support costs down and

improves customer

experience compared with

wireless alternatives. Source: Cirricom/Operators

Powerline Growth

3. Set Top Box Market

A number of factors are driving the Set

Top Box market in UK homes.

1. Take-up of catch-up TV from BBC,

ITV, Channel 4, Channel , Sky and

Virgin Media which grew by a third, to

60% of internet users in Q4 2011.

2. The arrival of services such as

LOVEFiLM, Netflix and Spotify. Netflix

alone accounts for more than 29% of

all IP traffic in the US.

3. Digital Switchover forcing customers

to upgrade equipment.

4. Fixed-line operators and broadcasters

delivering additional content over IP

networks: BT Vision, Sky Anytime+,

Virgin TiVo, TalkTalk TV, YouView,

Now TV.

5. Customer base with legacy TV

technology that does not support OTT.

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4. Current Opportunities

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£36,000,000.00, 25%

£19,120,000.00, 13%

£18,000,000.00, 13%£16,905,000.00, 12%

£15,200,000.00, 11%

£12,800,000.00, 9%

£7,505,000.00, 5%

£5,915,250.00, 4%

£2,400,000.00, 2%

£2,520,000.00, 2%

£2,250,000.00, 2%

£1,470,000.00, 1%

£960,000.00, 1% £750,000.00, 1%

£600,000.00, 0%

£480,000.00, 0%

£115,000.00, 0%

STB OTT, DVB/T2, PVR (YouView,Vision)ADSL2, 4x10/100 Port, 2x2 11n

VDSL2, 2x100/1000 Port Bridge

PLC, 1x10/100 Port, Pass-through,200MbADSL2, 2x100/1000, 3x10/100 Port 2x211nDOCSIS 3.0, 4x100/1000 Port, 2.4 &5Ghz 11nGateway 2x100/1000, 3x10/100 Port 2x211nGPON, 2x100/1000 Port ONT

STB OTT

PLC, 1x10/100 Port, 2x2 11n, 200Mb

PLC, 3x10/100 Port, 200Mb

VDSL2, 4x10/100 Port, 2x2 11n

VDSL2 Bonded, 4x10/100 Port, 2x2 11n

ADSL2 Bonded, 4x10/100Port, 2x2 11n

STB OTT, DVB/T2

GPON, 4x100/1000 Port, 2x2 11n

ADSL2, 4x10/100 Port, 2x2 11n, 2FXS,FX0

5. Current Technology Spend

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£39,000,000.00, 33%

£35,185,000.00, 29%

£20,800,500.00, 17%

£20,430,000.00, 17%

£4,935,000.00, 4%

STB

ADSL2+

PLC

VDSL2

GPON


The End

About CirricomCirricom offers a range of services in the telecommunications and software sector specialising in strategy, sales, product development, marketing and procurement. The company's multi-disciplinary team are highly respected within industry and trusted by both operators and suppliers to identify requirements, appropriate technologies and application software, delivering solutions on time and to budget.

About Jonathan LishawaJonathan is the Managing Director of Cirricom. Before founding Cirricom Jonathan was a Managing Director of Comtrend in Europe contributing more than £120M towards group revenue.

Prior to joining Comtrend he was the Commercial Director at C&W leading the negotiation of wholesale agreements worth more than £250M with Tiscali, Virgin Media and Tesco Telecom.

Previously Jonathan was Head of Product Development for Bulldog Broadband managing the development of products & services sold to more than 250k customers.

Jonathan has advised the UK Government, Ofcom, France Telecom, JPMorgan and Lehman Brothers as well as providing investment due diligence for Ziff Brothers Investments, Bernstein Investment, the Royal Bank of Scotland, Barclays Private Equity, Reliance Capital and PoluninCapital Management.

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uk telecoms & tv june 2012

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