Strong IPTV picture in the US

IPTV is helping to loosen cable's stranglehold on the US pay-TV market

8 October, 2009

Laurence Baker

IPTV is starting to make inroads into the US pay-TV market, primarily through the efforts of AT&T and Verizon. The US has one of the highest rates of pay-TV penetration in the world with nearly 100 million pay-TV (or multichannel video programming distributors) subscribers, which amounts to over 85 per cent of US households. Yet, according to industry data, IPTV accounted for four per cent of the US pay-TV subscriber market by end Q1 2009 - not bad going for a service that only became commercially available in 2007.

Between 2005 and 2009 Verizon has been aggressively rolling out its fibre-to-the-home (FTTH) network and acquiring franchise licences in order to deploy its FiOS TV service across its footprint. By March 2009 Verizon had approximately 2.2 million subscribers out of the 9.7 million households to which the service was available for sale.

In late 2007 AT&T started rapidly deploying fibre into its network using a combination of fibre-to-the-curb (FTTC), fibre-to-the-node (FTTN) and FTTH, on which it launched its U-Verse Video IPTV service. By late 2008, AT&T's U-verse fibre network had been deployed in 80 major markets across 16 states, with the number of U-Verse TV subscribers increasing 400 per cent year-over-year to pass the one million mark at end-2008. By March 2009 there were over 1.3 million subscribers from the nearly 18 million households and other dwellings passed by the service. Despite the economic downturn, subscriber growth in early 2009 was tracking at a healthy 25-30 per cent, with nearly 60 of subscribers coming from customers switching away from cable.

Given the rate of deployment and uptake of the telcos' video service, by 2010 Verizon and AT&T are expected to be significant competitors in the digital TV sector and increasingly in broader IP-based digital media markets.

The satellite factor

While IPTV is a relatively new threat to cable's dominance of the pay TV market, satellite has been snapping at its heels for a number of years. For nearly a decade the number of basic cable subscribers has been slowly declining, from a high of 67 million in 2001 to around 63 million in 2009. Cable's share of the pay-TV market has declined accordingly from nearly 80 per cent in 2000 to less than 65 per cent in 2009. The loss in market share has been largely due to aggressive competition from the satellite TV (DBS) providers (and more recently from IPTV).

During 2008 and early 2009 the major satellite providers, DirecTV and the DISH Network, continued to make gains at cable's expense. Thus DBS's share of the pay-TV market has increased from under 20 per cent in 2000 to over 30 per cent in 2009. DBS growth is partly attributable to price-competitiveness, the increase in local-into-local broadcast stations, service enhancements - such as multiple room viewing solutions and HDTV - as well as improved marketing.

In response to the entry of the cable companies into triple-play services, the two major DBS providers established partnerships with the nation's largest telcos to offer a combined TV, voice and DSL bundle. Verizon, BellSouth and Qwest each signed with DirecTV, while AT&T (then SBC) signed with DISH. In late 2008, however, AT&T announced that it was switching its satellite TV partnership from DISH to DirecTV, effective from February 2009.

The various alliances between the telcos and DBS providers have delivered gains in DBS subscribers. However, these gains are likely to dry up and possibly be reversed with the increasing penetration of the telcos' own video offerings. Indeed, with the market moving towards a triple-play model in the longer term, satellite will struggle to maintain these gains as it cannot match the cable companies', or indeed the telcos', broadband networks.

With IP networks allowing the convergence of voice, video and data services, significant challenges loom for DBS as well as for cable, as telcos deploy extensive fibre networks and move towards triple-play, quadruple-play and broader digital media bundles.

In search of the digital dividend

The US experience in transitioning from analogue to digital TV is still unfolding, with mandatory analogue switch-off having occurred as recently as 12 June 2009. The experience to date may offer valuable lessons to other countries still to undergo full transition to digital TV.

Although the analogue switch-off had been first proposed back in 1997, and the initial date of 2006 postponed till 17 February 2009, by the end of 2008 an estimated 5-10 per cent of US households were regarded as unprepared for the transition. Accordingly, on 11 February 2009, President Obama signed into law the DTV Delay Act, giving consumers until 12 June 2009 to appropriately prepare for analogue switch-off.

A key issue affecting transition, and the primary cause for the delays, was whether a sufficient percentage of households were aware of the need to obtain a convertor and were in fact taking the necessary action. In order to increase awareness of the transition and to subsidise consumers for the cost of digital-to-analogue convertors, the government made available a $1.3bn coupon programme.

Another issue affecting transition involves what is known as the cliff effect. The cliff effect describes the phenomenon at the outer areas of a signal's footprint, where a digital image distorts or even goes black even though the analogue signal was good. It is expected that there are at least some areas, particularly certain 'rural fringe' areas, where channels are being lost despite the presence of a convertor. Consumers in affected areas may need to obtain a new or reconfigured antenna to receive all available digital channels.

The third related area of concern involves the shrinking of digital coverage. It was estimated that 15 per cent of TV stations would have a smaller digital coverage area than their analogue signals reached. The FCC has been looking at ways of addressing these shrinkage effects and their impacts on consumers.

Of course some consumers may have the option of subscribing to pay-TV, a choice that is not lost on the marketing departments of pay-TV companies. But this is not an option in the underserved areas (ie, where it isn't available) as well for many lower-income households. Ultimately, the newly constituted Obama administration may find itself bearing the fallout from a less than smooth digital TV transition.

This article was compiled from a report published by Paul Budde Communication Pty Ltd. To find out more information about Paul Budde Communication, go to www.budde.com.au or contact Paul Budde directly at pbc@budde.com.au