European telcos will lose more than €3,000 per subscriber over 10 years if they build hybrid satellite and ADSL networks to fight cablecos’ triple play of voice, video, and data, according to a new report by Forrester Research B.V. (Nasdaq: FORR). Instead, Forrester advises telcos to focus on operational efficiencies, increased capacity utilization, creative partnerships with satellite TV firms, and a few value-added services to make broadband access profitable — they will then dominate with a 63% market share of the 38 million European households using broadband in 2006.
“Although cable pioneered broadband in Western Europe, ADSL is the future: 56% of broadband connections in 2001 were ADSL, and telcos are just getting started. But telcos aren’t yet making a profit from broadband with today’s services and prices,” said Forrester Senior Analyst Lars Godell.
“The most profitable strategy for ADSL providers is to sell value-added PC services like gaming, music subscriptions, adult content, remote-office connectivity, and security on top of access,” Godell added. “These services will help telcos draw a cumulative profit from subscribers two years earlier than through access alone. Using mature technologies and with limited additional investment, telcos can generate €5.50 of extra monthly revenue per subscriber in year six. Conversely, the triple play designed to attack cablecos’ dominance of TV will deliver very negative returns. Telcos like BT, toiling with the idea of rebuilding their networks to provide the full triple play on their own networks, should note the similarities with their recent UMTS investments — very high capital costs and very uncertain returns. For a telco, video is suicide: Small revenues and huge losses will kill the business case, and immature technologies are very risky.”
To depict the lowest possible costs to provide TV and video to end users, Forrester modeled a telco network in which a satellite link is used to feed video streams to existing DSLAM (broadband “switches”), avoiding expensive fiber costs. With an annual capex cost per subscriber of €764 in year one — a whopping €663 more than in the access-only case — cash-strapped telcos will be hard pressed to find revenues to justify such a massive investment. Because it’s tough to compete against the cheap and firmly entrenched broadcast, cable, and satellite TV that Europeans already enjoy, telcos’ multimedia revenues will be very small — witness €3.6 in additional revenue per average subscriber in year one and €36 in year 10. As a result, telcos will lose a cumulative €3,169 per subscriber that joined in year one.
“Telcos trying to go it alone with TV over copper networks will fail as they face substantial hurdles — immature set-top box and VDSL technologies, lack of knowledge of content bundling and pricing, digital rights management, and CPE connectivity. Instead, telcos must find new ways to build scale, wholesaling to anyone who wants to use their DSL pipes, including rival cablecos and satellite TV firms. Indeed, telcos should follow the example of BT and begin to offer cheaper triple-play services by reselling satellite TV from firms like BSkyB,” Godell said.
For the report “Making ADSL Broadband Pay,” Forrester extended its broadband forecast model through 2006. Europe’s broadband penetration nearly quadrupled in 2001 as access providers signed up early adopters, but providers need to attract the next wave of broadband users. After a year of reduced growth in 2002, access providers will use price to attract new users and steal existing ones from rivals, and successful pricing drops will sustain a 50% growth rate for the next two years. In 2006, price wars will ebb, and content delivered to PCs and consumer electronics devices will become the new battleground. At the end of 2006, 38 million Western European households will be using broadband — 24% of all households and an impressive 41% of all households online. Finally, looking at penetration by access technology in 2006, we expect to see xDSL claim two-thirds of market share, cable drop to less than a third of market share, and other technologies see only modest gains.