Building a new business model for television – how telcos can succeed with IPTV

By John Reister, Chief Architect, BigBand Networks
These are exciting times for IPTV. Research firm Infonetics projects that IPTV subscribers will grow to 53.7mn worldwide by 2009 and generate US$38bn in revenues for service providers. Investments by telcos in the necessary equipment are also expected to grow significantly. Infonetics, a market research firm, predicts that IPTV equipment sales will increase from $371mn to $6.8bn between 2005 and 2009.

Sustaining this dramatic rate of growth in a competitive marketplace will not be easy. As the second or third video provider after satellite or cable, telcos offering IPTV will not be able to charge substantially higher monthly subscription fees and still capture market share. To succeed and grow, they will need to differentiate their offering. One of the ways they can do this is through addressability. IPTV networks can direct content to individual recipients, much like the Internet. This addressable advertising capability may be the key to enabling IPTV operators to generate additional, incremental revenue streams as they ramp up subscriber numbers.

BigBand Networks believes that telcos can leverage the design of their IP-based video delivery networks to deliver addressability and, by so doing, solve problems that advertisers are facing with declining ad effectiveness.

In this way, they may also be able to take advertising dollars from established competitors like cable operators, satellite dish operators and Internet content providers, in addition to traditional
advertising media outlets such as direct mail, publishers, or banner ad agents.

The wholesale ad model

In order to access the revenues they have generated from addressable advertising, telcos need to have first worked out an appropriate business model and have put in place an appropriate traffic and billing infrastructure.

In a traditional retail ad delivery model, the content provider opens up the opportunity in the programming, and the delivery operator sells and delivers the advertisement. Historically, content providers extract a premium for content that includes these ad opportunities for the delivery operator. The delivery operator keeps all the ad revenue but must have an advertising sales force to sell the ad opportunities. However, for a telco without an ad sales force, wholesale delivery is the best business model.

In the new, wholesale ad delivery business model (illustrated in Figure 1), the content provider opens up the opportunity for the IPTV delivery operator to carry out the ad insertion process. However, the content provider can still make the ad selection decision on which ads to use for which specific target markets and therefore continue to sell the ad inventory. And the operator can also send back information to the content provider relating to the number of people who viewed the ad and the number who skipped it. So, instead of placing one ad for the whole of a country or a region, for example, content providers can place individual ads in individual towns or neighbourhoods or even target them at specific demographic groups.

As a result of this, the content provider’s ‘product’ is now much more refined, enabling it to attract the attention of more advertisers and halt defection to the Internet.

From the operator’s perspective, moving to a wholesale delivery model can be extremely lucrative. Content providers have to provide available time slots (widely known as avails) for advertising. This entails marking off space within content streams to enable the operator to insert ads, using splicing techniques to target specific regions. This practice, which is prevalent in the US and is likely to become increasingly so in Europe, can be lucrative for operators who might conservatively expect to generate $5 - $6 a month of incremental revenue per user for regionally or demographically-targeted ad placement.

Wholesale advertising delivery model
 

On top of this, technology service providers like BigBand Networks are able to support not just the traditional SCTE30 ad server approach but also the emerging SCTE130 standard that helps to support this brand new wholesale business model and at the same time achieve capex savings and ad campaign flexibility.

The SCTE 130 ADM+ADS+Ad Cache approach can reduce the capital cost of the process by as much as 75 per cent. The approach also eliminates duplication and streaming and provides distributed storage and more centralised control. Critically, it also provides scalability for evolving to more zones or to full addressability.

Effectively, this new standard has helped television advertising evolve from an essentially monolithic to a much more distributed model such that the business entity that inserts the ads can be a different entity from the one that sells, chooses or schedules the ad.

With this distributed model in place, operators can start to think about moving from a traditional advertising strategy to a much more closely targeted approach.

From zoning to interactivity

On the road to full addressability, operators would typically first opt for zoning. The degree of granularity chosen can be highly flexible. Using the wholesale ad model, operators could start with a ‘coarse’ city-by-city methodology, or alternatively jump to a neighbourhood-by-neighbourhood strategy. Obviously, from the operator’s perspective, the more granular the approach, the more it will cost in terms of configuring the network to deliver the requisite functionality.

Once zoning is in place, the potential now exists for the operator to provide feedback on the viewership within each zone to the advertiser. Operators can, for example, gauge the number of viewers tuned into a particular channel and the number of people within a particular neighbourhood or postal code who viewed a specific ad. The level of feedback delivered will of course depend on the prevailing privacy regulations.

The next stage typically is to move to full addressability and ultimately interactivity. This kind of phased approach allows the operator to mitigate the level of risk by ensuring that the business model works and that the necessary authorisation has been received from the content provider, for example.

Why telco operators are suited to addressable advertising

Despite being recent entrants to the world of video service provision, telco operators do have several advantages over their competitors when it comes to delivering addressable advertising, the most important of which are categorised below.

Demographic Profiles
With the help of technology service providers like BigBand Networks, telco operators are well placed to be able to identify subscriber interests while also protecting privacy. There are two broad categories of viewer information:

1. Static subscriber data: geographic and demographic information such as zip code, household size, ages of the family members, marital status, household income, ethnicity, viewing preferences and viewer op-in data etc.
2. Dynamic information including viewing history, channel change details etc.

Such “contextual and behavioural” data can be aggregated into a profile and then the users’ private information is concealed.

Local advertising
Local advertising can be expanded through telcos’ existing yellow page and directory services. Recent market data shows a rapid shift of paper advertising dollars into other advertising media. Telco operators are well positioned to capitalise on this inevitable trend since they typically already have local advertising teams and relationships with local businesses.

Telescoping and other enhancements
Multiplatform ads, enhanced ads and telescoping facilitate a richer exposure and increase mindshare for the advertiser.

Reporting and feedback mechanisms
Advertisers are increasingly focused on ad effectiveness and demanding results on their ad campaigns. While protecting personally identifiable information, IPTV operators can provide valuable feedback to advertisers on the effectiveness of their ads.

Bright future ahead

Addressable advertising services over IPTV networks are feasible today and have been in active deployment in the United States for several years. The approach offers benefits to operators, content providers and consumers alike. From the viewers’ perspective, it is much better to see commercials for products and services that are relevant and tailored to their individual areas of interest. For the content providers, the extra revenue generated can fuel additional content creation.

For operators, the potential benefits of implementing addressable advertising over IPTV are arguably even more far-reaching.

Addressable advertising offers them the opportunity to extract much higher value per ad, but also the ability to sell a specific slot to multiple advertisers. Rather than selling an advertising slot to just one advertiser, using addressable advertising allows the carrier to optimise revenues by targeting multiple advertisements to different viewers during the same programming break. With the ability to choose ads per subscriber based on specific geographic, demographic, contextual or behavioural information, operators could fetch much higher average revenue per user (ARPU) from the targeted IPTV ad revenue.

Coupled with this, the likely growth in their subscriber base from deploying addressability could positively contribute to better competitiveness against cable operators, satellite operators and Internet video providers and in turn attract more advertisers and marketers. For the telco community, addressable advertising may well turn IPTV from a service with potential to one capable of delivering sustained commercial success.