Convergence in the media market – a renaissance for broadband cable Cost-efficient growth strategies for cable network operators in a new media age
April 2010 We would like to thank Dr. Henning Bandte, Felix Dohna, Ralf Hetzer, Armin Naraghi, Kathrin Koch, Tobias Sedlmayr and Philipp von Stietencron for their analyses and valuable contributions as well as Christina Kraus, Armin Raffalski, Georg Rainer, Jochen Schmidt, Manuela Nikui and Birgit Gelsdorf for their dedicated support regarding the contents and creation of the study. Introduction _ 3
Introduction
When the cable networks made their way into Western Europe, they certainly repre- sented an enormous improvement with regard to quality and variety of TV stations com- pared to the terrestrial analogue reception which had prevailed until then. However, for a long time, cable networks were “merely” an infrastructure for distributing analogue television which surely brought in good margins, but was relatively unspectacular in itself.
Since the second half of the 1990s, technical development has made possible the additional transmission of digital television as well as broadband internet and voice telephony by cable. Driven by the prospect of additional sales through this already existing infrastructure, cable has experienced a renaissance in recent years:
The network upgrade with regard to digitalisation and back-channel capability is being expedited with great urgency and considerable investment. At the same time, the additional possibilities are being applied in new products and product logics (Keyword: Triple Play). A wave of consolidation between the cable network providers in Europe has begun.
Today, the cable network providers in Europe are among the central players in supplying multimedia applications to the population.
And the development is not at all complete. In addition to an expansion of the customer base, the emphasis is above all on increasing the sales per customer by means of new products, services and contents that result from the convergence of television and internet.
The following study deals with cost-efficient growth strategies for cable network operators on their continuing route into the converging media market. In Chapter 2, the strategic starting positions of various EU countries will be briefly analysed with regard to the conditions in the national cable markets, and basic options for growth will be identified. Chapter 3 will then introduce a toolbox of measures and instruments with which, in our experience, an EBITDA increase of approximately 14-25% over two years can ideally be realised.
The analyses and results in this study are based on the project and market experience of goetzpartners. Since 1998, goetzpartners has helped to shape the deregulation of the German cable market significantly with M&A and consultancy services, and it accompanied numerous companies in their alignment and transformation to the new market conditions.
We hope you enjoy reading our report! The authors
Dr. Alexander Henschel, Managing Director
Ulf Rieckhoff, Senior Manager
Sonja Lippert, Manager Table of contents _ 5
The authors Table of contents
1. Subject of the study 6
2. Analysis of the relevant markets 7 2.1 Technically addressed market volumes (technical coverage) 7 2.2 Utilised market volume (contract penetration) 9 2.3 Strategic starting positions and basic lines of action 10 2.4 Product-specific development in the cable business 12
3. Reorientation of the cable network operators – optimisation areas and measures 24 3.1 Network expansion 24 3.2 Sales Push 28 3.3 Product optimisation 35 3.4 Inorganic growth 42
4. Outlook and conclusion 48
Table of figures 50 List of abbreviations 52 6 _ Cable Study
1. Subject of the study
Here, the term “cable network operator” represents the operators of net- work levels 3 and 4, as these levels are usually handled together. For historical reasons, only in Germany the ownership and operation of level 3 and level 4 are separate, and at present this is being overcome in some places. It is obvious, that both the strategies for technical supply of households as well as the, therefore limited, commercialisation are very strongly determined by the physical cabling network.
In regard to content, developments and opportu- Figure 1: Structure of cable networks and focus of the study nities for the cable market in the EU countries are analysed in the study. The focus here is on the 17 Focus of the study countries of EU27 which have a cable share in the TV sector between 25% and 75%. Markets with Repeaters lower or higher penetration are not considered as the relevance of cable there is too low or cable has
Repeater already taken up a very dominant position, so that
Transfer points it is not always possible to compare. Within the TV Studio countries under consideration, Germany clearly Content Reception Radio link & head-end Glass fibre/coaxial cable Transfer to house/ production & bundling with repeaters network & repeaters house network stands out from a sales perspective, as around 38% of subscriber contracts for cable-based ser- Network level 1 Network level 2 Network level 3 Network level 4 vices of the entire subject of the study are to be found here alone. Poland and Romania follow (cf. Kaufmanns/ Siegenheim/Sjurts: Obsolescent model of television?, Wiesbaden 2008 ) with approximately 11% and 10% respectively.
Figure 2: Market size in the focus countries 2009
Target Countries within the European Union Target Country breakdown 2009
Cable customer vs. total households
Focus EU but not Not EU Subscriber for cable based services [in thousands] Focus 75% > x > 25% 100% > x >75% Germany 23,962 (38%) Austria Belgium Poland Bulgaria Luxembourg 6,943 (11%) Czech Republic Malta Romania 6,098 (10%) Denmark Netherlands Estonia Portugal 3,737 (6%) Less than 25% Finland Hungary 3,657 (6%) Germany Cyprus Sweden Finland Hungary France Sweden 3,595 (6%) Greece Ireland Austria 2,601 (4%) Italy Latvia Estonia Lithuania Spain Denmark 2,480 (4%) Poland UK Latvia Czech Rep. Portugal Denmark 1,851 (3%) Lithuania Slovakia Ireland Finland 1,819 (3%) Slovenia Bulgaria 1,675 (3%) Romania Germany Poland Czech Republic Sweden Slovakia 965 (2%) Slovakia Ireland 822 (1%) Subscriber absolute Austria (in % of subscribers total) Hungary Romania Lithuania 694 (1%) Slovenia telephony Estonia 590 (1%) Bulgaria internet Latvia 560 (1%) Portugal digital TV Slovenia 549 (1%) analogue TV
(Analysis by goetzpartners (data extrapolated to 2009), Cable Europe/Screen Digest) Analysis of the relevant markets _ 7
2. Analysis of the relevant markets
The media landscape is in a state of change and it is exhibiting an un- suspected vitality. The digitalisation is the driving force for the current changes in all stages of the value creation chain – from production via distri- bution to reception. The conversion of analogue signals into bits and bytes has resulted in lasting and irreversible changes to the processes surrounding the use of media.
The various media distribution channels are growing ever closer together on the basis of internet technologies - the multimedia world is converging more and more strongly. As a result of upgrading the classic broadband cable to back-channel capability and a bandwidth of up to 862 MHz, cable is technically in a position to transmit not only analogue television but also digital programmes and IP signals at the same time. Due to standardisation (e.g. DOCSIS), it has been possible to roll it out and operate it economically on a large scale since the end of the 1990s. By the time the most up-to-date DOCSIS 3.0 standard, which allows IP transmission rates of 100 MBit/s or more, is applied, cable will be superior to the twisted pair technologies such as DSL, ADSL or VDSL. Against this background, cable is currently experiencing a renaissance as a multimedia infrastructure platform.
In recent years, the development of so-called new digital services has been the focus of business endeavours Europe-wide among the cable network operators. These include pay TV packages as well as broadband internet access and telephony by Voice over Internet Protocol (VoIP). Accordingly, on the one hand the required network expansion represents an urgent prerequi- site for the distribution of digital TV, internet and telephony by broadband cable. On the other hand, it will require a significant change in the marketing of these products to stimulate the acceptance and demand by customers.
Following that, both the technical coverage and the contractual penetration for cable-based services will be considered. The results are used as a starting point for further groupings and considerations.
2.1 Technically addressed market volumes (technical coverage)
In general, the network is the limiting factor for market volume when distri- buting cable-connected media. A network expansion only makes sense if it is market driven, i.e., the investments can only be made if a return on invest- ment is made possible as a result of corresponding sales volumes, i.e. customer contracts. Therefore, cable networks are preferably installed and expanded in urban areas where a correspondingly high customer potential exists for each section of cable laid. 8 _ Cable Study
Figure 3: Proportion of households accessible to cable compared To specify the level of cable network penetration, to total households 2009 the so-called “homes passed” is normally used. [Households in thousands] These are all households that are already acces- 75% 37% 91% 84% 91% 60% 50% 72% 57% 81% 51% 60% 63% 96% 71% 41% 55% sible by main and backbone cables, even if the (Proportion of homes passed to total households) 40,266 actual house connection to network level 4 (the 10,216 14,473 so-called “last mile”) is not yet present.
9,173 To achieve more transparency of the penetration of cable networks, the degree of urbanisation 7,381 of the countries under consideration was also 30,050 681 4,498 4,209 analysed, in which an urban region is defined as 11% 3,909 3,807 3,599 1,798 2,921 609 337 2,503 1,809 2,423 one with more than 20,000 inhabitants. If one 6,700 1,799 2,144 5,300 1,431 703 463 1,582 1,222 992 37% 3,470 866 601 760 assumes that the urban regions are developed for 3,300 2,700 2,400 50 410 1,800 1,800 1,960 1,490 582 173 345 1,278 1,000 1,172 428 582 415 cable first, it appears that with a combined con- Germany Poland Romania Portugal Hungary Sweden Austria Denmark Czech Finland Bulgaria Slovakia Ireland Lithuania Estonia Latvia Slovenia Rep. sideration of penetration and degree of urbani- Households without cable supply Connected/connectable households (“homes passed”) sation the development of the non-urban or rural
(Analysis by goetzpartners (data extrapolated to 2009), Screen Digest) areas has taken place to a very different degree. While today the number of “homes passed” in some of the target countries is just below the number of urban households (in Poland, Bulgaria and Latvia), it clearly exceeds the number of urban households in other countries. Thus in some places more than a third of all households (in Romania, Portugal, Hun- gary and Lithuania) in rural areas according to the definition are connected.
Figure 4: Technically developed potential according to degree From a purely economical point of view, a of urbanisation 2009 network expansion in towns with less than [Households in thousands] 20,000 inhabitants must be questioned criti-
40,266 14,473 7,381 3,909 3,807 4,498 3,599 2,503 4,209 2,423 2,921 2,144 1,582 1,222 601 992 760 cally. In order to determine the potential here, 4% 9% 16% 9% 25% 28% 19% one would have to consider more closely the 37% 29% 100% 40% 40% 50% 43% 43% 39% 45% 52% 38% 16% 53% building density in rural regions on the one hand, 17% 41% 49% 21% 22% 12% 6% but also on the other hand include the com- 13% 25% 32% 11% 11% 6% 32% petitive situation with regard to alternative 65% 58% 57% 53% 50% 51% 51% 49% 48% 44% 41% platforms. However, a further reason for a 37% 35% 39% 35% 31% 23% high level of cable penetration outside of urban
Germany Poland Romania Portugal Hungary Sweden Austria Denmark Czech Finland Bulgaria Slovakia Ireland Lithuania Estonia Latvia Slovenia regions can also be a politically desired develop- Rep.
100% = Total households ment of the infrastructure in rural regions.
[1] Calculated as the difference between the number of urban housholds according to the definition, and total homes passed [2] Towns with more than 20.000 inhabitants
Households without cable supply in rural regions Households without cable supply in urban regions [1] Connected households in rural regions Connected households in urban regions [2]
(Analysis by goetzpartners (data extrapolated to 2009), Screen Digest, Eurostat) Analysis of the relevant markets _ 9
The countries analysed in the framework of the study show widely differing degrees of cable penetration, caused by different historical developments of these countries. Particularly in those countries in which the expansion of cable took place when monopolies existed, political considerations have often resulted in cable-households being developed even outside areas of high population density, which today would probably no longer be developed, for economic reasons. This applies in particular to towns and districts with less than 20,000 inhabitants.
2.2 Utilised market volume (contract penetration)
The utilised market volume is determined on the basis of subscriber house- holds, in other words, on the proportion of technically developed households for which at least one contract already exists.
The product revolution from normal cable connection via digital TV to internet and telephony means that a customer can now receive more than one product and thus more than one contract can exist for one household. A distinction is thus made between customers and the so-called RGUs (Revenue Generating Unit), as the individual products are usually called from the cable network operator‘s point of view.
The current technical requirements in the cable networks are forcing a differentiation when considering the utilised market volume compared to the technically available potential. In the meantime almost all networks are being expanded to > 400 MHz, making possible the transmission of digital TV channels. While analogue and digital TV products can thus be received in vir- tually the whole network, for internet and telephony products the network must be expanded with back-channel capability. For the following analysis it means: The utilised market volume in the TV segment results from the ratio of cable TV RGUs – analogue and digital – to the total number of households that can be supplied (homes passed). For the utilisation degree of internet and telephony, only the number of internet RGUs is referenced to the homes passed that have been upgraded to back-channel capability. This is based on the assumption that the households with cable telephone also have a cable internet connection, but not vice versa. Thus any inaccuracy due to double counting should be minimised. 10 _ Cable Study
The analysis shows that the technical potential Figure 5: Volume utilised in terms of technical potential 2009 in the TV segment in at least 8 of the 17 target 63% 90% 60% 58% 71% 93% 89% 92% 46% 77% 92% 68% 63% 40% 88% 97% 88% countries is already utilised by more than 85%. (Analogue and Digital TV RGU as % of homes passed) [1] 19,027 RGU absolute [in thousands] Only 4 countries show a utilisation of less than 60% here. Significantly, the countries with high
4,760 4,014 penetration rates in the non-urban area (par- 1,926 2,452 2,518 1,601 1,661 1,112 1,509 1,371 864 ticularly Romania, Portugal and Lithuania) also 633 468 376 398 365 show the lowest TV utilisation rates. However, Germany Poland Romania Portugal Hungary Sweden Austria Denmark Czech Finland Bulgaria Slovakia Ireland Lithuania Estonia Latvia Slovenia Rep. the countries in which not even all of the urban regions are developed for cable yet (Poland,
12% 44% 15% 25% 28% 32% 36% 42% 29% 18% 22% 9% 15% 22% 34% 35% 32% Bulgaria and Latvia) all show with over 90% the (Internet RGUs as % of back-channel capable homes passed) [2] 4,935 RGU absolute [in thousands] highest utilisation rates.
2,183 In the internet and telephony sector the situa- 2,084 1,811 tion is clearly different. Here, the maximum 1,205 1,077 1,000 747 739 310 304 100 189 226 214 162 184 utilisation rates per internet or telephone Germany Poland Romania Portugal Hungary Sweden Austria Denmark Czech Finland Bulgaria Slovakia Ireland Lithuania Estonia Latvia Slovenia Rep. customer are just over 40%. It is not only the [1] Assumption: The proportion of non digitally capable networks is negligibly small. very strong competition with the DSL platform [2] Back-channel capable homes passed calculated from the percentage share of the developed network, multiplied by the total homes passed.The details of the developed network share were not available for 4 countries (Bulgaria, Slovakia, Lithuania, Latvia); in this case the weighted average of the remaining 13 countries was used. of the telecommunications companies that is The stated share refers exclusively to the internet utilisation, as it is assumed that households with cable telephone will also have cable internet. responsible for the generally lower rates, but Digital TV Analogue TV Telephone Internet also, in particular, the short product history.
(Analysis by goetzpartners (data extrapolated to 2009), Cable Europe/ Screen Digest, OECD Communications Outlook 2009 )
Regarding the utilisation of technical coverage, attractive opportu- nities are still appearing, especially in the internet and telephony sector. In particular, the networks in countries with very high technical coverage tend to show a rather low utilisation and, correspond- ingly, appear less efficient. Accordingly, companies with a low utilisation should first and foremost work towards an increase of utilisation for their growth before they focus on further expansion of their network. Here, a relatively efficient growth can be realised without making further investments in infrastructure.
2.3 Strategic starting positions and basic lines of action
The insights gained regarding the technical potential and the utilised market volume in the individual countries led to a classification of strategic starting positions. For this the economic potential of the networks and the utilised customer potential are considered. Analysis of the relevant markets _ 11
The countries can be subdivided into three groups, Figure 6: Positioning of the national cable markets with respect based on their general market penetration: to network expansion and utilisation 2009 Ratio of homes passed to TV households in % A) Countries where the penetration of the ex- 100 - High technical Hungary isting network is already high but where coverage 95 - Lithuania Romania the technical coverage of the network 90 - 85 - Portugal seems to be expandable economically. 80 - Finland B) Countries where the penetration of the 75 - Germany Denmark 70 - B CEstonia existing network is low and the techni- 65 - cal coverage could thus be economically Ireland 60 - Slovakia Sweden Czech Republic overstrained. 55 - Slovenia Bulgaria C) Countries where the penetration of the 50 - Austria 45 - existing network is already high and it Latvia 40 - appears barely possible to extend the tech- 35 - Poland A Ratio of TV nical coverage of the network economi- 30 - RGUs to homes Low technical passed in % cally (however, a network upgrade can coverage 25 - 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 make sense here, provided it is carried out Low penetration rate High penetration rate in own network in own network in a focused manner in small steps, and with parallel safeguarding of sales volume). (Analysis by goetzpartners (data extrapolated to 2009), Cable Europe/ Screen Digest, OECD Communications Outlook 2009) Depending on the particular situation in which a cable market exists, there are some general guiding principles for growth that can be deduced. It can be assumed that the situation for a specific country as derived above can also be applied to an individual cable network operator or a specific region.
The following three lines of growth can principally be derived: for A) Further network expansion (“Expand”) for B) Increase of cable penetration of the existing network (“Penetrate”) for C) Optimise the sales per customer (“Leverage”) in a highly developed market.
In the “Expand” segment, the focus should basically be on the economically reasonable expansion of the network area, as there still appear to be some areas which could possibly be developed. This can also apply to the further upgrading of already existing cable networks, to give them digital or back- channel capability. The utilisation within the old and new network areas should not be neglected, however.
In the “Penetrate” segment, on the other hand, the conclusion can be drawn that the network area already extends over the major part of the house- holds that can be developed economically, but the customer penetration and thus the refinancing of the network expansion investments still offers much potential. Accordingly, with the existing network extension the focus must be on increasing the marketing performance for classic TV products and new services respectively. 12 _ Cable Study
In the “Leverage” segment, both the network expansion and the network utilisation with respect to customer numbers are very well developed. Here, the prospect of growth is primarily an increase in sales with the existing customer base. Above all, this means developing additional services, offer- ing content that is attractive and capable of producing earnings, optimising contract duration and pursuing a consistent pricing policy. And furthermore, this certainly also includes means of a further, focused and controlled expan- sion of the network area and customer numbers, which must be expected to take place in small steps.
In addition to the organic options for growth shown, inorganic growth of course is always an option. This not only leads to growth but also to an in- crease in efficiency as well as a mutual supplementing of existing competen- cies. Examples are synergies in the operation area or the extension of the value chain (carriers for backbone cables) and/or the product range (mobile opera- tors for Quadruple Play), and also the use of potential economies of scale, for example in hardware purchasing or service.
The basic lines of action shown represent generally derived approaches which must, of course, still be checked against a multitude of other aspects in the individual case for each country or each company. When defining the growth strategy and the goals behind it, the fields and measures of action must therefore additionally be considered and approached on a product- and country-specific basis.
Figure 7: Basic lines of action Depending on the technical coverage and the level of contract penetra- tion, the following three basic guiding principles can be deduced and Strands Optimisation areas applied by companies to achieve cost-efficient organic growth: 1. Low coverage and high penetration: “Expand” EXPAND Inorganic growth > Focus on the expansion of the network area Network expansion/ upgrade in potential markets 2. High coverage and low penetration: “Penetrate” A > Focus on increasing the penetration of the existing network Network 3. Coverage and penetration equally high: “Leverage” expansion/upgrade > Focus on increasing sales and/ or profit per existing customer PENETRATE Optimised penetration into developing markets B Sales Push 2.4 Product-specific development in the cable business LEVERAGE
Cost-efficient growth Product strategies in fully optimisation As shown below, organic growth can be achieved both by an increase in developed markets C customer numbers and by a rise in the ARPU, e.g. via the number of services (RGUs) purchased per customer. The following illustration shows that the (goetzpartners) Analysis of the relevant markets _ 13
number of cable RGUs in the subject of the study Figure 8: Transnational product-specific market development has grown steadily in recent years, by nearly 7.8
% for all services since 2005. A differentiated view [RGU in thousands] CAGR 2005 - 2009 shows, however, that for TV products it is basical- Accelerated development in digital services 65,000 - ly not a question of growth but of an increasing 60,000 - 64.1% replacement of traditional analogue TV in favour 55,000 - 41.4% 32.7% of digital TV. The comparatively small increase of 50,000 - 45,000 - 1.8 % is in part also due to the fact that in some 40,000 - 59.2% product models a digital product is booked in 35,000 - 7.8% 30,000 - 1.8% addition to an existing analogue product. In the 25,000 - internet/ telephony sector, on the other hand, a 20,000 - -4.4% genuine growth of approximately 41.4% has been 15,000 - 10,000 - recorded since 2005. These exorbitant growth 5,000 - rates are due to a strongly growing demand, par- 0 - 2001 2002 2003 2004 2005 2006 2007 2008 2009 ticularly in the broadband sector as well as gains made by cable in the platform competition with telephony internet digital TV analogue TV (Analysis by goetzpartners (data extrapolated to 2009), Cable Europe/ Screen Digest, the telecommunications companies. OECD Communications Outlook 2009)
When one considers the ARPU development for TV, internet and telephony in the target coun- Figure 9: Transnational ARPU development cable TV and internet tries, it can be observed that the ARPUs for inter-
CAGR 2005 - 2009 net and telephony fell in the period from 2005 – [Monthly ARPU per RGU in EUR]
2009, due to entry into the mass market as well 26 - as the strong competition with the telecommuni- 24 - 22 - cations companies. In contrast, the ARPU for TV at 20 - -4.3% 6.9% CAGR has risen sharply since 2005, caused 18 - Internet by, among other things, the increased proportion 16 - 14 - of digital TV, which tends to be more expensive. 12 - TV 6.9% 10 - According to the previous descriptions in Section 8 - 6 - 2, it becomes clear that there is only one direc- 4 - tion for cable-based services at present: upwards. 2 - However it is not possible to draw across-the- 0 - 2001 2002 2003 2004 2005 2006 2007 2008 2009 board conclusions about the previous and future development of cable network operators and (Analysis by goetzpartners (data extrapolated to 2009), Screen Digest) their products for this broad ranging and hence heterogeneous subject of study. The following will therefore present the significant market and competitive factors that have an additional influ- ence on the development of cable products in the target countries and must be included in business decisions. 14 _ Cable Study
In the TV sector, the cable platform was able to continue the ex- tension of its market share slightly. Despite a fall in the analogue sector, the total number of TV-RGUs has increased slightly due to a clear rise in digital TV (CAGR 59%). Furthermore, this shift is re- flected in a rise of TV ARPUs as digital TV connections tend to be more expensive and are enhanced to some extent with additional products in the basic pay area. In the internet/ telephony sectors, the cable platform shows a very clear net growth in customers of more than 41% CARG. In addition to the growing demand for broadband connections, this is also due to the fact that this relatively young product was able to wrest sig- nificant market shares from the telecommunications companies. However, the intense competition in this sector resulted in falling prices.
2.4.1 Television To assess the development of TV products, both the competition between cable and other TV platforms, and also the question of the signal transmission, analogue vs. digital, must be considered. Both aspects must be seen in context against the background of the current conversion of cable to digital.
The cable connection itself is basically in competition with other, also digital or digital-capable, platforms. These are primarily reception by satellite and terrestrial reception as DVB-T (Digital Video Broadcasting - Terrestrial) or as an analogue signal. However, classic analogue terrestrial television is increasingly losing importance, and sooner or later will be replaced completely by DVB-T in the countries under consideration. The switch-off of analogue terrestrial television in Europe has already taken place, e.g. in Germany, Finland, Luxem- bourg, Sweden or The Netherlands.
By transmitting a digital television signal over the internet (IPTV), VDSL and FTTH emerge as a competing platform. However, with a market share in single percentage figures in the countries under consideration it is very much in its infancy.
The following graphics show the distribution of the national TV markets by platform as well as the growth rates of cable and satellite TV by households. They make it clear that cable is experiencing growth as a TV platform in virtu- ally all countries under consideration. The extremely high growth rates for the satellite sector in the Eastern European countries tend to be explained by the fact that these countries had a backlog with regard to modern TV infrastruc- ture. Accordingly, the faster and more cost-effective conversion from ana- logue terrestrial television to satellite has taken place particularly in the ru- Analysis of the relevant markets _ 15
ral regions, resulting in higher growth rates than Figure 10: Market share of the cable platform in TV 2009 for the spread of cable TV in the existing or newly developed urban districts. In mature markets such [Households in millions] as Denmark or Sweden, a migration of customers 47% 33% 54% 49% 64% 56% 44% 66% 26% 62% 47% 40% 40% 38% 63% 40% 48% (Cable TV penetration in % of total households) from satellite to cable can be seen, which can be 42 - 40.27 40 - 1.62 explained, e.g., by the better range of services of 38 - 3.61 cable. 36 - 16.02
18 - The aspects described below represent the 16 - 14.47 customer‘s primary decision-making parameters 14 - 1.01 4.59 4.21 7.38 for or against cable as a TV platform. 19.03 0.43 2.14 8 - 0.01 4.50 3.81 3.60 2.50 1.63 2.42 2.92 0.01 1.58 4.11 1.56 0.22 0.15 1.22 0.99 6 - 3.91 0.28 0.06 0.02 1.04 0.09 0.07 0.54 0.76 0.92 0.07 0.62 0.60 0.11 1.80 0.10 0.13 0.05 0.47 1.11 0.62 1.01 0.74 0.30 0.31 4 - 0.73 0.14 0.15 1.21 0.35 0.20 0.48 0.86 0.08 0.19 0.02 2.4.1.1 Availability 4.76 0.66 0.94 0.84 1.89 0.63 0.47 2 - 4.01 0.38 0.40 0.07 1.93 2.45 2.52 1.60 1.66 1.51 1.37 As already described, the provision of cable to 0 - Germany Poland Romania Portugal Hungary Sweden Austria Denmark Czech Finland Bulgaria Slovakia Ireland Lithuania Estonia Latvia Slovenia a region only makes sense economically if the Rep. density of potential customers is sufficient to Cable Satellite Other Non TV justify the investment for developing this region. (Analysis by goetzpartners (data extrapolated to 2009), Cable Europe/ Screen Digest, Consequently, urban regions rather tend to be Eurostat, OECD Communications Outlook 2009) supplied by cable, whereas in rural regions, satel- lite reception dominates. Of course, the satellite Figure 11: CAGR of cable TV vs. satellite 2004 - 2009 signal is also available in towns. However, mount- ing the satellite receiving equipment („dishes“) is [in %] 70.4 61.0 not perceived to be particularly decorative, and in 55.2 20.7 18.7 10.2 12.1 12.1 12.0 11.9 some places it is forbidden by the housing asso- 8.7 7.5 7.7 8.7 10.4 4.6 5.2 4.7 4.5 4.8 5.4 5.9 6.6 ciations. Furthermore, cable is available directly in 0.4 1.3 2.3 1.3 3.2 2.8 3.3 2.3 -1.0 -2.0 the living room, which is also seen to be simpler -4.3 Germany Poland Romania Portugal Hungary Sweden Austria Denmark Czech Finland Bulgaria Slovakia Ireland Lithuania Estonia Latvia Slovenia and more convenient. The still relatively young Rep. option, DVB-T, is usually available both in urban Cable TV Satellite and rural areas. (Analysis by goetzpartners (data extrapolated to 2009), Cable Europe/ Screen Digest, OECD Communications Outlook 2009 ) 2.4.1.2 Range of services The range of services of a TV platform is considered with regard to the criteria of programme variety/ content and also picture quality.
Programme variety/ content A decisive factor for programme variety is the question of whether the transmission is analogue or digital. Digitally transmitted programmes ba- sically require less transmission capacity, which explains why the number of programmes that can be transmitted rises sharply. Only due to the intro- duction of digital television through cable the transmission of a multi- tude of even smaller special-interest or foreign language programmes has become possible. Currently, in addition to approximately 30 analogue channels, more than 200 digital radio and television programmes can also be transmitted on a cable upgraded to 862 MHz, whereas before the 16 _ Cable Study
Figure 12: Connection between free-to-air TV offering and Ø monthly digitalisation only approximately 30 analogue pay TV ARPU 2009 TV stations and a few VHF radio stations were available. Thus the channel limit of a digitally Number of upgraded cable is rather a theoretical one and national free TV channels [1] does not represent any real competitive disad- 140 - Extensive Germany Free TV 130 - vantage for the customer compared to digital programme 120 - satellite reception with up to approximately 110 - 1,000 programmes in some places. DVB-T on 100 - Austria [3] 90 - the other hand has a lower transmission ca- 80 - pacity than cable and is presently implemented 70 - in Europe with a number of TV channels in the 60 - Romania 50 - lower to middle double digit range. Czech Republic 40 - 30 - Poland Monthly Pay TV A further aspect when assessing the range of 20 - Finland Sweden Denmark sales [2] per total Severely 10 - Estonia cable TV subscriber services is the availability of paid-for premium limited Free TV Hungary Portugal Ireland programme 0 - in EUR content, in other words, classic pay TV. One can 0 1 2 3 4 5 6 7 8 9 10 11 12 Small increase in the mean TV Significant increase in the mean TV assume that the greater the additional benefit ARPUs due to Pay TV ARPUs due to Pay TV and the customer‘s willingness to pay for pay [1] Criteria: free TV channels established in the individual country and available by cable, satellite or terrestric [2] Pay TV sales calculated from total sales of cable TV, excluding the cable basic sales TV, which is usually broadcast digitally, is, the [3] Austria: including free TV channels established in Germany No data available for Bulgaria, Lithuania, Latvia, Slovakia and Slovenia smaller is the range of free-to-air television programmes in the particular country. This is (Analysis by goetzpartners (data extrapolated to 2009), Screen Digest, MAVISE) reflected both in the number of pay TV custom- ers and in a higher realisable ARPU, as the illustration shows.
In addition to the number and variety of free-to-air TV programmes, the type of paid-for content in particular can also be crucial to the demand for pay TV products. Classic pay TV content includes feature films as well as live sport events (football, Formula 1). Owing to the continuing trend to- wards special interest channels and special interest offerings, documen- taries are also capturing a large share of the total pay TV offer.
Depending on which role pay TV basically plays in a market and to what extent the cable providers manage to place such offers on cable, the aspect of pay TV is an argument for or against cable.
Picture quality While DVB-T tends to be rather more susceptible to interference and pro- vides a poorer picture quality, the picture qualities via cable and satellite are comparable. However, against the background of the increasing spread of broadcasting in HD quality, cable is faced with the challenge of “creating” space to feed in HD channels. Owing to its existing or easily expandable capacity, the satellite platform has a clear advantage here. At present, HDTV via DVB-T does not play any role in Europe; currently de- velopments and pilot projects are running here on the new standard Analysis of the relevant markets _ 17
DVB-T2, which is based on MPEG-4 coding instead of the MPEG-2 coding used until now for the DVB-T format.
As a result, in the TV sector the range of services of digital cable is superior compared to the DVB-T platform, but compared to the satellite platform it is at best equivalent. With respect to both programme variety/content and degree of digitalisation, the satellite platform is superior to cable. On the other hand, cable enjoys a clear advantage when one looks beyond the purely TV segment to other services. In contrast to DVB-T and satellite, cable is in a position to offer not only TV but also internet and telephony services with a high bandwidth at reasonable cost from a single source. (see 2.4.2 for this). And taking into account the back-channel capability, this opens many opportunities for cable in terms of interactivity (e.g. VoD), which can’t be provided by satellite or the DVB-T platform.
Digression: Digitalisation Figure 13: Degree of digitalisation in cable and satellite 2008 As already mentioned in the introduction to this study, an upheaval in the media world [in %] was announced in the middle of the 1990s. 100 - After its debut in the USA, digital television 90 - 80 - also appeared in Europe, but initially found 70 - no viewer acceptance here. Today, 15 years 60 - 100 50 - 98 87 99 99 94 95 94 91 later, it can be observed that the rate of digi- 40 - 82 86 86 82 83 69 76 80 78 talisation in cable, while still clearly behind 30 - 65 47 43 52 20 - 38 26 22 that in the satellite sector, has nevertheless 10 - 21 17 18 16 19 8 10 10 13 progressed considerably in some countries. 0 - Germany Poland Romania Portugal Hungary Sweden Austria Denmark Czech Finland Bulgaria Slovakia Ireland Lithuania Estonia Latvia Slovenia Rep.
The development status of the digitalisation is Degree of digitalisation in cable as % of cable households Degree of digitalisation in satellite as % of satellite households on the one hand dependent on the technical (Analysis by goetzpartners, SES Astra, Screen Digest) possibilities, but on the other hand also on the demand for this service, which usually bears a charge in cable.
From a technical point of view, digitalisation means modifying the old analogue transmission routes to digital technology. As digital signals re- quire less transmission capacity, this means more programmes or room for additional digital services. Since the digital cable connection carries addi- tional cost, it will not yet be possible to switch off the analogue signal via cable completely in some countries. A so-called “simulcasting” must take place, in order to broadcast digital television in addition to analogue televi- sion. This means a higher transmission capacity will be required, but it also means that conversely a significant additional potential for further pro- grammes or faster internet will be freed up when the obligatory analogue broadcasts on cable are switched off. In contrast to analogue reception, digital reception requires the use of a receiver which is usually connected ahead of the television set as a separate unit (set-top box). 18 _ Cable Study
However, the purely infrastructural/technical aspect as a requirement for a digitalisation is actually insignificant, as the cable networks Europe- wide nowadays mostly operate with bandwidths greater than 400 MHz and are thus in a position to transmit digital programmes. The decisive point for the development of digital conversion is the acceptance by cus- tomers. With digital transmission, a far greater number of programmes can be supplied, as described above. Furthermore, in addition to better picture quality, digital programmes also offer greater operating conveni- ence such as, for example, an Electronic Programme Guide (EPG) or a Per- sonal Video Recorder (PVR). Despite the existence of unique advantages, digital cable television is penetrating only slowly, clearly slower than satellite television. In addition to the greater variety of programmes, the increasing number of flat screen televisions is particularly seen as one of the drivers that is required to allow the qualitative advantage of digi- tal television to become apparent. A clear advance in the acceptance of digital cable television is expected from the increasing changeover of programmes to HD quality, which represents yet another leap in quality from the television picture which is familiar up to now. The main obstacles to the digitalisation of cable television are on the one hand the need to pay for it in conjunction with an analogue offer which is considered adequate in some countries, and on the other hand, while the television set in the living room of many households is a modern flat-screen unit, the second and third sets are often still classic CRT sets, on which the better picture quality is not noticeable. Furthermore, supplementing all the sets in the household with a receiver is felt to be bothersome. With satellite television, in contrast, the customers are accustomed to using the receiver which is required anyway, so that there is no noticeable difference here.
The various framework conditions in the individual European countries result in different rates and speeds of digitalisation. While countries such as the UK, Luxembourg, Spain and Norway (not part of this study due to differing selection criteria) and also Finland and Ireland show digi- talisation rates of considerably more than 50%, there are, for example, in Germany only 21% in 2008 or even just 16% in Denmark. However one can assume that digital TV will continue to penetrate, even with cable, but due to market conditions and political pressure at different speeds in the individual countries.
2.4.1.3 Costs In contrast to a cable connection, which always bears a charge, current DVB-T and satellite reception are often cost-free. In this case the customer simply has to pay for an initial investment in a receiver and a satellite re- ception system or a DVB-T antenna, available together from approximately Analysis of the relevant markets _ 19
100-150 euros upwards. Whereas for example in Figure 14: Monthly ARPU for basic TV via cable 2009 Germany, the largest market considered, DVB-T and satellite even digitally based are unencrypt- [in EUR] ed and cost-free, cable customers must pay for 30 - their connection even if analogue based, with 25 - 23.54 22.39 20 - 14.22 extra payment for digital offers. However, in 15 - 12.13 11.90 13.45 13.30 9.66 8.81 9.18 10.15 the course of further digitalisation and in par- 10 - 7.69 7.80 8.30 7.48 8.13 5 - 4.11 ticular the conversion of digital television to HD 0 - Germany Poland Romania Portugal Hungary Sweden Austria Denmark Czech Finland Bulgaria Slovakia Ireland Lithuania Estonia Latvia Slovenia quality, there is even in Germany the tendency Rep. to charge a type of flat-rate fee on the DVB-T (Analysis by goetzpartners (data extrapolated to 2009), Screen Digest) and satellite platforms for the significantly more expensive HD technology. In countries such as Sweden, Norway, Italy, France, Holland or England on the other hand, it is completely normal to require payment for the provision of digital television via DVB-T and satellite.
The satellite platform was superior to the cable platform in its early days – both with regard to the degree of digitalisation (and thus the programme variety and picture quality) and also the costs in some places (in countries without basic encryption). With the digitalisation and the back-channel capability of modern cable networks, however, they can now offer additional features in the field of television (VoD) and also in communication services such as telephony and broadband internet access (see below). At the same time, the classic landline telephone network has been developed into a competing platform in the TV and media sector (IPTV). In particular, former state-owned enterprises are pushing their way into the TV market with substantial investments in infra- structure and the marketing of media services.
2.4.2 Internet and telephony As with TV products, the opportunities for further development of the IP ser- vices like internet and telephony are very strongly dependent on how cable can assert itself in competition with other technical platforms. Here, in con- trast to TV products, it is not a satellite or DVB-T platform, but it is the platform of the classic telecommunications providers, that is DSL or optical fibre based internet (FTTH) and landline telephony. Mobile broadband access, which in terms of stability and connection speed can scarcely be compared with cable or DSL at present, is mainly used in rural areas where there is no cable or DSL provision and represents a fairly small share. Due to the considerably lower bandwidth and the costs, internet/ telephony by satellite currently has no role to play in this context. 20 _ Cable Study
The dominating market share of DSL-based Figure 15: Market share for cable internet 2009 broadband connections is primarily due to histori- [Households in millions] cal reasons. The telecommunications companies 7% 12% 10% 20% 21% 14% 17% 26% 13% 12% 9% 5% 9% 18% 21% 12% 15% and internet providers, at one time the sole pro- (Cable Internet penetration in % of total households) 40.27 viders of internet access, were earlier in a position 14.77 41 - 0.09 to make higher bandwidths available to the bulk 14.47 of customers. Accordingly, sales and marketing 14 - 13 - were in full swing to disseminate the products in 12 - 11 - the marketplace. Thus the majority of potential 10 - 9 - 22.62 9.84 4.50 4.21 customers more or less equated broadband inter- 8 - 3.91 3.81 7.38 1.30 3.60 2.22 7 - 2.16 1.93 2.92 net with DSL. Only in recent years, after the cable 0.62 1.74 2.50 0.74 2.42 6 - 0.03 0.20 1.94 0.06 2.25 2.14 0.93 0.22 0.72 0.64 1.58 1.22 5 - 0.88 0.64 1.19 0.11 1.52 0.99 network operators invested heavily in network 0.78 0.28 0.53 0.04 0.28 0.13 0.56 0.64 0.60 0.76 4 - 0.05 5.23 0.80 0.61 0.64 1.34 1.45 0.39 0.15 0.26 0.28 0.28 0.00 0.24 3 - 2.91 0.66 0.30 0.10 0.73 0.37 0.05 0.00 expansion, were they able, at a high cost for sales 2 - 0.68 0.14 0.17 0.12 0.36 2.78 0.22 0.00 1 - 1.68 0.72 0.13 0.11 and marketing, to bring the existence and the 0 - 0.75 Germany Poland Romania Portugal Hungary Sweden Austria Denmark Czech Finland Bulgaria Slovakia Ireland Lithuania Estonia Latvia Slovenia advantages of cable home to the broad masses, Rep. which now shows up in the sky-high growth Cable DSL Rest Non-broadband rates. In any case it was advantageous for broad-
(Analysis by goetzpartners (data extrapolated to 2009), Cable Europe/ Screen Digest, OECD Communications band internet and telephony to be commodity Outlook 2009, PWC Global Entertainment and Media Outlook 2009-2013) products, which are simply judged on bandwidth and price, and which are attractive to virtually all existing customers.
The following graphics show the distribution of Figure 16: Market share for cable telephony 2009 national markets for fixed network telephony by [Households in millions] platform as well as their development in recent 5% 3% 18% 26% 11% 10% 11% 3% 5% 0% 1% 0% 3% 1% 14% 5% 9% years. It is noticeable that in the target countries (Cable telephony penetration in % of total households) examined, a reduction of general fixed line net- 41 - 40.27 40 - work telephony is observed universally due to the 1.84 39 - drop in prices of mobile telephony. Despite this 14.47 0.03 7.38 reduction, the number of customers making calls 7 - 1.26 via cable is growing significantly in all the coun- 4.21 6 - 4.50 36.27 3.81 3.60 0.17 0.38 4.06 tries considered. The extremely high percentage 5 - 0.11 3.83 2.92 3.91 3.02 0.44 2.50 2.42 3.11 0.21 0.12 2.14 4 - ?.?? 0.41 0.00 0.05 values are attributed to the low base volume. 13.94 4.79 0.39 2.78 0.15 1.58 2.42 2.36 0.03 1.22 3 - 1.99 0.00 0.99 0.09 0.01 0.11 0.60 0.76 2.53 0.00 1.53 0.03 0.00 2 - 0.05 1.10 0.01 0.92 0.69 The aspects described below represent the 0.01 0.51 0.05 1 - 2.16 0.09 0.07 1.33 1.03 customer‘s primary decision-making parameters 0 - 0.50 Germany Poland Romania Portugal Hungary Sweden Austria Denmark Czech Finland Bulgaria Slovakia* Ireland Lithuania Estonia Latvia Slovenia when deciding on an internet/telephony plat- Rep. form. * For Slovakia, no figures for telephony customers are available for the period under consideration
Cable telephony Landline telephony No fixed line
(Analysis by goetzpartners (data extrapolated to 2009), Cable Europe/ Screen Digest, OECD Communications Outlook 2009) Analysis of the relevant markets _ 21
2.4.2.1 Availability Figure 17: CAGR for cable telephony 2005 - 2009, development of fixed As already reported, by no means all households network connections are developed for cable, particularly outside [in %] 739 the towns. Classic landline network telephony 225 212 197 on the other hand has blanket coverage, par- 128 130 115 135 95 59 54 65 47 38 26 ticularly in the Western European countries. 22 0 3 0 -4 -10 -5 -2 -7 -1 -3 However, offering broadband internet requires -6 -25 -1 -8 -33 -19 -9 Germany Poland Romania Portugal Hungary Sweden Austria Denmark Czech Finland Bulgaria Slovakia Ireland Lithuania Estonia Latvia Slovenia that the telecommunications providers also up- Rep. grade the telephone networks to DSL – or even [1] For Finland, telephony figures are only available from 2006 onwards; hence the extremely high CAGR the ultra fast VDSL standard – or to FTTH. This [2] For Slovakia, no figures for telephony customers are available for the period under consideration upgrading is carried out for much the same Cable telephony Fixed network telephony reasons as for cable network operators, with (Analysis by goetzpartners (data extrapolated to 2009), Cable Europe/ Screen Digest, OECD Communications Outlook 2009, E-Communications Household Survey ) a focus on the urban regions, so that genuine competition between the platforms can be ob- served in these metropolitan regions.
In rural areas, however, there is often no possibility of broadband access, either by DSL or by cable. On the one hand, in several European countries further mobile radio frequencies will be auctioned off in the near future. After the appropriate conversion/upgrading of all the networks it will be possible to operate broadband services based on the LTE standard, running at speeds up to 100 MBit/s. However, commercial use is not expected before the next 1-4 years. On the other hand, in Germany for example the three largest cable network operators have recently run projects to develop rural areas, as there is virtually no competition from the telecommunications companies at present.
To speed up the access to broadband internet for the rural population, both the EU and some individual countries such as Germany or France have established broadband initiatives. The goal of the German broadband ini- tiative is to have at least 1 MBit/s internet access in all households by 2010. By 2014, 75% of all households should be connected at 50 MBit/s. In France, at the beginning of 2010, every citizen is to be given access to broadband with at least 512 kBit/s at a price of not more than 35 euros per month (in- cluding the cost of access equipment). In Switzerland (non-EU), a broad- band connection at more than 600 kBit/s has even been part of the basic services since 1st January, 2008.
2.4.2.2 Range of services Provided that it is available, cable is superior to DSL-based technology in terms of bandwidth. This means that internet and telephony services can be provided with better quality and performance, and the types of usable applications are more varied. Looking to the future, cable is the best pre- pared, particularly with the introduction of the DOCSIS 3.0 standard and a realisable bandwidth of 100 MBit/s and above. The German cable provider 22 _ Cable Study
Unitymedia has even been offering bandwidths Figure 18: Bandwidth requirement and provision of 120 MBit/s using DOCSIS 3.0 in the cities of
Bandwidth requirement Köln and Aachen since November 2009. As of in Mbit/s February 2010 Kabel Deutschland is also offer- FTTH ing 100 MBit/s in Hamburg. Furthermore, the, 100 - DOCSIS 3.0 HDTV Multiple Stream compared to DSL technologies, slight reduction in performance with increasing distance from 50 - DOCSIS 2.0 / VDSL the nodes results in a high degree of flexibility HDTV Single Stream 20 - ADSL2+ when expanding the network. By current stand- ards, only using optical fibres as far as into the 15 - Gaming home (FTTH) provides a greater bandwidth but IPTV Photoprocessing 10 - ADSL Single this is extremely expensive, with costs of ap- Stream User Generated Music VoD proximately 1,500 EUR/household (10th Broad- 5 - E-mail Video Content ISDN/ attachments Video Modem band Forum KölNRW) and accordingly is used
2002 2004 2006 2008 2010 only very prudently and targeted in metro- politan areas. At the moment, FTTH plays only
(Anga Cable 2009) a subordinate role in the countries under con- sideration. It is universally agreed that this is where the future lies. The question is, in which period of time and with which investment this can be realized. .
Figure 19: Stability with distance of various 2.4.2.3 Costs transmission technologies In contrast to TV services, both internet and telephony incur costs on all
Mbit/s platforms, with the exception of VoIP services such as Skype. However, Cable: DOCSIS 3.0 100 - an aggressive price war has developed, in which services and prices are changing in short cycles in the struggle for market share to the benefit 80 - of the consumers. Up to now, however, cable network operators have better been able to limit the reduction in prices by offering higher band- 60 - width compared to the telecommunications companies. Cable: DOCSIS 2.0
40 - 2.4.2.4 Products In the course of shortening product life cycles, so-called bundled prod- 20 - ucts, through which internet and telephony are sold as a single package (“Double Play”), have also found their way in. Cable network operators 0 - 0 1 2 3 4 5 6 have the advantage of integrating also TV elements into such bundled Distance to head end (cable) or exchange (DSL) in km packages. These so-called “Triple Play” packages appeal to customers
VDSL2, 5-Band (DS) VDSL2, 4-Band (DS) ADSL2plus ADSL mainly for two reasons: On the one hand it normally represents a price
(Anga Cable 2009) advantage over purchasing individual components. On the other hand there is only one provider, which brings administrative benefits. For the cable network operators, bundled products also offer the advantage of greater customer loyalty. The barrier for withdrawal is clearly greater for two or even three products than for only one. Analysis of the relevant markets _ 23
Only telecommunications providers who have an appropriate IPTV offer can also provide this service and thus represent the only competition with a comparable range of services in the platform contest. IPTV was originally developed by the telecommunications companies as an instru- ment to commit customers to a broadband contract by means of attrac- tive content. Due to the currently still very low proliferation in the coun- tries under consideration, IPTV plays only a subordinate role here.
In contrast to the pure TV platforms of satellite and DVB-T, the cable platform is also in a position to provide broadband internet and telephony. On the one hand this enables extremely attrac- tive additional sales by means of up-selling commodity products within a broad existing customer base. A further crucial advantage, however, also exists in the ability to provide bundled products – often at flat rates – which is appreciated by customers due to the simpler administration as well as the cost benefits, and which is rewarded with greater loyalty. In the internet and telephony sector, cable is competing primarily with the broadband products of the classic telecommunications companies and for the moment appears to be equivalent, if not actually superior, to their DSL technology due to greater band- widths. As a result of massive network expansion and targeted marketing, cable network operators are positioned as successful access providers and will attract more and more customers to the cable platform in the coming years. The response of the telecommunications companies to the en- croachment of the cable network providers into their territory is to offer IPTV through fast internet connections via VDSL or FTTH. Telecommunications providers with offers of this sort are likewise in a position to offer “Triple Play” packages with comparable per- formance features and thus represent the single comprehensive competitive platform for the cable network. However, IPTV offers are still comparatively young and not very widespread. 24 _ Cable Study
3. Reorientation of the cable network operators – optimisation areas and measures
As shown above in Chapter 2.3, there are various basic strategic options for cost-efficient growth of cable network operators depending on the par- ticular situation. In addition to inorganic growth, these are on the one hand network expansion and an increase in sales performance in order to multiply the number of paying customers. On the other hand it is an increase in ARPU, which is the average revenue per existing customer.
In the following, some approaches for effective and efficient implementa- tion of these options are shown. The explanation is not based on claims to be complete, but it rather uses some experiences that goetzpartners has collected in the course of project work in this field.
3.1 Network expansion
The convergence of the services offered by the telecommunications com- panies and the cable network operators described in the previous chapter results in ever closer competition between two sectors which originally had their roots in different business areas. This development harbours both oppor- tunities and risks for the cable network operator. On the one hand, they can design their networks to be future-proof and prepare them for new services and interactivity in the course of the necessary upgrade or modification. On the other hand, a huge investment is necessary Figure 20: CAPEX for selected cable network operators in Europe 2008 for these measures, which against the back- ground of further falling prices is increasingly Capex as % difficult to refinance. The problem here is less the of revenue 100 - technical feasibility than rather the requirement
80 - for a huge investment arising from an appropri- ate expansion. This applies both to the expansion 60 - 49.0 and modification of the existing infrastructure for 40 - 29.0 27.0 back-channel capability, and to the construction 22.0 21.0 20 - 13.0 of new in-house systems (level 4) and the associ-
0 - ated signal feed via level 3. KDG Unity Media Multimedia UPC ZON YouSee Polska Broadband Multimedia As an infrastructure business, the cable business Germany Poland e.g. in Poland, Portugal Denmark Romania, Hungaria, has a further characteristic which must be noted Austria, Czech Republic, Slovakia, when winning over new customers: the long- Ireland, Slovenia term nature of the decisions. No company in a (Analysis by goetzpartners, company statements) capital-intensive business of this kind can allow Reorientation of the cable network operators – optimisation areas and measures _ 25
oneself to develop or upgrade new areas without first having checked in detail which opportunities can be expected there, and which CAPEX and OPEX they will be faced with.
Attention should be particularly focused on the fact that infrastructure built in at one point can hardly be directed towards a second use, should the busi- ness not turn out to be viable. Fibre nodes or line amplifiers can certainly be removed and reused in case of doubt, and the pipes laid can be rented out as cable routes, but this is merely damage limitation. The reason is the high proportion of underground work in the construction costs of the infrastruc- ture, which as sunk costs prohibits a quick withdrawal from unviable areas. Consequently, the challenge lies in organising the network expansion in a market and product driven manner, and determining the profitability of the investment as precisely as possible in advance.
Target-oriented expansion by means of market-driven network expansion To achieve this goal, the investment planning in network construction by a cable network operator must be transferred from a methodology based on collected experiences to an integrated and dynamic model. The require- ment by investors and owners to employ CAPEX, so that it increases value as much as possible, demands a quantitative foundation for all underlying assumptions, and the alignment of the parameters to be considered for increasing the value of the company. In doing this, previously trodden paths of focusing on homes connected or sales should be abandoned and the attention deliberately directed at EBITDA or EBIT. In the following, for the sake of simplicity we shall take the maximisation of EBITDA as repre- sentative of the goal.
This more comprehensive examination places high demands on the under- lying model, which must cover both the sales side and the cost side transparently and, above all, flexibly. Furthermore, it is no longer advis- able to consider the CAPEX as a given factor, but to construct the entire investment strategy flexibly. The planning of infrastructure investments is no longer dependent on the current investment budget. The objective is a model which describes the investment planning for the coming years for a clearly defined geographical area (city, region or country) in prioritised individual projects. This enables those responsible, depending on budgets and cash-flow planning, to approve the expansion and new construction of the infrastructure in a phased and transparent manner. At the same 26 _ Cable Study
Figure 21: NPV model for prioritising investment time, an integrated model demonstrates the owners which future effects projects can be expected from the CAPEX used, and puts them in a position to better understand and be able to track the allocation of resources. marketin Geo g Structure of an integrated model Revenue The logic of an integrated infrastructure model is based on the pre-/post-
Investment objects consideration of the net present values of a project. To do this, a compari- prioritised according to best case son is made of the net present value for the object under consideration
C
A EBITDA P CAPEX X (e.g. a CATV cluster) with and without the planned investment. This E E X P O approach can be further extended as required, to the effect that different
expansion options for a project (e.g. HFC vs. edge-PAL/ QAM/ FM) are T e s ch ve no ati considered and compared. This is very helpful, for example, when a com- logical altern parison is being made between different technical variants which differ in CAPEX and OPEX. (goetzpartners) Based on the logic of an integrated treatment based on EBITDA, the model consists of three basic elements: (1) Revenue (2) OPEX (3) CAPEX.
The change in EBITDA in proportion to the CAPEX employed has been proven as a decisive performance figure. This is shown in the centre of the diagram. It guarantees that every CAPEX euro is used in such a way that it produces the maximum possible increase in the target figure. However, turning unviable network clusters into merely “less unviable” ones should be avoided; the goal is always to have a positive EBITDA figure after the network expansion. Figure 22: Example showing regions of acceptance (1) Modelling revenue by means of socio-demographic data Revenue does not track the forward projection of historical sales figures with the aid of incremental factors, but instead utilises the by now very mature geo- and socio-demographic data which are available at the market. If these data are linked using statistical pro- cedures (e.g. regression analysis) with historical customer or sales data, the sales or acceptance potential of individual clusters can be calculated from the results. These are then transferred to the model and highlight the potential sales or acceptances for different stages of the expansion. As a by-product, the information gained can be used to identify additional up-selling potentials for sales, and at the same time to specify realistic sales or penetration targets for a sales
Colour density = push (see Chapter 3.2). Measure of acceptance in the particular post code area When developing new areas for which no customer data are avail- (goetzpartners) able yet, socio-demographic data (application of factor and discrimi- Reorientation of the cable network operators – optimisation areas and measures _ 27
nant analysis) can be used to identify the properties that promise the best prospect of winning customers.
(2) Integration of different OPEX scenarios If alternative technologies, which are possibilities for the expansion or new construction of a cluster, are being compared within the model, the costs linked to the particular technologies must be modelled flexibly (see Figure 21, outer ring). To do this, the cost drivers are worked out separately and integrated into a quantity and cost structure. The OPEX for each alternative can be calculated using the corresponding variables (e.g. number of households to be supplied) and can also be broken down according to the cost drivers if necessary.
(3) Dynamic calculation of CAPEX Similar to the calculation of the OPEX, the calculation of the CAPEX should also be carried out dynamically within the model. The chal- lenge lies in enabling as precise a calculation of the investments as possible using few parameters (e.g. line length and number of households to be connected).
The key part here is the automated calculation of the underground cable runs between the exit points of the existing network and the clusters to be connected. To enable this within a Graphic Information System (GIS), all the locations to be linked must be geo-coded. The GIS programs available nowadays then calculate the shortest link to the existing trunk for each cluster to be connected. The routing of the cable runs along the roads close- ly matches reality, due to the use of digitised mapping materials, and pro- vides very reliable figures for subsequent calculation. The cable runs thus generated are imported from the GIS into the computational model, where they are converted into underground engineering and material costs for cable, sleeves, repeaters, etc. with the aid of the topology framework de- scribed above. Parallel to this, the resulting quantity structure can be used within the planning department for requirements and order planning.
Using the net present value method a ranking list for the projects or de- velopments, which can be sorted according to the goal being pursued, is calculated from the sales, cost and CAPEX information. Depending on the available CAPEX or the maximum size of the infrastructure measures that can be developed parallel, the list of the projects to be constructed can be produced from the model and expanded with detailed data such as material lists or underground cable runs, if necessary. The depth of the data retained in the model enables a broad spectrum of recipients to be supplied with information from a consistent data base. Thus aggre- gated CAPEX volumes can be contrasted with EBITDA effects as a basis for 28 _ Cable Study
decision-making for the company management, while site managers are provided with parts lists from the same source.
Options for further integration The comprehensive approach of the NPV model and the cooperation between engineering, sales and marketing necessary for preparation and plausibility checking form an ideal basis for further embedding the knowl- edge gained in the company. The geo- and socio-demographic data applied can be used within marketing, for example, for better control of campaigns, and sales can control the deployment of representatives better. For engineer- ing, the model offers the option of evaluating all projects objectively within a standardised procedure and thus pursuing a transparent and traceable in- vestment policy. The next step is the integration or linking of the model with the ERP system used in the company, thus taking the continuous work with the NPV model a step further and enabling the dynamic performance review of the projects selected by the model.
The expansion of networks is naturally carried out on a fundamen- tally potential-oriented basis. The project implemented by goetzpartners on which the present deliberations are based has shown, however, that with the correct methodology the return on investment can be increased noticeably. It is thus apparent on the one hand that the use of geo-marketing data results in a clear improvement in sales potential, which has a significant influence on the returns from individual projects. As a result, almost 10% less CAPEX was required for the same target sales as with conventional planning. Furthermore, the evaluation and ranking of all the construction projects under consideration according to their profitability has proven to be advantageous when performing the investment and construction planning for the coming years.
3.2 Sales Push
The change in positioning and self-image of the cable network operators, away from infrastructure operators to content-driven multimedia providers, is resulting in significant changes in their sales orientation. To win more end customers on a large scale – and this must be the goal when expanding the cost-intensive new services – requires an efficient multi-channel sales func- Reorientation of the cable network operators – optimisation areas and measures _ 29
tion which is based on business intelligence results and is tightly controlled by appropriate organisational and technical means. Furthermore, the inten- sification and reorientation of sales requires a corresponding adjustment of customer management including customer service, which represents a major part of the outward image.
3.2.1 Multi-channel sales The goals of multi-channel sales are on the one hand to address different customer groups via various sales channels, on the other hand, positive interactions should be produced between them via the various channels. For the cable network operator this means using several channels and thus generating a multitude of points of sale (PoS) primarily in order to bring the digital services to the customer. A distinction must be made here between the reactive channels, where the customer goes to the PoS with an interest in advice or purchasing, and the active ones, where the customer is proactively spoken to by a sales agent. The customary sales channels are listed in the following figure.
The choice of sales channels is strongly depend- Figure 23: Customary sales channels for cable network operators ent on the particular circumstances and also especially on the sales targets being aimed Sales channel Features at. The strongly marketing-supported reactive Customer centre Sales in service centres or small shops or shops/pop-up Pop-up stores: set up cheaply and temporarily in areas with potential, possibly closing channels, which operate on a “pull” effect, stores after the potential has been utilised rather tend to be suited for winning longer Commission-based, when operated externally term and resilient customer loyalty. Advertis- Retail/Specialist Sales in product-related specialist shops, e.g. electrical markets
reactive shop Commission-based ing and marketing build up a positive image Online Generation of demand by direct marketing/advertising which the customer remembers in case the Interested party concludes contract on specifically communicated internet site Inbound Generation of demand by direct marketing/advertising need arises. The active outbound and door- Interested party concludes contract over specifically communicated hotline to-door channels, in contrast, operate on the Door-to-Door Sales carried out “on the doorstep” “push” principle and focus on selling large Commission-based, when operated externally Outbound Sales carried out by telephone marketing, as is conclusion of the contract volumes in a short time. Furthermore, promo- Commission-based, when operated externally active tional activities can be used to increase the de- Promotion Sales carried out by mobile agents who approach passers-by in busy locations (airports, shopping centres, …) gree of brand awareness massively in a short Commission-based, when operated externally time during product introductions.
Performance and costs (goetzpartners) In addition to sales targets, the available sales budget is a strongly decisive factor for the choice of channels. The individual channels are distinguished by, among other things, their costs, and also their success and cancellation rates. The relevant statistics here are the subscriber acquisition costs (SAC), which state how high the costs for winning a customer or a contract are. The SACs include mainly sales commissions as well as other direct market- ing and sales costs, in later stages internal process and personnel costs are also considered. 30 _ Cable Study
Depending on the sales targets or the aspira- Figure 24: Response and conversion rates for direct marketing tions for growth, a company must decide which
Response Rates Conversion Rates sales channels it wants to use: While rela- tively moderate sales targets permit focusing [in %] [in %] 5.0 - 70 - on cost-efficient channels with lower SACs, 4.5 - 60 - for ambitious growth the use of cost-intensive 4.0 - channels for aggressive market cultivation is 3.5 - 50 - also required. The magnitude of the sales tar- 3.0 - 40 - 2.5 - gets being aimed at also results in large fluc- 30 - 2.0 - tuations in sales costs within the inbound and
1.5 - 20 - online marketing channels. Thus, for example, 1.0 - mailing campaigns to qualified addresses lead 10 - 0.5 - to higher response rates and hence to lower 0.0 - 0 - Response Response Response Response Response Response SACs. If the sales targets also require the use of per Call per Web per Call per Web per Call per Web anonymous mailshots or bulk mail, the lower response rates (a factor of approx. 3-5) result Response to direct Response to direct mailing Conversion rates of mailing with qualified without qualified address responses to mailings in correspondingly higher SACs. In the online address (anonymous) sector, the coverage can be further increased by measures such as affiliate marketing or key- (Analysis by goetzpartners) word advertising, however the SACs also rise at the same time.
Figure 25: Direct sales costs/commissions and cancellation rates Reactively sold contracts tend to prove to be (Germany) more advantageous with regard to cancellation SACs rates, as the customer addressed by advertis- per Sales Channel ing and marketing seeks the sales pitch on his [in EUR] reactive active own initiative and acts more deliberately. With 120 - 110 - 120 110 - 120 110 - the rather sudden addressing of the customer 100 - Direct mailing without 90 - qualified address in active sales, however, the cancellation rates 80 - 70 - tend to turn out higher. 60 - 50 - Direct mailing with 40 - 35 - 45 qualified address 30 - 40 30 - 25 - 35 25 - 35 When putting the individual channels into op- 20 - 30 20 - 30 Retail/ 20 - Service- 15 - 25 Specialst center, Door-to- 10 - eration, the involvement of service providers Inbound Online shops Shops Door Outbound Promotion 0 - should be taken into account. Firstly, to keep 10 - Usually no right to cancel 20 - the fixed costs as low as possible, and secondly 30 - 40 - to be able to organise the sales intensity flex- 50 - Cancellation ibly as a whole and also in the individual chan- rate [in%] nels. Furthermore, service providers are special-
SACs Sales Channel in EUR Cancellation rate in % ised in sales, particularly in the active channels,
(Analysis by goetzpartners) and achieve a better performance. Reorientation of the cable network operators – optimisation areas and measures _ 31
Monitoring/ Reporting The various internally and externally operated channels in multi-channel sales are usually at the centre of organic growth and are provided with a correspondingly high budget. Against this background, detailed and very prompt monitoring and reporting must be set up. This must be meaningful to the extent that at least the following information is available and can be analysed for each product, channel and campaign, and also for each service provider/partner and if necessary for each region:
Sales performance (to be reported daily/weekly) Cancellations/counter-orders (to be reported daily/weekly) SACs I-II (to be reported monthly) Response and conversion rates (to be reported monthly).
Furthermore, for special promotions and campaigns an attribution to the particular promotion is required.
The implementation of such sales reporting should not take place via the channel‘s own reporting system but by use of so-called sales IDs. Sales IDs are keys which contain data such as channel, region, product or partner, and are recorded in the CRM system during processing of contracts. Report- ing based on sales IDs is therefore to be preferred, as among other things it is based on the transactions actually recorded in the system and not on the “self-disclosure” of the channels or even of the service providers. Reporting based on sales IDs requires, however, that completions and cancellations of contracts are also processed promptly in the system. In addition to con- trolling the sales performance, reporting for channels with service pro- vider involvement is used as a basis for their remuneration. Accordingly, service provision contracts in the sales sector should always be linked to KPIs such as sales performance and cancellation rates and contain appropriate bonus and penalty rules.
Also, the assessment of sales costs should always be carried out from the point of view of amortisation, i.e. to what extent will the costs of winning a contract be borne by the gross margins of the sold product over the under- lying term. For considerations of this sort, the one-time sales costs should be separated from the recurring gross margins of the product. While the recurring gross margin provides information about the profitability of the product itself, it is possible to assess on the basis of the one-time sales costs what sales expenditure one wants and can afford, which in turn has an influence on the choice and intensity of the channels. The requirement for these considerations is transparency concerning SACs and terms as well as, in particular, the individual gross margins of the respective products. 32 _ Cable Study
Against the background of the hard fought-for Figure 26: Amortisation of sales costs market in the additional digital services sector,
Recurring Contribution Margin the transparency concerning to what extent
ARPU Different sales channels result in sales costs are justified by the achievable mar- ./. Signal costs different customer acquisition costs and ./. Service / Maintenance thus in differing amortisation periods gins is of great importance. The telecommuni- ./. Material ./. Bad debt cations companies and the internet providers ./. Customer service (ongoing) in particular are carrying on a hard pricing ./. Marketing (ongoing) ... struggle. This leads on the one hand to high
Acquisition Costs change rates (=short terms) and to low gross
One-time revenues margins for the products. On the other hand the ./. SACs ./. Connections/ marketing and sales costs will consequently rise disconnections (initial) ./. Customer service Difference between further or be kept at a high level. Telecommuni- (order entry) various sales channels cations companies in Europe are currently in- 0 1 2 3 4 5 Periods 7 vesting approximately 10% - 20% of their turn- over in marketing and sales (goetzpartners). Contribution Margin Acquisition Costs
(goetzpartners)
In particular selling new products often represents a challenge for cable network operators. This applies especially in highly competitive markets with strong competition on the part of the telecommunications companies. To ensure the highest level of efficiency in multi-channel sales for cable network operators, goetzpartners has designed and imple- mented an efficient and effective sales control system. The newly gained transparency, with respect to sales performance, cancellations and in particular to direct, channel-specific sales costs, has been used for optimisation as well as for a noticeably more stringent control of sales and service providers. As a result it was possible to increase the efficiency of sales by almost 10%.
3.2.2 Optimisation of Customer Service The increasing importance of the new digital services is resulting in a fun- damental change in the tasks, the organisation and the self-image of the customer service function. Customer service increasingly represents a dif- ferentiating feature and consequently a strategic success factor in compe- tition.
The growing challenges for customer service are based on a higher volume of contacts and an increasing complexity of contact, and can be attributed to three significant drivers: Reorientation of the cable network operators – optimisation areas and measures _ 33
Increasing complexity of the products: Figure 27: Contact rates and costs for analogue TV and new services p.a. Due to the higher complexity of the prod- uct structures in the new services, there is Contact rates per year Annual service costs an increased requirement for consultation [in contacts p.a./RGU] [in EUR p.a./RGU] on the part of the customers. Consequently, 4.5 18,0 the level of support and contact frequency 4.5 - 18 - 4.0 - 16 - 15,0 3.5 increase and thus the service costs rise 3.5 - 14 - continuously. 3.0 - 12 - Increasing sales and marketing activities: 2.5 - 10 - 2.0 - 8 - 7,0 With the goal of winning new customers 1.5 - 6 - in a market with intense competition, the 1.0 - 4 - 0.5 use of innovative and effective marketing 0.5 - 2 - 0.0 - 0 - promotions is required. As a result of such Analogue/ Digital TV Internet Analogue/ Digital TV Internet marketing promotions, which refer the po- Basic TV Telephone Basic TV Telephone tential buyer explicitly to customer service (Analysis by goetzpartners) for the purpose of consultation or conclud- ing the contract, a distinctly greater volume of contacts is generated, possibly only temporarily. Shorter contract terms and up- and down- grade possibilities additionally lead to a rise in contact rates due to cancellations or contract extensions, as well as to a rise in interactions even between the contract periods. Increasing number of end customer relationships: The constant ex- pansion of the cable networks is leading to a rise in the addressable customer base for classic TV and new digital services. Thanks to the responses to the sales offensives and ambitious sales targets, a con- stant rise in customer numbers and hence contacts can be recorded.
In order to be able to handle the rising numbers of customer contacts and growing demands on customer service in the best possible way, it is essen- tial for cable network operators to adapt the previous service structures and establish an efficient customer service function which pursues the following goals:
Ensuring a high quality of service to increase customer satisfaction and customer loyalty Reducing costs by creating efficient cost structures and processes Ensuring flexibility and scalability, in order to be able both to adjust ca- pacities at peak times, and to handle customer growth at optimum cost Sales and customer loyalty orientation for the targeted use of the cus- tomer interface for sales activities (up and cross-selling) and customer loyalty measures.
Static or rigid customer service organisations are unable to respond ad- equately to the requirements for high flexibility with equally high quality of service and cost efficiency. To ensure the availability and the service 34 _ Cable Study
level, however, the development of an integrat- Figure 28: Customer service level concept ed level concept is recommended. This means Calls E-Mails Documents that the processing of standardised, regularly occurring customer cases will take place in the 1st level by so-called multi-skilled persons. The Integration of an external call center 1st Level service provider to process the high individual and more complex requests and High volume business volume business (calls and document processing) enquiries that require greater technical knowl- edge are processed by specialists in the 2nd 2nd Level Processing of individual processes by Individual business a centralised internal customer level, who possess a wide detailed knowledge service function (2nd level) in their own particular areas of expertise. For very specific debit-related and, in particular, Support/ Management and support team Control with support / cross-over functions technical questions a further 3rd level entity should be implemented. However, for reasons of workload as well as to ensure know-how,
(goetzpartners) this should be a specialist department and not a unit in customer service.
To increase the flexibility with regard to volume handling and service times, it proves to be appropriate to involve one or more external service providers for the 1st level. As a result of higher productivity, a lower wage level, if possible, as well as greater flexibility due to economies of scale and diversified personnel deployment options, an external service provider can normally handle the bulk business more efficiently. Furthermore, due to the changeover to contact cost remuneration, significant cost savings or a reduction in costs for idle time can be realised.
Figure 29: Cost advantages of 1st level However, outsourcing customer service activities also means giving up outsourcing direct contact with the end customer. In addition, there is the loss of direct [EUR/Call Minute] influence on customer support and service processes. The formation of an Top 10 German Call Centre Service Providers integrated quality and control management is required to compensate for this risk. Therefore, the creation of a central, integrated customer service -46% -31% -14% 0.55 - 0.70 control is vital. Quality and process management, as well as reporting, training coordination and the control of service providers is carried out centrally via this internal control entity.
0.60 0.48 0.38 The implementation of an efficient and transparent system for controlling service providers with the objective of ensuring a high, consistent quality
Internal costs Lowest price Average Highest price level and cost efficiency represents a central success factor when outsourc- ing the 1st level. For operational control, clear target value specifications for costs, productivity etc. based on industry benchmarks are vital. The (Analysis by goetzpartners) embedding of enforceable control mechanisms based on KPIs on the one hand, as well as the corresponding enforcement options such as bonus or penalty rules or a special cancellation right on the other hand are therefore essential in the service provision contract. Reorientation of the cable network operators – optimisation areas and measures _ 35
Other technical features such as IVR, CTI or customer self-service portals enable additional automation and thus result in a relief of customer ser- vice and an increase in efficiency in the form of reduced contact costs. However, the profitability of these practices in specific cases must always be verified by means of a business case analysis.
Even market consolidation and the necessary integration of opera- tional units linked to it presents cable network operators with challenges. Following the merger of several decentralized cable network opera- tors, goetzpartners has integrated their customer service units and realigned them according to the changed market requirements. The introduction of a level concept and the outsourcing of large- volume and standardised activities have proven to be a central success factor for cost-efficiency and flexibility in this personnel- intensive sector. Regional centralisation as well as the creation of an efficient inter- nal control and a quality assurance capacity has proven essential in ensuring a high processing quality. As a result it was possible to realise an increase in efficiency of approximately 25% by applying all these measures.
3.3 Product optimisation
Cable network operators can achieve further growth in developed and highly penetrated network areas by optimising the price and product landscape.
A corresponding increase in the revenues per customer can be realised by two approaches:
The ARPU for conventional products can be increased by means of a price increase. With this course of action, however, the questions of enforce- ability and acceptance in the market must be taken into account. Additional revenues per cable household can be generated by offering and selling new paid-for services, so-called value-added and additional services. 36 _ Cable Study
3.3.1 Price increase The implementation of price increases in the field of classic TV products is usually in pursuit of two goals: On the one hand, of course, the increase of the ARPU, among other things to adapt to general price rises or to refinance the large investments in network expansion. On the other hand, to achieve, if necessary, an equalisation of the often historically caused heterogeneous price structure for the various districts and properties. By means of structured planning and a holistic consideration of the increase process, both the pricing leeway can be used up and an (incremental) harmonisation of the prices can be achieved. In doing so, neither the complexity nor the expenditure, particu- larly in the downstream processes such as customer service, must be under- Figure 30: Framework of price increase estimated. 1 Analysis of internal and external business conditions A sustainable price increase is based on four successive phases, which can also be carried out in repeating waves:
4 Controlling/ 2 Price increase (1) Environment and internal analysis Reporting mechanism (2) Development/adaptation of price increase mechanism (3) Cancellation management/customer recovery (4) Controlling and Reporting 3 Cancellation mgmt./ win back (1) Environment and internal analysis The starting point for a price increase is a structured analysis of the current customer base. All sales items of the customers must be analysed and collated (goetzpartners) here. Important details such as for example the differentiation into one-time costs in contrast to monthly or recurring income play a major role in this. Al- though it has transpired that price increases also Figure 31: Factors influencing the probability of cancellation offer significant potential for increasing turnover in the area of “hidden” one-time costs, regular Relative Price Increase ARPU - Absolute payments represent the greatest sales leverage and accordingly the focus is also on these items.
Strong influence Small influence After the sales figures have been collected they Probability of cancellation (%) Probability of cancellation (%) are supplemented by further data. Meaningful in-
low medium high low medium high formation is demographic data such as spending capacity or price sensitivities, to enable calculation
Competitive situation Possibilities for alternatives of the probabilities of churn and objections for [DVB-T etc.] each customer segment, or important regional aspects such as the possibility of access to and the use of alternatives such as DVB-T or IPTV. In addi- Small influence tion to internal knowledge, various commercial Medium influence Probability of cancellation (%) Probability of cancellation (%) databases and benchmarks from previous price low medium high few medium many increases can be used as sources. The goal is the creation of a detailed risk assessment for each in- (goetzpartners) dividual contract using standardised algorithms. Reorientation of the cable network operators – optimisation areas and measures _ 37
(2) Development/adaptation of the price increase mechanism Based on the risk analysis, various price increase scenarios are modelled. Basi- cally it should be decided at this point whether a standard price system or a sys- tematic price structure should be implemented. The “One-Price-Solution” is particularly suitable, above all for reasons of communication politics, however, it can be difficult to implement due to heterogeneous price structures as well as drastic increases in some places. A compromise is a price level system with as few price levels as possible. Target prices and price levels are specified in an initial step. Then the optimum prices can be calculated, taking the risk factors (alternatives, etc.) into account. The required algorithm should take account of the price harmonisation being aimed at. Minimum and maximum prices and increases are specified for this purpose. The customer base is then divided into several time phases. Even if an increase for all customers at a single point in time seems attractive at first, this solution harbours too many disadvantages such as a temporary overload of customer service or negative reporting in the media.
It is also important for all customer communication to be clearly structured beforehand. The customer expects added value from a price increase. If this is not obvious immediately, benefits, e.g. in the form of digital package solu- tions, can provide this added value and thus boost additional sales potential.
Despite optimum preparations and consideration of risks, price increases will result in objections and cancellations. This leads on to the third part of system- atic price increases: customer win-back.
(3) Cancellation management/customer win-back As a price increase always results in cancellations and objections, the com- plaints management and especially the issue of cancellation management/ customer win-back have a decisive role to play. These processes can decide the success or failure of a price increase, as each cancellation means not just the loss of the increase in turnover but also the loss of the entire sale. If the cancel- lations become too numerous, the positive effects of the price increases can be outweighed by the cancellations.
In customer management a distinction is generally made between three stages: Customer retention: Measures which are permanently taken during the contract relationship (thus independent of price increase measures and hence of secondary interest here) Churn prevention: Measures which are taken shortly before or directly at arrival of the cancellation Win-back: Measures which are taken after the customer relationship has ended. 38 _ Cable Study
It is important that all three stages are coordinated, with each other and with the customer communication. The legal aspects and their observance in cus- tomer service are also of great importance here. Depending on the attrac- tiveness of the win-back offers, win-back rates of up to 30% in the churn pre- vention phase and up to 15% in the win-back phase can be achieved. As only the costs for the offers or a loss of revenue due to Figure 32: Customer management in the event of price increases credit notes are incurred in addition to the pro-
Conclusion Cancellation Contract relationship cessing costs, won-back customers are generally of contract announced ended more beneficial than new ones.
Customer retention Cancellation management Customer recovery (4) Controlling and Reporting Customer disaffection should be Customer disaffection is averted Customer should be persuaded to Only detailed and prompt reporting of the opera- prevented by customer retention shortly before or during cancellation renew the contract relationship which measures. but before the contract relationship was previously ended by cancellation. tional and financial figures for the price increase Description ends. will enable speedy countermeasures in the event Analyses (examples) Analyses (examples) Analyses (examples) Customer value analysis Cancellation analysis Cancellation analysis of undesirable developments. Controlling fulfils Probability of cancellation based Customer value analysis Customer value analysis on customer history (Goal: extent of “holding offer”) (Goal: extent of “win back offer”) two important tasks here. On the one hand it Activities (examples) Activities (examples) Activities (examples) must possibly be able to show real time data in Actions “Are you happy“ calls Individual customer dialogue Individual customer dialogue Regular company and (by telephone and in writing) (by telephone and in writing) order to remain responsive. The results can be product updates Holding offer based on customer Customer win back offer, incl. Customer retention programme value (upgrades, etc.) problem resolution/compensation used primarily to deduce the need for change in Compensatory gifts for any or modification of the price to problems that occur value ratio the subsequent phases. On the other hand, the calculation of the effects of the increase on rev- (goetzpartners) enue planning is of great importance.
The central success factors for setting-up a reporting for this measure are: Clear responsibilities for data Transparent definition of the central figures Central reporting Prompt compilation of reports
After ending of the price increase, the structures created frequently offer the possibility of repeating further increases in a timed sequence. A “rolling price increase” like this, however, is crucially dependent on the average level of the initial increase and the communication that has already taken place. Only if the possibility of repeated increases has been systematically considered from the outset, they can be implemented optimally. Reorientation of the cable network operators – optimisation areas and measures _ 39
An “intelligent” increase in prices offers the possibility of increasing the profitability of cable network operators and creating room for further business development. As price increases are not accompanied by cost increases, they have a direct effect on the operating profit and thus represent a particularly effective means of increasing profitability. Within the framework of a project, goetzpartners has conceived a comprehensive price increasing procedure following the principle described above, and accompanied it through implementation. In doing so, it has been shown that the success factors lie particularly in consistent and convincing communication and also in effective anti- churn management. As a result, despite a price increase of approximately 15% in the indi- vidual customer segment, it was possible in the specific case to keep the churn rate below 4%.
3.3.2 Value-added and additional services Value-added or additional services are understood to be services which go beyond the provision of the cable connection and the transmission of linear analogue or digital television. These can be additional contracts for internet and telephony or even pay TV packages. In order to be perceived and accepted as genuine and, above all, paid-for value-added services by the end customer, the new services must offer an additional benefit, e.g. in the form of attractive content, time sovereignty or interactivity. The requirement for the provision of value-added services from cable network operators is the digitalisation and back-channel capability of the network. The spectrum of value-added services includes both already established services as well as services which will be- come established on the mass market in the future.
The currently established value-added services include the services which, among other things, are offered bundled into Triple-Play products, i.e. a broad- band internet connection, a fixed line telephony and also where appropriate, paid content within the context of a paid-for digital TV package. The broad- casting of paid content (pay TV) basically represents a significant element of value-added services. In Central and Eastern Europe and also in Russia, pay TV is showing a high growth potential. The number of pay TV subscribers in this region has risen by approximately 18 % in 2007 alone, which suggests a high acceptance and a willingness to pay for this value-added service (Eastern European Pay Television, 2008). However, in a classic free TV country such as Germany, users tend to show a very low willingness to pay for TV content. A certain proportion of viewers is willing to pay small amounts of less than 20 euros per month for various content, however the broad acceptance of higher 40 _ Cable Study
Figure 33: Willingness to pay for TV content in amounts as are currently required for premium content is extremely low, and Germany (VoD) primarily driven by the exclusiveness of the German soccer league.
Willingness to pay for VoD subscription [EUR per month] The clearly higher acceptance of small amounts for TV consumption in Ger- Latest movies 2.1% 37.0% 60.1% 0.8% many has two effects: The first, amongst other things, is that for so-called Documentaries 1.2% 37.4% 60.7% 0.8% basic content, which primarily contains special interest or foreign language programmes for approximately 5 - 15 euros per month, a clearly more positive Live sports 2.3% 23.6% 73.3% 0.8% development can be observed than for premium content for approximately
TV series 1.6% 24.6% 73.3% 0.6% 20 - 30 euros. Cable network operators can sell this form of content to their already existing TV customers and realise an easy up-selling effect. Secondly, Erotic 0.4% 9.5% 89.5% 0.6% the acceptance of small amounts pushes the usage of on-demand services like
> 20 EUR ≤ 20 EUR Nothing No response pay-per-view (PPV) or video-on-demand (VoD).
Willingness to pay for single VoD usage [EUR per take] The other components of a Triple Play bundled product, that is IP telephony
Documentaries 1.6% 14.3% 35.9% 47.7% 0.6% and internet via cable, are widely accepted by customers as paid-for services and exhibit high growth rates as shown in the previous chapters. Further- Latest movies 1.2% 15.5% 35.1% 47.5% 0.8% more, in the last month the offer of mobile telephony and mobile broadband
Live sports 1.6% 10.1% 23.1% 64.7% 0.6% products, partly integrated into bundles, have more and more established. Examples are Kabel Deutschland (Germany), Telecable (Spain), Virgin Media TV series 0.4% 7.8% 23.3% 68.2% 0.4% (UK) or Telenet (Belgium).
Erotic 1.0% 5.0% 12.2% 81.2% 0.6% With the increasing bandwidth and back-channel capability of the networks, > 5 EUR 3-5 EUR 1-3 EUR Nothing No response an expansion of the offers from cable network providers and the further establishment of additional features are expected in the short to medium (goetzpartners customer survey 2009) term. These will provide customers with greater operating convenience, more flexibility and time sovereignty. The services and features worthy of naming here are:
Electronic programme guide (EPG) Figure 34: Development of pay TV acceptance On-demand services (VoD, NVoD) in Germany Personal video recorder (PVR) Time-shifted television (Time-Shift) [Millions of customers*] 7.0 7 - +8% Media centres (Catch-up TV) 6.3 6 - 5.6 2.5 5.1 5.1 5 - 4.6 2.3 In addition to the previously mentioned services, a closer fusion of TV and 4.1 2.0 4 - 1.4 1.8 1.9 1.1 internet, which provides space for further interactive applications, can be 3 - 3.7 seen. The list of potential services is long: whether access to social me- 3.4 2 - 3.0 3.0 2.8 2.8 3.1 dia platforms, simple information or transaction-based activities such as 1 - teleshopping, voting, chatting or gaming, the most important thing is the 0.5 0.7 0.8 0 - 0.0 0.2 0.4 0.4 2006 2007 2008 2009 2010 2011 2012 possibility of avoiding media disruptions. The still low-key interest in this functionality is, in the opinion of goetzpartners, due to the continuing lack *Premium Pay contains 50% of T-Home customers who are assumed to book additional packages of provision and the low level of information for potential users associ- Basic Pay Premium Pay PPV, nVoD, VoD ated with it. Furthermore, coupling of TV and internet in the cable sector (Analysis by goetzpartners ) Reorientation of the cable network operators – optimisation areas and measures _ 41
without media disruption requires the use of Figure 35: Interest in additional TV functionality hybrid boxes or terminals which currently are not widely available. Certainly the acceptance 6.7% 1. High quality 0.8% 10.2% 22.3% 60.1% of these features does not only depend on the 14.1% 2. Personal video recorder 0.2% 17.8% 21.1% 46.8% technical options but also on the acceptance by consumers. Against the background that 3. Time shifted TV 0.6% 18.0% 18.4% 17.0% 46.0% among younger consumers the internet is tak- 4. Electronic programme guide 0.2% 25.2% 21.5% 19.8% 33.3% ing over from television entertainment, good 5. Video on Demand 0.8% 25.6% 22.1% 19.8% 31.7% prognoses can be given for acceptance of the fusion of the two media. The requirement for 6. Additional interactive services 0.6% 22.7% 27.6% 22.9% 26.2% this, however, is that the TV providers pay more Number of respondents = 511 50.0% attention to the understanding of the product, Not applicable Totally uninteresting Fairly uninteresting Interesting Very interesting and in particular to simplicity of operation, ra- (goetzpartners customer survey 2008) ther than to technical gimmicks that only a few know how to use and appreciate.
Against the background of the ARPU increase, which is linked to these Figure 36: Proportion of media use value-added services, it is also important here to emphasise the particular according to demographic criteria 2008 added value to the customers by means of an appropriate communication, [in %] in order to generate the desired willingness to pay. It can possibly make 14 – 29 31.4 28.2 3.4 37.1 years sense also to offer some services as cost-free add-ons, in order to raise the 30 - 49 34.9 41.5 6.7 16.9 customer’s awareness and the acceptance of interactive additional ser- years vices. However, the main focus is then mostly on the customer retention Over 50 39.7 35.8 11.0 13.5 aspect, as it is usually difficult to levy a fee in future for formerly cost-free services. Internet Daily newspaper Radio TV (ARD/ ZDF On-line study 2008) The sales forecasts for cable network operators show that the potential for additional sales lies primarily in value-added services. While the ARPUs from the classic analogue cable connection are declining and are being compensated or overcompensated by digital TV, the ARPU contribution from the VoD, internet and telephony services is rising significantly.
However, before the potential increases in revenue due to offering value- Figure 37: Development of the ARPU added services can be realised, substantial investments in upgrading the contributions for each service in EU27 networks are required, as described in chapter 3.1. Hence, it is necessary ARPU contribution [in EUR] 30 - for the value-added services to generate the corresponding sales in turn, +5-8% in order to refinance the high expenditure. In Western Europe, invest- 25 - 20 - ments of 50 EUR up to 180 EUR per household, depending on the network 15 - level, are assumed for implementing the required back-channel capability 10 -
(goetzpartners). In addition, there are one-time costs in the supply network 5 - and costs for hardware provision such as the required set-top boxes. With 0 - 2006 2007 2008 2009 2010 2011 2012 2013 investments of this level the cable network operators should be certain of realising an even higher ARPU with the new products. Telephony Broadband VOD Digital TV Analogue TV (Anga Cable 2009, Screen Digest) 42 _ Cable Study
A network expansion only makes sense if the technical features of the modernised network are used consistently. Therefore a central importance must be attached to the develop- ment and introduction of new services. goetzpartners has, for example, designed a VoD platform for a cable network provider. By outsourcing very specific and investment-intensive value creation stages such as content purchasing or platform provision to external service providers, the high risk of developing this new business could be taken into account. With regard to the acceptance by viewers, an operation free of media disruption and a subscription or pricing model similar to flat-rate have proven to be the central factors for success. Meanwhile approximately 10% of customers use this platform regularly.
3.4 Inorganic growth
In addition to the options described for organic growth, the option of in- organic growth by acquisition or merger in principle always presents it- self as well. In the last decade, the sector of cable network operators went through a far-reaching consolidation phase in the whole of Europe, which had three fundamental forces:
(1) The strong attractiveness of the sector for private equity investors, (2) The possibility of exploiting synergies on a national basis and ex- panding geographically and (3) lastly – especially in recent years – the increasing convergence of telecommunications providers and cable network operators, who are now emerging more and more as competitors and are beginning likewise to consolidate their own particular infrastructure.
(1) The role of private equity The cable network operators in continental Europe were one of the first industries to be examined closely by private equity investors, mainly from the USA and Great Britain. The reasons for this are above all the high mar- gins, the clearly predictable and secure cash-flows and the possibility of reducing investments noticeably, temporarily at least, without sustaining a direct negative influence on the operating business. Reorientation of the cable network operators – optimisation areas and measures _ 43
The phase of buying by private equity players Figure 38: Most important acquisitions of cable network operators in in the cable sector began to gather speed in Europe from 2003 - 2009
2003, but especially in the years 2005 un- Overview of Valuation Development by Acquiring Parties* til the first half of 2007 a major part of the Revenue 2.1 2.4 3.8 3.7 5.2 3.4 1.8 large transactions in the European cable market multiple EBITDA- 7.8 7.5 9.2 10.4 14.5 8.4 7.9 was characterised by financial investors. This multiple 18 was due not least to the financing options by 17 17 means of acquisition credits from major banks. 15 7 Financing by more than seven times the EBITDA 11 11 7 8 8 3 of the purchased company was not unusual, 5 8 1 5 5 10 so that the enterprise values, especially in the 8 2 6 6 years 2005 and 2006 could assume values of 3 4 3 11x up to 14x EBITDA with acquisitions of this 2003 2004 2005 2006 2007 2008 2009 sort. Here, strategic buyers at the larger trans- * Pure cable asset, share deal > 5 milion EUR within Europe actions were only rarely in a position or pre- Private Equity Telco Other pared to offer these prices in a sale. Companies (Analysis by goetzpartners, company information, Mergermarket, Thomson, broker reports) were often resold by private equity compa- nies to other financial investors in so-called secondaries, which often intensified the debt position of the company even further.
The entry of financial investors had a positive effect on the cable sector generally. On the one hand, inefficiency was reduced by means of operational improvements and cost reduction. Figure 39: Examples of the private equity players in the European On the other hand, companies whose share- cable market holders believed in appreciation by means of Overview of Private Equity Players in the European Cable Market the new services received capital grants for the GET: Goldman Sachs, Quadrangle necessary expansion of their networks. YouSee (TDC): Blackstone, Permira, Apax and KKR UPC Sverige: Providence, Carlyle Com Hem: Providence, Carlyle While some investors achieved high returns by Ziggo (Essent Kabelcom & Casema & Multikabel): reselling, many cable companies today are still Cinven, Warburg Pincus Starman: Bancroft in the financial investors’ possession. However, Kabel BW: EQT KDG: Providence as the EBITDA multiples of cable network ope- Pepcom: GMT, VSS Stream: Penta rators in today’s market environment have fal- CompleTel Europe: Carlyle Numericable: Carlyle F.C.A.: Argus len to an average of about 6x up to 8x EBITDA, for the moment it makes sense for the least of UPC Telemach: Mid Europa these shareholders to sell their shares. Compul- FiberNet: Warburg Pincus sory situations arise, however, when the fund Melitta: GMT from which the investment was made runs out and the money lodged must be paid back to the institutional investors of the fund. In these cases, interesting investment opportunities in (Analysis by goetzpartners, company information) the cable market can arise for strategic buyers. 44 _ Cable Study
However, a possible solution arises for the private equity companies by passing the company from the old fund to a reissued one, in order to profit from a better market position in a few years and higher selling prices. In re- cent times, private equity investors in the German cable market appeared above all through exits. Apollo and BC Partners, the former owners of Uni- tymedia, found in Liberty Global a strategic buyer for the second largest German cable network operator. In addition to a direct sale, the possibility of an IPO was also checked in this transaction. Ultimately the old owners decided on the sale to Liberty Global, however, for which in particular a more attractive valuation level in comparison to the alternative IPO as well as the security of a 100% exit would have had spoken in favour. As acqui- sition financing at an adequate level for this transaction was not available from any banking consortium, a high yield bond negotiated by Unitymedia itself helped with the financing. In February/March 2010, Providence, the largest shareholder of Kabel Deutschland, was checking to carry out an exit with a comparable strategy. Finally, they decided for an IPO of approxi- mately 1/3 of shares.
Investments in the cable market have mainly been financed in the long term, so that the debts of the cable network operators generally do not turn out to be too dramatic. In individual cases, however, tranches of ac- quisition financing run out and because in today’s market environment they cannot even to some extent be refinanced with comparable terms, these companies with expiring credit lines are threatened with insolvency or a takeover of control by the financing banks (see the Orion Cable case in Germany regarding this). Besides, it could be observed that the debts of these companies are partly being bought up at substantial discounts and largely by hedge funds that want to gain control of the company by means of debt-equity swaps in order to then break them up if necessary, if the situation worsens or before insolvency occurs, and resell them at a profit. . (2) Synergies and geographic expansions The second major driver for consolidation in the cable sector is the possibility of exploiting synergies by means of mergers and the fact that supra-regional growth for cable network operators is frequently only possible at all by means of acquisitions.
In Germany, which has earned a special position due to the original strict separation of the owner structures on the various network levels (level 3 and level 4), this consolidation took place to a large extent at network level 4, whereby the formerly extreme fragmentation of the market was sub- stantially reduced.
The realisation of synergies can take on very different proportions de- pending on the character of the two companies being merged. The most Reorientation of the cable network operators – optimisation areas and measures _ 45
important criterion is obviously the mapping of the respective networks. Large savings can be achieved by combining network clusters, particularly with the costs of signal delivery. In the field of the new services these savings can be achieved, depending on the depth of the network, from the costs of the IP backbone.
The second item, which provides room for significant savings, are the costs of operating the networks. Particularly with geographically exten- sive, nearby or overlapping networks, the expenditure for logistics and access when servicing the network is reduced. Some transactions are ex- plicitly carried out with the intention of reducing the fragmentation of the network districts and creating more homogeneous networks. How directly and quickly these savings can be realised depends not least on whether the maintenance of the networks is operated within the company or largely carried out by third parties. In the latter case this results in downsizing of their own technical personnel.
Personnel costs in general are a further possibility for achieving synergies by merging cable network operators. In addition to the savings in technical personnel for maintenance and operation of the networks, these can pri- marily be achieved in central administration and also in customer service.
As a result of merging cable network operators synergies can lastly also be exploited by the savings in investments, especially in the IT area. Mergers of cable network operators are frequently associated with high integration costs, which are readily underestimated when drawing up a cumulative business plan as a basis for a transaction.
(3) Convergence between cable and telecommunications The third reason for acquisitions and mergers of cable network operators is the well advanced convergence between the cable and the telecommuni- cations sectors. As already shown, the competitive situation between the two sectors has intensified in the first few years of the new millennium, as cable network operators increasingly offer telephony products and inter- net access over upgraded new networks, and telecommunications compa- nies have also incorporated television products over their IP platform into their product range.
As the product range now largely overlaps, in recent years there was a clear rise in mergers of classic cable network operators and telecommunications companies. Here the players can profit from the strength of their counter- parts.
In many countries, telecommunications companies are still dependent on the local “incumbent” for direct access to the customer and they can 46 _ Cable Study
Figure 40: Comparison of expanding own network vs. purchase of new free themselves of him by acquiring cable net- customers work operators with customer relations on the last network level. Even in case of a geographic Cost of expanding own network Costs per acquisition expansion it is frequently more convenient to [Costs per household in EUR] [Costs per subscriber in EUR] win customers by buying companies than by 1,500 setting up one’s own infrastructure and internal customer acquisition with high SACs. Thus, for example, the German broadband provider Ver- satel estimated the costs of its own expansion of a FTTB network at approximately 3 times as 581 563 high as for the cost of a cable network provider 400 with his own end customer access.
Other attractive features of the cable compa- Internal Year of acquisition 2008 2007 2006 expansion costs Purchaser Versatel ORION Cable EQT nies are their often greater experience with TV Acquisition target AKF Telekabel Primacom Kabel BW content for pay TV offers, a relatively stronger customer loyalty and lower pressure on prices and margins. (goetzpartners; Versatel AG)
The high customer retention of the cable network operators is caused by various factors. Thus the cable charges in some countries are partly Figure 41: Strategic positioning of telecom- deducted from the utility charges, so that the individual households do munications companies vs. level 4 operators not develop any active cost awareness. The possibility of an alternative reception path may also be absent (prohibition of external satellite dishes, Strategic Fit Positioning missing DVB-T, etc.) resulting in a genuine local or regional monopoly of Topics Positioning Telcos Level 4 Operators the television provision for the cable network operator. Furthermore, the Market Saturation 7 3 cable network operators maintain in part long-time contracts with the ARPU-Development / Pressure on Margins 7 3 apartment owners or housing associations, which also imply 100% cus- Content Know-how 7 3 tomer retention. Direct Customer Access 7 3 On the other side, however, there are also many points in which telecom- Customer Loyalty 7 3 munications companies are considerably better positioned in comparison Dependance to Upstream Suppliers 3 7 to cable network operators. In view of the relatively low customer fluctua- Customer Orientation 3 7 tions, the cable network operators have failed to introduce a professional Marketing Power 3 7 customer service or to establish a lasting brand in the majority of Euro- Compatibility of pean countries. Cable network operators are also more dependent on IP Services / Products 3 providers in the classic sense than classic telecommunications companies, Technical 3 Compatibility because they only set up broadband internet access and VoIP a relatively
3superior position 7inferior position short time ago and do not always supply from their own networks. (goetzpartners) Since a symbiosis of cable network operators and telecommunications companies can, as explained, improve the position with respect to the cus- tomers, reduce the competitive situation and enable higher margins and ARPUs, acquisitions and mergers between companies from the two sectors have increased in recent years. Reorientation of the cable network operators – optimisation areas and measures _ 47
Looking to the future, it is possible to summarise that although the frag- mentation of the cable providers has already reduced greatly in some Euro- pean countries the consolidation in the cable sector will proceed for some time yet:
Firstly there are still sufficient companies with financial investors, who sooner or later will have to take the leave of their shares. Secondly, against a background of high investments, increasing market saturation, falling margins and the growing convergence between classic telecommunications companies and cable network operators, further combinations to realise economies of scale make sense. Thirdly, due to the intensifying competition between classic tele- communications companies and cable network operators, cartel offices and regulatory bodies, which in recent years appeared rather as blockers of an ever stronger consolidation (in Germany primari- ly between network level 3 and network level 4), meanwhile appear more open-minded with respect to mergers, as they rightly begin to take a wider view of the market definition.
With its high margins and calculable cash flows, the scope to achieve economies of scale as well as the potential for growth in the area of additional services, the cable market has attracted numerous financial investors. They have invested extensively in cable network operators and promoted their consolidation. However, high entry prices based on optimistic business plans on the one hand as well as diminished financing options on the other, have led to it, that the euphoria of many cable network operators and their companies has given way to a more realistic view of the still attractive market potentials. The transaction market has cooled off in the meantime, with mainly private equity investors looking for exits at present. Never- theless, goetzpartners is assuming that the consolidation of the European cable market will continue to progress. 48 _ Cable Study
4. Outlook and conclusion
As shown, the national cable markets in the countries examined differ some- times markedly with regard to their size and their degree of maturity. How- ever, cable as an infrastructure platform is constantly very well positioned, both with regard to the platform competition and with regard to the multime- dia requirements of the future, to realise further growth in the coming years.
This assessment is supported by the following three expected developments:
(1) Cable will continue the digitalisation and the increase of bandwidth The interplay between rising market acceptance of digital cable products, technical development and the political efforts to overcome analogue trans- mission will lead to a clear, short-term rise in the digitalisation of the European cable networks.
With the introduction of DOCSIS 3.0 cable will be Figure 42: Digitalisation of cable networks 2008 and 2013 able to transmit bandwidths of 100 MBit/s and [in %] above stably over greater distances. A further
100 - increase to approximately 300 MBit/s using this 90 - technology seems to be realistic at the moment; 80 - 70 - further developments remain to be seen. Due to 60 - a high degree of digitalisation and a bandwidth 50 - 100 100 99 94 100 87 40 - 82 81 87 of 100 MBit/s and above, cable is the mass-mar- 74 73 67 30 - 58 64 65 69 65 67 61 ket platform that best meets the future require- 47 43 52 20 - 38 26 22 10 - 21 17 18 16 19 ments of the customer for TV, broadband inter- 8 10 10 13 0 - net, telephony and other value-added services or Germany Poland Romania Portugal Hungary Sweden Austria Denmark Czech Finland Bulgaria Slovakia Ireland Lithuania Estonia Latvia Slovenia Rep. the convergence of TV and internet. Only FTTH in Proportion of digital cable in 2008/09 Proportion of digital cable in 2013 conjunction with IPTV represents a platform with (Analysis by goetzpartners analysis, Screen Digest) equivalent performance which today, however, is only established in a fraction of households, and whose full-coverage intro- duction, even in densely populated areas, represents an exorbitant financial challenge for telecommunications companies.
(2) A multitude of new products and services will gain acceptance New products and services, for which revenue models will also be estab- lished, will gain acceptance around the technical development, the de- mand of the customer for better picture quality (HDTV), time autonomy (PVR, time shift, VoD), variety of content (special interest channels, pay TV) and interactivity (fusion, internet and TV). Besides telecommunica- tions companies with their VDSL or FTTH based IPTV offers, cable net- work operators will be in a position to provide the full range of products in intelligent product logic. Accordingly it is expected that this differen- tiation over performance and one-stop shopping will also be reflected in the willingness to change and a willingness to pay on the part of the customer. Outlook and conclusion _ 49
(3) The consolidation is set to continue The still very strong engagement of financial investors in this segment and the economic conditions such as continuing high requirement for invest- ment, falling margins or the convergence between cable and telecommu- nications companies, are leading to a continuation of the wave of consoli- dation in the European cable markets. In this context, positive effects with respect to growth, investment and innovation, and above all an increase in cost-efficiency are expected, which will further improve the competitive- ness and the earnings situation of the cable network providers.
The challenge for the cable network providers now exists primarily in using the opportunities for growth that are arising in this positive market en- vironment in an intelligent and cost-efficient manner. To this end, some measures and instruments from the project experience of goetzpartners, which are especially aimed at the efficiency aspect, have been presented in this study.
As a result, using all the sales and cost-relevant measures shown, accord- ing to the experiences of goetzpartners, and depending on the efficiency and the initial situation of a company, a total EBITDA increase of up to 25% over two years can be achieved. Furthermore, if one takes into account the CAPEX effect of an optimised network expansion strategy, a free cash-flow effect of up to 61% over two years can result. The offering of new services is apparently the main driver for sustainable growth. Major cable network providers have recently shown that these revenue increases can be realised.
Figure 43: Summary of the effects
Optimisation State-of-the-Art Price Offering Optimised Multi-Channel Customer Increase for Value added/ Network Sales Service Basic TV Additional Expansion Services
[in % of EBITDA] [in % of free cash-flow] + 10.0-16.0% ∑ Revenue + 2.2-3.5% 114.4 – increase due 124.8% to new + 1.3-3.3% Price increase services etc. + 2.5-5.0% basic TV by by ~ 5-8% + 0.9-2.0% Cust. Care ~ 15% p.a. CAPEX for SACs: ~ 4-6% costs: ~ 4-6% Basic TV: network ∑ of revenues of revenues expansion: ~ 50-60% 134.9 – Optimisat. Optimisat. Δ ~ 10% of of revenues EBITDA 160.8% potential: potential: Share of + 32.4 – revenues 100% ~ 10-15% ~ 15-25% customers 55.8% Optimisat. affected: potential: ~ 20% ~ 5-10% Churn: ~ 4% 100%
EBITDA old EBITDA new CAPEX Free cash- Free cash- old flow old flow new Assumptions: Period under consideration: 2 years EBITDA: 45% of revenue, Total CAPEX: 25% of revenue, free cash-flow: 20% of revenue; accordingly 14.4-24.8% of EBITDA = 32.4-55.8% of free cash-flow EBITDA is seen as approximation to operating cash-flow
(goetzpartners analysis) 50 _ Cable Study
Table of figures
Figure 1: Structure of cable networks and focus of the study 6 Figure 2: Market size in the focus countries 2009 6 Figure 3: Proportion of households accessible to cable compared to total households 2009 8 Figure 4: Technically developed potential according to degree of urbanisation 2009 8 Figure 5: Volume utilised in terms of technical potential 2009 10 Figure 6: Positioning of the national cable markets with respect to network expansion and utilisation 2009 11 Figure 7: Basic lines of action 12 Figure 8: Transnational product-specific market development 13 Figure 9: Transnational ARPU development cable TV and internet 13 Figure 10: Market share of the cable platform in TV 2009 15 Figure 11: CAGR of cable TV vs. satellite 2004 – 2009 15 Figure 12: Connection between free-to-air TV offering and Ø monthly pay TV ARPU 2009 16 Figure 13: Degree of digitalisation in cable and satellite 2008 17 Figure 14: Monthly ARPU for basic TV via cable 2009 19 Figure 15: Market share for cable internet 2009 20 Figure 16: Market share for cable telephony 2009 20 Figure 17: CAGR for cable telephony 2005 – 2009, development of fixed network connections 21 Figure 18: Bandwidth requirement and provision 22 Figure 19: Stability with distance of various transmission technologies 22 Figure 20: CAPEX for selected cable network operators in Europe 2008 24 Figure 21: NPV model for prioritising investment projects 26 Figure 22: Example showing regions of acceptance 26 Table of figures_ 51
Figure 23: Customary sales channels for cable network operators 29 Figure 24: Response and conversion rates for direct marketing 30 Figure 25: Direct sales costs/ commissions and cancellation rates (Germany) 30 Figure 26: Amortisation of sales costs 32 Figure 27: Contact rates and costs for analogue TV and new services p.a. 33 Figure 28: Customer service level concept 34 Figure 29: Cost advantages of 1st level outsourcing 34 Figure 30: Framework of price increase 36 Figure 31: Factors influencing the probability of cancellation 36 Figure 32: Customer management in the event of price increases 38 Figure 33: Willingness to pay for TV content in Germany (VoD) 40 Figure 34: Development of pay TV acceptance in Germany 40 Figure 35: Interest in additional TV functionality 40 Figure 36: Proportion of media use according to demographic criteria 2008 41 Figure 37: Development of the ARPU contributions for each service in EU27 41 Figure 38: Most important acquisitions of cable network operators in Europe from 2003 – 2009 43 Figure 39: Examples of the private equity players in the European cable market 43 Figure 40: Comparison of expanding own network vs. purchase of new customers 46 Figure 41: Strategic positioning of telecommunications companies vs. level 4 operators 46 Figure 42: Digitalisation of cable networks 2008 and 2013 48 Figure 43: Summary of the effects 49 52 _ Cable Study
List of abbreviations
Abbreviation Explanation ARPU Average Revenue per User CAGR Compound Annual Growth Rate CATV Analogue Cable TV CAPEX Capital Expenditure CLV Customer Lifetime Value CMTS Cable Modem Termination System CTI Computer Telephony Integration DOCSIS Data Over Cable Service Interface Specification DSL Digital Subscriber Line DVB-T Digital Video Broadcasting Terrestrial EBIT Earnings before Interest and Taxes EBITDA Earnings before Interest, Taxes, Depreciation and Amortisation EPG Electronic Programme Guide FM Frequency Modulation FTTH Fiber to the Home GIS Geographic Information System HD High-definition HFC Hybrid Fibre Coax HH Households IP Internet Protocol IPTV Internet Protocol Television IVR Interactive Voice Response KPI Key Performance Indicator LTE Long Term Evaluation MBit/s Megabits per Second M&A Merger and Acquistition NPV Net Present Value NVoD Near Video on Demand OPEX Operational Expenditure PAL Phase Alternating Line PoS Point of Sale PVoD Push Video on Demand PVR Personal Video Recorder QAM Quadrature Amplitude Modulation RGU Revenue Generating Unit SAC Subscriber Acquisition Cost TMT Telecommunication, Media and Technology VDSL Very High Speed Digital Subscriber Line (N)VoD (Near) Video on Demand VoIP Voice over Internet Protocol About goetzpartners/Disclaimer _ 53
About goetzpartners
goetzpartners is one of the leading independent advisory firms in Europe, offering M&A (Mergers & Acquisitions) and Management Consulting services under one roof. The group stands for an innovative consulting approach and tailor-made solutions that are successfully implemented in cooperation with its clients. goetzpartners has offices in Munich, Düssel- dorf, Frankfurt, Zurich, London, Paris, Madrid, Moscow and Prague as well as cooperations in New York, San Francisco, Los Angeles, Bangalore, Mumbai and Budapest. goetzpartners Corporate Finance is focused on M&A. goetzpartners Management Consultants specialises in the fields of strategy, organisation, operational excellence, sales and marketing, restructuring and strategic due diligence. goetzpartners is „Hidden Champion“ 2009 in the fields of strategic due diligence, financial and merger strategies as well as post- merger integration (Corporate Finance Advisory). goetzpartners focus industries are TMT, consumer goods and retail, ener- gy, automotive and financial sponsors. With its TMT practice goetzpartners has actively supported the deregulation of the telecommunication and cable infrastructure in the 1990s and has accompanied numerous players to adapt their strategies to the new market situation. With its expertise, goetzpartners is able to help its clients regarding the ongoing convergence of these markets and develop the most suitable strategies that ensure their competitiveness as well as their measurable and sustainable success.
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