STL Partners

Telco 2.0 Growth & Innovation

Lessons from the UK TV Market

The structure of TV markets and competition vary greatly by country. Essentially they are national markets. The structure is highly dependent upon the historical context - the strength of the state broadcaster, the degree of regulation with wildly different rules for local content creation and distribution, the penetration and financial strength of payTV (both cable and satellite) and the transition from analogue to digital terrestrial switch-over.

Unsurprisingly, this means the size of the opportunity for both telcos and "over-the-top" internet companies to find a profitable place in the value chain varies greatly by country. We are firm believers that the technological economies of scale that the global internet offers are more than overcome by the complexities of national regulation and content acquisition. TV will remain national market-driven in the internet era.

UK Distribution Market

According to Q4 2008 data released by OFCOM here, one of those huge inflection points in the UK TV market is finally happening - it looks as if free-to-air digital TV adoption is grinding to a halt. There are still 2.9m homes watching analogue TV who have yet to adopt digital, but these are very much at the back-end of the adoption curve and will need economic incentives to swap. Cue lots of tax-payer-subsidised advertising raising awareness of the need to swap for the 11% of UK homes still residing in analogue land.

The inflection point will mean that the focus may once again return to the indefatigable trend of slow-but-sure transition from Free-to-Air TV towards Pay TV. With 13m homes still Free to Air (9.5m DTT, 0.6m Satellite and 2.9m Analogue) there is plenty of growth left for the payTV companies. There are currently 12.7m payTV homes (8.9m Satellite - Sky, 3.3m Cable - Virgin Media and 0.5m Others) and we expect, even in the credit crunch, that payTV homes will exceed Free for the first time ever sometime in 2009. We have discussed the problems the UK free-to-air advertising funded business before, here.

The UK TV distribution adoption ratio of 1: 0.7: 0.26 (free: cable: satellite) is almost certainly unique across the world.

The weirdest aspect of the OFCOM DTV report is that it exposes the failings of the one subscription-DTT provider, Top-Up-TV (down 9.4% to 0.4m), and the IPTV sector - Tiscali's service is down 16.7% to 0.1m homes. The data on BT and its Vision service is not disclosed directly, because the BT numbers are included in the DTT section - BT have a DTT tuner in their Vision box. BT separately disclosed that they only had 336k subscribers in their December 2008 figures.

This apparent lack of success for IPTV in the UK is in sharp contrast to great success in France and the growing success in the USA.