Competing against free

Dstv vs. Google TV MBA5921 TMA03 EXAM STRATEGY

To: Meyer. N, Chief Executive From: Dalla Pria. S, Analyst Date: 05/09/2011 Student number: 72781793

CONTENTS
IPTV vs. Pay TV The macro and competitive environment
STEEP/STEP factors Porters Five Forces Model of industry structure

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Using R+C to compete with free

Revenue streams Differentiation

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Conclusion REFERENCES

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IPTV vs. Pay TV

IPTV (or internet protocol TV) is considered by global telecommunications companies to be the cutting edge in digital content distribution to direct end-users, using IP networks and STB (set top box) receivers connected via broadband connection (Martinsson, 2006: 5). The advantages of IPTV for the end consumer are largely contained within its current and potential features:

Increased capacity for two-way communication and consumer interaction with the service provider, including VOD (video-on-demand) content; The availability of choice, and broadcasts catering to individual tastes and needs; Personalised advertising (for the service provider, customer focused advertising will provide valuable revenue streams); Custom value-added services, such as internet connectivity (the ability to access online content), video blogging, PVR (personal video recording), EPG (electronic program guide), TV shopping the possibilities seem to be boundless (Martinsson, 2006: 5).

Satellite TV (of which Dstv is an example) utilises similar set top boxes (or decoders) that receive signals from uplink stations that themselves distribute signals between satellites (network) in the earths upper atmosphere. End consumers pay for these digital broadcasts and access content via subscriptions (hence, payTV). The most significant difference between the two formats is the relatively passive nature of broadcasts when subscribed to channel bouquets (as referred to by Dstv), choice is limited; payTV is adapted to deliver the same thing to everyone and interactivity is limited (Holmes, 2007: 4). Dstv has developed its own on-demand services (PVR, EPG and Video-on-demand in the form of its Box Office movie rental offering), thus providing the consumer with that all-important value-adding option of choice. However, as IPTV catches up in South African media trends and new entrants such as Google (internet) TV increases competition, Dstv will need to look further into developing a sustainable and attractive offering in line with consumer needs or face gradual erosion of its
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subscriber base. Bob Larribeau, founder of TelecomView (Holmes, 2007: 4) says A one-way broadcast only service is becoming obsolete. People want personalisation. The life cycle curve (figure 1 below) traces the position of Dstv within a combined IPTV/pay TV industry view, showing how it would need to reintroduce itself as an IPTV service provider, and how it would need to compete with a threat such as Google TV from scratch. The upside is that Dtsv has the ability to forward-integrate its broadcast infrastructure for an IPTV platform. In Ansoffs (1965) growth vectors (figure 2, below), it can be noted that Dstv would compete to access new markets (users who have never felt inclined to subscribe to pay TV services); and develop new products, like IPTV capability, which is a strategic route to growth in established markets where existing products do not fully exploit the available opportunities (Viney and Gleadle, 2005: 76).

Fig 1 The life cycle curve for DStv/IPTV (as adapted from Bakhru, 2005: 31).

Fig 2 Ansoffs growth vectors (as adapted from Viney and Gleadle, 2005: 69).

The macro and competitive environment

IPTV is no longer coming. It is already here, and it presents a double-edged sword to satellite players. Mark Holmes (2007)

Although the IPTV industries in territories such as the US and Europe are developing quickly, the IPTV market in SA is in its infancy steps, with no industry to speak of. Probably the single greatest barrier to establishing fully fledged mainstream IPTV services in SA are the low broadband speeds and restrictive monthly usage limits for consumers. Wireless connections available to consumers are unable to carry true IPTV services due to issues with latency and network unreliability (http://mybroadband.co.za/news/telecoms/8722-dstv-iptv-service-here-soon.html ). Multichoice have been rolling out an IPTV service within gated villages and hotels
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with high speed internal LAN networks, but Dstv will be looking to develop infrastructure, technology and services for population-wide consumption (http://mybroadband.co.za/news/telecoms/8722-dstv-iptv-service-here-soon.html). Dstv itself acknowledges that Internet-based TV and online user activity is the future and that future battles will be fought online there is a direct threat from the increase of viewers accessing free content from peer-to-peer sites; the same kind of threat that an online service such as Google TV will present (http://www.multichoice.co.za/multichoice/view/multichoice/en/page44252? oid=74294&sn=Detail&pid=44252 ). Macro- and near environment analysis will reveal the extent to which Multichoice can compete with online products, and the relevance of internet-based media services. STEEP/STEP (Bakhru, 2005: 9) factors: Sociological factors Evolving trends with consumers for personalised, choiceorientated content and services; more interactivity with media; and the desire to pay less for quality content, hence the rise of free content consumption. These trends have been seen in the US, and as more consumers gain access to the internet in SA, the same results might be seen here soon (http://news.yahoo.com/pay-tvindustry-loses-record-number-subscribers-090422571.html ). Technological Factors As mentioned earlier, broadband speeds and availability will pose an incredible barrier to IPTV, whether a Multichoice offering or Google TV. Many have considered the role of telco companies, such as Telkom, in impeding the delivery of faster and more efficient broadband. Naspers (as parent company to Multichoice/Dstv) has begun positioning itself as the next major telco (telecommunications company) including investing billions of rands into a national network with LTE (long-term evolution) technology that will deliver speeds in excess of what the fixed line broadband is delivering today, thus circumventing this barrier (http://www.techcentral.co.za/naspers-sas-next-telecoms-operator/25396/ ). Economic factors Inflation, increased living expenses and growing unemployment currently experienced in the economic recession will have a permanent effect on
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consumer spending on luxury items, such as home entertainment. Dstvs base of subscribers increased substantially during the 2010 period a 59% growth can be attributed to the interest in the Dstv Compact bouquet priced for lower-income households; and the 2010 FIFA World Cup frenzy (http://teeveetee.blogspot.com/2011/06/multichoice-grows-its-pay-tv-dstv.html ). A driving concern for Multichoice will be the willingness of consumers to emigrate to content that may be inferior quality, but free of charge, as subscription prices continue to rise. Political factors On the one hand, government is supporting the growth of IPTV in SA. In 2008, it had announced the introduction of a scheme for ownership support to help households that could not afford to buy set-top boxes. Part of this scheme would see government subsidising 70% of the costs of STBs. Government has acknowledged that IPTV could deliver access to more channels, including focused educational channels; and direct access to new services, such as e-government services (http://www.southafrica.info/about/media/digital-220709.htm). If Multichoice successfully launches IPTV capability, it might see government as a potential partner and customer. The macro environment is showing signs of appropriate opportunity for a local IPTV service to launch and begin its development in earnest.

Porters (1980) Five Forces Model of Industry structure (Bakhru, 2005: 19): Dstv is virtually monopolistic in the pay TV industry in SA with approx. 3.2 million subscribers in South Africa alone, compared to the next biggest competitor TopTV, which is said to have 100 000 subscribers (it does not reveal its numbers) ( http://www.multichoice.co.za/multichoice/view/multichoice/en/page44252? oid=82084&sn=Detail&pid=44252 ). However, the IPTV industry as discussed so far does not fully exist in the South African context, yet the challenge will still have a structure (see figure 3, below):

Fig 3 Porters Five Forces model (as adapted from Bakhru, 2005: 20).

Entrant/potential threat/substitute - Google TV and its free product must be seen as a potential entrant that poses a solid threat to the pay TV industry in SA. Its attractiveness to buyers would be how it differentiates itself the content it shows (Premier League and Spanish La Liga); the distribution channel of this content and the free aspect of the content. Similairly, Google TVs soccer offering will serve as an appropriate substitute for Dstvs content it will offer the advantage of price (no charge) and concentration (Google TV will be available to all who own Google STBs (set top boxes). This study will argue that performance of the product will determine the threat and how performance of an integrated IPTV platform will distinguish the incumbent). Suppliers ICASA for industry regulations; MWEB (a Naspers subsidiary) as a partner to provide broadband and online resources; Irdeto (a Naspers subsidiary) will provide digital content management and protection systems to protect, manage and
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monetize digital media on the IPTV platform (Datamonitor, 2011: 5); Altech EU for the local production of set top boxes (the company produces Multichoices decoders)- as evidenced, Dstv (as a subsidiary of Naspers) has the ability to integrate its IPTV offering with partnerships within the group. The interdependence of these firms will lower the bargaining power of suppliers. Instead of depending on the current Telkom infrastructure, Naspers will attempt to become a telco in its own right, reducing Telkoms power as supplier. Dstv is also supplied with content by a host of channels, production houses, studios and other packages from local and international producers. In addition to broadcast rights (that the pay TV firm has acquired at a premium), suppliers will also be negotiating transport reception rights (the rights to broadcast programming via IPTV broadband home networks to subscriber homes (Jackson, 2006: 5). Besides the supplier of adequate broadband, Multichoice has the opportunity to deploy a vertically-integrated architecture that will provide a seamless value chain for IPTV to succeed against the entrant. Buyers - Buyers will have increased bargaining power with access to Google TVs free soccer offerings. However, they would still need to purchase a set top box to view Google TV, so cost to the consumer is implied (the differentiation of hardware will be discussed in the next section). Equally important will be the increased bargaining power of buyers of ad space (advertisers) potentially IPTV would afford advertisers to personalise advertising campaigns, thus delivering more focused strategies. IPTV would have the ability to profile customers this information would enable advertisers to target and differentiate their offers and sponsor certain ondemand content, i.e. Heineken and its sponsorship of the English Premier League (while the Barclays advertising is largely redundant for SA viewers) (Dargue, House and Naef, 2007: 96). Industry Rivalry The presence of TopTV as a competitor should be noted the advent of IPTV in SA will open up new opportunities for the firm to compete on the same on-demand basis. It has content that differentiates itself from Dstv and will manage to capture those consumers that want to pay for what they watch; and not for all the content they dont (provided that the company can establish the same consumer-friendly infrastructure).
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Using R+C to compete with free

*R+C Resources and capabilities The problem addressed by this study is how to compete with free, specifically Google TVs free broadcast of the English Premier League and La Liga Dstv and Google TV will not be competing on the product itself (both are offering the same content), but the price and performance of the distribution channel. Bryce, Dyer and Hatch (2011) argue that once the genuine threat from an entrant offering a free alternative is detected, the incumbent should use all the resources at its disposable to engage in an outright competitors battle, despite very real concerns regarding its existing business models and profit-centre structure. Bryce et al (2011) suggest that a genuine threat should be assessed before firms act impulsively, as competitors often self-destruct before they can turn non-paying customers into paying ones. Google TV might use its offering to lure new consumers to its services on a permanent basis according to Bryce et al (2011), Dstv would perceive the threat from Google as serious if its customer base for the free offering was growing at 40% or more a year; or if its own defection rate to the free offering is 5% or more a year (Bryce et al, 2001) (see figure 3, below). However, delaying a countermove might prove disastrous as the increase of Google TVs consumer base will almost undoubtedly be bolstered by network effects a users satisfaction of consumption of goods and services increases with the number of users consuming the goods, resulting in an ever-growing pool of users and thus self-reinforcing the products market lead (Bakhru, 2005: 40). This advantage is gained by the firm that establishes an early gain in an existing market. With its rate of innovation and rapid expansion of Googles products, it should be assumed that Dstv would need to reply immediately with an offering before Google tips the market, and forces an insurmountable lead in what could turn out to be a local standards war. From

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DEFECTION RATE HIGH 5% A YEAR OR MORE IMMEDIATE THREAT LAUNCH FREE PRODUCT IMMEDIATELY BUSINESS MODEL THREAT CHANGE BUSINESS MODEL EG. DSTV OPTION DELAYED THREAT COEXIST OR DELAY LAUNCH OF FREE PRODUCT

MINOR THREAT LESS THAN 5% A YEAR LOW LOW LESS THAN 40% A YEAR GROWTH RATE MONITOR SITUATION

HIGH MORE THAN 40% A YEAR

Fig 3 How big a threat is free competition? (as adapted from Bryce et al, 2011).

analysis, it would appear that users migrating toward a free Google offering do not want to pay for the full Supersport bouquet subscription (due to expensive fees and not being able to choose exactly which content to consume) and Dstv would not be able to offer stand alone on-demand soccer games via its satellite packages.
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Distributing an ad-sponsored free option or subscription-based offering via IPTV service seems to appropriate strategy, but Multichoice would need to assess whether it can successfully monetize the platform. Dstv/Multichoice certainly possesses the resources and capabilities that Bryce et al (2001) mention (see RBV diagram, figure 4 below):

An established customer base, representing 3.2 million subscribers. Superior product features, including the rights to content available from no other firm in SA, superior technologies such as PVR, EPG and VoD (Box Office), and an integrated broadcast architecture that enhances product efficiency.

A strong reputation, characterised by its ability to deliver content and strong branding. Abundant financial resources, to which Dstv/Multichoice has access as a subsidiary of Naspers. (Bryce et al, 2011)

As evidenced from the figure, Dstv has ample opportunity to leverage its competitive advantage to monetize the IPTV distribution space (Holmes, 2007: 4); this would allow Dstv to be more flexible with pricing approaches. The broadcasting architecture is up and running and costs are largely incurred (Holmes, 2007: 4). The broadcast rights have been acquired for the soccer leagues in question and largely paid for by satellite bouquet subscribers and advertisers.

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Fig 4 The link between resources, capabilities and competitive advantage (as adapted from Bakhru and Gleadle, 2005: 8).

Google TV will use its tried-and-tested strategy of increasing its market share with a free offering (soccer games on IPTV) and consequently charge companies to advertise to its millions of users (charging third parties) (Bryce et al, 2011). Should Dstv decide to challenge Google TV with its own free business model, it runs the risk of cannibalizing itself, both in terms of new subscribers and advertisers; the risk is that this strategy may set a wider expectation that on-demand content should always be available for free (Dargue et al, 2007: 98). For most media experts, the advantages of IPTV services for firms will depend on two crucial pillars:
1. For sustainable profitability, additional revenue streams must be derived from

an IPTV platform;
2. The IPTV service would need to offer positive differentiation if user targets are

to be reached. (Dargue et al, 2007: 99)

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Revenue streams If the Dstv offering decides to adopt a free model, it will need to extend its advertising potential from capabilities (Dargue et al, 2007: 94):

Banner advertising; Targeted advertising through customer profiling; Social network (Facebook and Twitter) advertising within the IPTV user interface; Advertising for locally identifiable firms (such as Castle); Selling content packages wholesale to other distribution channels for their own IPTV consumers. Utilising more engaging advertising formats, for instance allowing for an entertaining interactive advertising campaign that involves the consumer more than broadcast advertising ever could have.

Differentiation The real source of competition, should Dstv decide to launch its own IPTV offering, would be based on how it differentiates its platform (a pure differentiation strategy, Porter) users will only use Dstvs free product if it offers better value-added services and a more user-friendly, accessible interface (Sarda, 2007: 24) than Google TV. Sarda (2007: 24) suggests that three parameters will define a customers IPTV experience:

Content: Rich, expansive and multi-faceted. While Google TV will offer the mentioned soccer content, Dstv will deliver the same, but with the opportunity to deliver a package comprising of video, information, entertainment, music and gaming better suited to the viewers taste (Sarda, 2007: 24). Dstv already has an advantage that Google TV doesnt it knows the local market and which content packages are relevant to local users.

Choice: Dstv would be able to affect customised pricing to packages, depending on the viewers preference and lifestyle (Sarda, 2007: 24) lower income households will be exposed to the Dstv/Supersport brand via a free Premier League/La Liga package offered on their government subsidised set
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top boxes. This would lead to potential buy-in into other on-demand Dstv video packages, at a cost that is affordable for that LSM group (for instance, an on-demand offering like the Channel O music channel, aimed at young, urban previously disadvantaged individuals and priced accordingly).

Control: Allowing users control of how and when they consume content (and on which device) (Sarda, 2007: 24). Besides bundling free content with paidfor on-demand/subscription based content, Dstv will also have an opportunity to bundle its free content with hardware such as DstvMobile devices.

Dstvs differentiation focus can ultimately based around its electronic program guide (EPG) the vehicle for defining a unique user experience that is simple to use and understand and offers the best value-added service (Dargue et al, 2007: 99). Simplicity would be an essential key success factor when designing a format for a wider, less technologically adept market.

Conclusion
Key ideas from the study emphasise the need for subscriber-based companies such as Dstv to be bold, different and financially brave when using a free-based approach that might only reap benefits in the long run. Maximizing the potential of IPTV by launching customer-orientated services, products or channels, while being able to test various business models is going to be a deciding factor. Service differentiation will be challenging to create and difficult to sustain, but ultimately it will provide the leading edge against Google TVs free offering. A simple strategy pathway (one of many) can be followed: Partner with Naspers inter-subsidiaries to design and implement a seamless IPTV architecture that incurs as little cost as possible;
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Use decoder hardware manufacturers to produce a set top box standard for the country and roll out en masse with the aid of government support via subsidies;

Target new (lower income) households that were previously unprepared to pay for subscriptions with free offerings bundled with personalised, cheap ondemand content;

Differentiate the distribution channel with superior accessibility and easy-touse simplicity, coupled with value-added services that are relevant to local markets and individual tastes and preferences.

Carry the recognizable brands that have made the pay TV synonymous with quality (e.g. Supersport and M-Net) into the new IPTV distribution channel.

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Name: Stephan Dalla Pria Student number: 72781793

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