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Enormous bets are being placed on the building of the information superhighway to Europe’s homes. In the United Kingdom alone, cable companies are spending $12 billion, and BT has announced its intention to respond with a $15 billion investment of its own. But even these sums will pale into insignificance when the European Union starts to use cable operators to introduce local competition in telephony.
Building the information superhighway is becoming the gold rush of the 1990s. A few players—most likely first-mover satellite television companies, innovative cable companies with high penetration in favorable regulatory circumstances, and telephone companies able to transform themselves into cost-competitive service organizations—are likely to hit the motherlode. Others, huge though their investments may be, have no guarantee of success and risk coming up empty-handed, or even facing massive losses.
Deep uncertainty surrounds consumer takeup, competitive threats, the emergence of substitutes, content and product availability, the cost of new product development, regulation, and content and gateway providers’ share of economic surplus. All the same, there is intense interest in building interactive broadband distribution networks among telephone com-
panies, established cable companies, satellite companies, and new cable entrants across Europe, and especially among:
These countries have very different starting points. At the extremes are Belgium and Italy
The countries of Europe have very different starting points. At one extreme is Belgium, with cable companies that are fully built out, independently owned, and poised to enter the telephony market; at the other is Italy, where less than 2 percent of homes are passed by cable. Such differences represent one of the key factors that will determine the industry’s fortunes in Europe. The other factor is participants’ ability to manage the uncertainties that lie ahead.
Uncertain returns
These large investments are being made in an environment of enormous risk. Consumer acceptance is one area of uncertainty. Demand is assured for neither current nor future technologies. Fresh-build cable TV and telephone networks in the United Kingdom, for instance, need 35 to 45 percent penetration to earn their return on capital, but they have stalled at around 20 percent for the past three years. Takeup rates for future services is even harder to predict.
Every form of broadband multimedia distribution will face fierce competition
Uncertainty also surrounds the nature of competition and the emergence of substitutes. Every form of broadband multimedia distribution will face fierce competition. In basic entertainment services, the contenders will include cable TV, telephone companies, satellite, CD-ROM, electronic games, and digital terrestrial TV. Telephone companies providing local services will come up against cable providers and new wireless competitors such as Ionica. The battle for transaction and entertainment services will be fought on personal computers with CD-ROMs and modems by satellite, telephone companies, and cable operators.
A further risk is that content and gateway providers—the suppliers, like CompuServe, Prodigy or America Online, of navigation assistance to end users seeking to locate resources available through the electronic network—might capture the power in the industry chain. An analogy already exists in the United Kingdom, where BSkyB controls the content it supplies, and where gross margins for cable operators are 10 to 20 percent lower than in the United States. As numerous participants battle for positions in gateway provision, this threat will become more acute.
Behind many investments lies the expectation that significant revenues will flow from NVOD, VOD, and broadband transaction and information services. Yet product development costs remain highly uncertain. A digital satellite dish with set-top box currently costs around $750, but this price is expected to fall by about $125 a year for the next four years. Digital cable set-top boxes are likely to cost $200 to $300 for initial high-volume orders and decline to $100 over time, though it is not clear when. Costs for video servers and broadband switches are equally unclear.
Finally, participants face an uncertain regulatory environment. One key question is when and under what conditions cable operators in continental Europe will be allowed to provide telephone services, since telephone revenues are a central part of the rationale for cable network upgrades. Another question is when telephone companies will be permitted to offer entertainment over their networks, a step that will affect the economics of cable and satellite. Yet another is whether cable operators will be forced to offer video dial tone in a switched broadband environment. If they are, much of the added value of an integrated broadband upgrade could be supplied by a gateway rather than by a cable or telephone company.
Starting points and end games
The likely end game and winners in European residential broadband distribution will vary dramatically from country to country because of marked differences in their starting points. Two factors are at the heart of these differences:
1. Broadband infrastructure penetration
Satellite and cable networks have achieved varying levels of penetration across western Europe (Exhibit 1). Where cable TV is concerned, the region can be divided into three broad categories:
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Emerging markets such as France, Italy, Spain, and the UK, with penetration below 10 percent of households;
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Maturing markets such as Scandinavia, Austria, Germany, and Ireland, with penetration between 25 and 60 percent; and
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Mature markets such as Benelux and Switzerland, with penetration over 80 percent.
These variations are the product of cultural, political, and regulatory diversity, and of underlying economic differences. As the globe’s second most densely populated area, Benelux, for instance, has been an ideal candidate for cable infrastructure deployment. On the other hand, Italy, with over 500 local terrestrial TV stations, represents a much less attractive proposition.
Providers have been slow to put together compelling language- and culture-specific content for individual countries
Satellite penetration also varies across Europe, but is generally much lower, surpassing cable penetration only in the United Kingdom. It is a newer technology, which is currently being spurred by a fall in dish sizes to 18 inches and by dramatic increases in channel offerings. However, providers have been slow to put together compelling language- and culture-specific content for individual countries.
2. Ability to compete
The second factor affecting the likely outcome is the extent to which ownership or regulation issues determine how cable companies are able to compete against tele-
phone companies. Cable and telephone companies’ ability to compete varies from place to place. In a few countries, such as Belgium, Finland, the United Kingdom, and Ireland, cable and telephony assets are held by different owners. Here, there are both opportunities and incentives to engage in infrastructure-based competition in video and telecommunications.
The competitive landscape would be transformed if telephone companies were forced to dispose of domestic cable assets
By contrast, in Sweden, Denmark, Germany, and Switzerland, telephone companies own much of the cable infrastructure, and some have even invested in satellite TV ventures. This makes it much less likely that there will be infrastructure-based competition in local loop telephony and interactive multimedia. However, the competitive landscape would be transformed if telephone companies were forced to dispose of their domestic cable assets. The short-term compromise that seems to be holding is to mandate separate accounting and ensure there are no cross-subsidies between telephony and cable.
Whether a cable company can compete against a telephone company also depends on the regulatory environment. Belgium, Denmark, Germany, France, Italy, Portugal, Greece, and Sweden are all contemplating, preparing for, or engaged in privatization, and their governments are trying to maintain the value of their telephone companies through the transaction period. The Netherlands and Denmark have privatized a minority share, and are gradually phasing in competition by allowing cable operators (which are partly owned by the telephone companies themselves) and other alternative infrastructure providers such as railroads to provide non-voice telephony services.
In the midst of privatization, Belgium is allowing its telco to offer video-based services from mid-1996, but it continues to forbid cable companies to provide voice traffic. By contrast, the United Kingdom has acted to protect its fledging cable industry by barring BT from entering broadcast video.
Competition will put tremendous pressure on European telephone and cable companies to improve their efficiency, though employment constraints may ultimately limit the extent of restructuring. Productivity, labor agreements, and underlying national unemployment vary widely among telephone companies, and will affect their ability to shed costs and hence the pace at which regulators will encourage cable and other competitors to gain market share.
Competitive outcomes
A country’s existing level of broadband infrastructure penetration and the ability of its telephone and cable companies to compete will therefore influence (if not determine) the long-term competitive outcome for its broadband environment. Four main patterns are emerging:
Multiple battlefields
In the United Kingdom, competition is already intense. The most advanced interactive cable networks in the world are being built to offer interactive entertainment, information, and telephony. BSkyB’s DBS (direct broadcast satellite) service has an entrenched position in offering multi-channel television services and is about to upgrade to 200-plus channels. BT is responding with ADSL trials and Ionica is entering with fixed wireless telephony.
In the video local loop, we estimate that DBS has superior economics for current broadcast services and future services such as pay per view (PPV) and NVOD (Exhibit 2).
The long-term implications are profound. The threat from satellite means that television is no longer a sure-fire investment for cable operators; they will have to depend instead on other sources of revenue such as telephony and interactive services and on differentiating their existing offer from that of satellite. Indeed, most UK cable operators only began investing after they were allowed to provide telephony.
In the telephony local loop, we estimate that fresh-build cable telephony can compete on cost if its penetration approaches 30 to 45 percent in urban areas (Exhibit 3). On a purely incremental basis, the economics are much more attractive, but we have assumed that 50 percent of shared costs should be dedicated to telephony, since the network would not be built without it. Fixed wireless economics are cost competitive with a typical telephone company’s economics even at low penetration levels. Barring regulatory relief, if telephone companies are able to shed capital and labor costs to achieve world-class levels, the penetration goal for cable companies may be even higher. Fixed wireless, by virtue of its high variable cost component, may be competitively deployed across rural, urban, and suburban markets, even at modest penetration levels.
Emerging cable markets
The fortunes of UK cable companies may influence whether cable is ever built out in fragile emerging markets such as Italy, Portugal, and France
The fortunes of UK cable companies may influence whether cable is ever built out in fragile emerging markets such as Italy, Portugal, and France. Broad-scale deployment of fresh-build infrastructure to compete with DBS is unlikely unless regulations change to permit cable companies to provide telephony. Local regulators would need to move decisively to provide incentives for investment; if they do not, the United Kingdom could be one of the last wide-scale fresh-build cable environments in Europe. Given the slow expansion of fixed-wire infrastructure, DBS will be well positioned to gain an early foothold in enhanced broadcast TV, and the door will be open for wireless telephony to provide a competitive alternative in the local loop.
War footing
With a touch of the regulatory wand, Belgium and areas of the Netherlands could be transformed into broad-scale two-wire local loop competition combined with DBS and eventually fixed wireless telephony. Long-term economics will be driven by the competitiveness of retrofit (rather than fresh-build) cable TV versus DBS and ADSL in the video arena, and retrofit cable telephony versus the telephone companies in the telephony local loop.
For video-based broadcast and premium services such as NVOD and PPV, we estimate that DBS economics are superior to those of standard cable company upgradings from an analog system (Exhibit 4). A typical $300 million satellite launch will generate a footprint covering tens of millions of households, bringing fixed costs down to a few dollars per home. Consumers, moreover, have shown a surprising willingness to rent or purchase the $750-plus variable-cost dish and set-top box required. This economic advantage is even more pronounced in rural areas.
Cable operators, with their high fixed costs, are vulnerable to small share losses to satellite operators
As a result, cable operators, with their high fixed costs, are vulnerable to small share losses to satellite operators. A 10 to 15 percent fall in subscribers is normally enough to send a cable company into the red. Similarly, telephone companies’ moves into video are unlikely to be profitable in the near term, having a mainly defensive value in protecting telephony market share, and are likely to be fraught with technical startup glitches associated with new equipment such as video servers.
In the telephony local loop, we estimate that retrofit cable telephony can hold its own against a reasonably competitive incumbent telephone company (Exhibit 5). The key issue will be how quickly telephone companies can shed costs through labor and capital efficiency programs. Cable retrofit costs can be contained by cherry-picking the most attractive customers, but might be harmed by unfavorable regulation such as a requirement to pay for a universal service obligation. Given that the competitors have such similar economics, two-wire competition will be likely in telephony where permitted in urban areas. Fixed wireless may be able to get a foothold, particularly in rural and suburban areas, but this will depend largely on regulation and first-mover competitive dynamics. Cost will not be a sound basis for long-term differentiation unless a telephone company can achieve world-class levels.
Negotiated truce
This may be the outcome in countries with medium to heavy cable penetration still dominated by telephone companies with cable assets, such as Denmark, Sweden, Germany, and Switzerland, or in non-privatized environments or slowly deregulating countries such as Luxembourg and Norway. Key factors will include whether telephone companies will be forced to divest their cable holdings, the timing of any privatization transactions, and whether cable operators and telephone companies will be allowed to compete in one another’s core business.
In video, satellite will compete with cable, possibly destroying a great deal of value
In video, the long-term prospects will resemble those for Belgium and the Netherlands. Satellite will compete with cable, possibly destroying a great deal of value. In telephony local loops, fixed-line competition is likely to be delayed, opening the door to wireless entrants and allowing cable operators to use learning curve effects to undercut the telephone company if it has not used the interval to put its costs in order.
A stepping-stone approach
Our experience of telephone companies, cable companies, and new telecommunications entrants in Europe suggests that participants in broadband distribution can limit the risks they face by taking certain steps:
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Basing investment decisions on short-term paybacks that also enhance long-term prospects
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Minimizing cost through tight control of capital expenditure
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Building a company driven by marketing, rather than technology
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Inuencing regulation to improve competitive conditions.
Investment decisions
In this risky environment, a thoughtful sequence of investments with short paybacks is superior to "go for it all"
In this risky and costly environment, a thoughtful step-by-step sequence of investments with short paybacks is superior to a "go for it all" approach. Obtaining rapid paybacks reduces risk and improves cashflow and overall economics. A gradual, phased approach also allows operators to align network investments with demand for new services as technologies and markets develop and regulation unfolds.
The steps in the sequence might include:
1. Protecting the core business. One of the few certainties in the rise of residential multimedia is that even players with a sound customer base will face mounting competition. Before any company can hope to succeed in expanding its range of activities, it must protect its core businesses by:
Attaining world-class efficiency. Benchmarking studies reveal that European telephone companies have not yet reached global best practice. Achieving low costs will be a challenge, since much progress will have to come through labor reductions. At the same time, ample opportunities still exist to improve capital efficiency by changing investment-related processes like network expansion and maintenance, and through new product introduction.
In the fiercely competitive multimedia industry, no company will be able to use profits from one part of its business to subsidize another
Eliminating cross-subsidies. In tomorrow’s fiercely competitive multimedia industry, no company will be able to use profits from one part of its business to subsidize another. In telecommunications, for example, international and long-distance calls currently subsidize local traffic and line rentals. Recognizing this, telephone companies are raising rentals to bring prices in line with costs. Incumbents in entertainment, information, and communications must quickly get to know their costs and profitability by segment and then revise their prices to cut out cross-subsidy.
Influencing regulation governing the terms and timing of competition. The key issues for telephone companies are when cable companies will be allowed to enter, when long-distance competition will be permitted, what conditions will govern competition for new entrants, and what degrees of freedom the incumbent will have with respect to pricing. For cable TV companies, what matters most is when telephone companies will be allowed to offer entertainment, and when and under what conditions they will be allowed to compete in telephony.
2. Fighting for basic telephone revenues. Broadband networks are capable of offering many new services, but we believe that telephony should be the top priority because:
Revenues are large and yield high margins. The average annual revenue per customer—including business customers—is between about $800 and $1,000 in Europe.
Only limited investment is required. With fresh-build cable TV, telephony can be provided for an additional capital cost of only 20 percent, yet it will more than double revenues (relative to a television-only build). To retrofit an existing cable TV system for telephony is likely to cost $1,200 per subscriber at year 2000 rates, and to pay off at around 10 to 30 percent penetration in urban and suburban areas, but at a relatively high 50-plus percent penetration in rural areas.
Risks are low. Unlike VOD and broadband information services, this is a market that already exists, and consumers have proven willing to switch to new suppliers. In the United Kingdom, 20 to 25 percent of all consumers offered cable telephony have changed provider.
3. Gaining access to or control of crucial content (including gateways). This is important for three reasons:
To develop the market for entertainment and information services. Programming builds penetration. In the United States, the ESPN and HBO channels were partly responsible for the rapid rise in cable TV penetration. UK satellite penetration has been driven by BSkyB’s purchase of rights to all Hollywood movies over a ten-year period and its exclusive rights to Premier League soccer. Indeed, top-tier sports and movies represent one of the two essential components of a credible content offering in Europe; the other is access to channels or films adapted to local-market languages and tastes.
In Benelux, satellite has been unable to enter precisely because it lacks access to French and Dutch programs and films
To achieve differentiation. UK cable providers have attempted to secure unique programming—as in their purchase of rights to the next cricket World Cup—to distinguish their offering from satellite. In Benelux, satellite has been unable to enter precisely because it lacks access to French and Dutch programs and films.
To protect or exploit a position in the value chain—another reason why cable operators invest in programming. In the United States, for instance, TCI has exploited its dominant position in distribution to promote its Liberty Media content subsidiary. The recent merger negotiations between Turner and Time Warner are driven at least partly by the desire to exploit Turner’s vast content library and production on the largest US cable network.
Should European distributors invest in programming? The jury is still out. In the United States, every major successful cable operator has programming assets. In Europe, such investments will probably be required if access to content cannot be secured via the market or by means of alliances.
The economic attractiveness of new services depends largely on when they are introduced
4. Making judicious bets on new technology. The economic attractiveness of new services depends largely on when they are introduced. For many technologies, from digital set-top boxes to ADSL pairs, cost-effective deployment relies on high-volume production. When planning an introduction, companies should take into account the pace of consumer adoption and threats by competitors to launch similar services. Particular attention should be paid to which standards—for instance, set-top box encryption technologies—are selected, to ensure that adequate penetration and customer control are retained. It is also vital to ensure that services are ready to be offered once the technology is available. Upgrading a cable network to offer full two-way interactivity for home shopping or VOD is unlikely to pay off at the moment, while these applications are still on the drawing-board. Distributors should use market trials to test new technology and consumer responses simultaneously.
Distributors should use market trials to test new technology and consumer responses simultaneously
5. Targeting investments at early adopters that will pay off through heavy usage. Communications and media companies have traditionally offered the same products to all segments in all locations. Winners in multimedia, by contrast, will focus their entire business on concentrated pockets of early adopters. In US PPV services, 20 percent of homes account for 80 percent of purchases. In US and UK video rentals, 20 percent of households with VCRs generate 80 percent of demand. In telephony, 20 percent of residential customers make 80 percent of residential calls. The message is that a company that tries to serve all segments with the same approach will be less successful than a specialist that understands and targets heavy-usage early adopters.
Distributors thus need to:
Understand the pockets of early demand, which can vary by geography, economic segment, and attitude. Winning companies will research which dimensions are most important, and find—and understand how to reach—the early adopters.
Aim their entire business system at these early adopters, which means focusing on the channels from which they are likely to buy. In information services, for instance, the channel mix should support the current trend for buying from software retailers. In addition, providers should build out their network to the early adopters before extending it to other consumers, and target product improvements and promotion messages to this segment.
Broaden investments by building on this base of early adopters. Once it has been captured, the next step is to combine intensive cross-selling to these consumers—one of the most profitable ways to fund further growth—with extending the network toward new groups of adopters.
Minimizing investment costs
Particularly for cable companies in a fresh-build or retrofit environment that have made investment decisions, managing capital expenditure tightly may allow a business to reduce its total costs by as much as 20 percent—with a dramatic impact on return on investment. Companies that achieve tight control have more scope for price flexibility and are able to make a return on capital with lower penetration. Good management involves:
1. Making the right design decisions. Complex design decisions such as duct capacity, set-top functionality, and laser deployment have long-term implications for a network’s ability to compete, but also short-term impacts on capital. To make these design decisions and tradeoffs requires senior level crossfunctional involvement, especially in marketing and construction. In addition, the capital/labor tradeoff is partly determined by network design. A startup company is usually well advised to invest in labor-saving devices such as fault tolerance, automatic fault detection, and centralized fault detection systems to reduce its long-term operating expenses.
2. Managing suppliers on a loose/tight basis. "Loose" means working intensively with suppliers to help them lower their costs: for example, by designing a network that is easier for contractors to build, getting designs to contractors early so that they can forecast their labor requirements, and assisting suppliers with centralized purchasing of materials. "Tight" means ensuring that payments to suppliers conform to industry norms. This does not preclude long-term relationships with suppliers, but it does mean benchmarking their prices at least annually to avert any risk of overpayment.
Networks have to be designed at the level of individual streets and houses
3. Tightly managing the micro design function. Networks have to be designed at the level of individual streets and houses. Skilled designers can devise cheaper solutions by producing designs that are easier to build.
4. Conducting regular industry benchmarking. Superior companies recognize that capital costs are incurred in hundreds of ways, and that they cannot be supremely cost-effective in all of them. They regularly compare their costs with those of others in the industry to find opportunities for further reduction.
5. Implementing superior capital budgeting. Best practice companies have monthly monitoring measures of the key variables in their capital budgets, such as the number of homes passed and the capital cost per home. If capital overruns are detected early, they can be quickly remedied.
Building a new network or converting an existing nationwide network can take a decade or longer
6. Building the network in the optimal order. This requires a deep understanding of the location of early adopters and of geographic cost differences. The investments required to build a broadband telecommunications network are large, while revenues are highly uncertain, particularly for new services. Moreover, building a new network or converting an existing nationwide network can take a decade or longer.
To minimize the risk of these investments, companies must maximize revenues in the early years, which means assessing the relative attractiveness of business and residential customers, the location of intensive users of existing services, the likely location of early adopters of new services, and cost differences by geographic area.
Building a marketing-driven company
The communications networks of the past were built under monopoly conditions. Prices were set according to demand elasticity calculations and regulatory directives. Promotion spending was minimal, since consumers had no choice of supplier. Distribution channels were not an issue in the days of the sole network provider.
Winners will see residential broadband distribution in the same way consumer goods companies view their business
Today’s multimedia landscape could not be more different. We believe that winners will start to see residential broadband distribution in the same way that consumer goods companies view their business. Like Unilever or Heinz, they will think about brand, price perception, channel management, direct salesforce management, and other aspects of the marketing mix.
Signs of this change are already apparent. Orange launched its UK cellular mobile network in 1994 with a $15 million advertising campaign. Only four years earlier, the entire industry advertising spend had been just $2.5 million. Mercury’s one2one won a Times marketing award for the launch of a new brand.
BT shows how a company can retain its customer base by moving toward marketing excellence. In the first six months of 1994, it conducted a campaign to convince consumers that it is one of the least expensive telephony providers. It has also run a campaign to increase usage of its current network. New product introductions, pricing, positioning, and salesforce approaches are key elements that need to be supported by changes in organization structure, systems, and skills.
Four aspects of marketing are particularly important:
1. Distribution channel management, including making continuous channel mix decisions and managing channel conflict. Channel demand varies by segment: some consumers prefer a direct salesforce, others favor telemarketing, yet others like to visit a store. The supply-side decision is naturally based on channel costs.
To succeed, companies must recognize that they will need to undertake research and economic analysis to understand the mix of channels
To succeed, companies must recognize that they will need to undertake research and economic analysis to understand the mix of channels. One channel alone will not suffice, though one or two channels are likely to dominate. In the United Kingdom, for instance, cable TV companies are beginning to understand that direct salesforces will remain central over the next two to three years, though the role of retailers and telesales is sure to grow.
Winning companies will realize that channel conflict is bound to occur, that it is not a reason to avoid supplementary or additional channels, and that it can be managed. Conflict has often come about as a result of introducing new channels naively. Early experiments with telesales in UK cable TV distribution led to resentment among the direct salesforce. Successful distributors will compensate channels equitably, divide channel "territories" by geography and market segment, and take all possible steps to minimize channel conflict—but not shy away from introducing channels because of it.
Winning distributors of satellite, cable, and telephone multimedia services will turn the art of promotion into a science
2. Promotion. Winning distributors of satellite, cable, and telephone multimedia services will turn the art of promotion into a science. The key to effectiveness is a detailed understanding of what it will take to move consumers from ignorance through awareness, interest, and trial to ultimate purchase. In telephony, the main objective is to communicate a company’s value proposition in relation to the competitor. The issue is not product awareness but switching, and the main incentive to switch is likely to be price. By contrast, the priority in subscription TV is to convince customers of the benefits of an unfamiliar product. It is usually better to communicate specific examples rather than general messages, as Canal Plus showed when it profiled exclusive new movies and sports in its advertising campaigns in Belgium and France.
3. Pricing. Getting this right both enables new entrants to increase their immediate revenues to fund network development and ensures their long-term survival. For incumbents, pricing is critical to protect attractive customer segments, eliminate cross-subsidies, and avoid an overall price war that destroys profitability.
In telephony, the aim for a new entrant is to set a price that maximizes switching from the incumbent. Most new entrants have started with a 12 to 15 percent discount, as did MCI and Sprint, which they have then reduced to almost zero over a number of years. The challenges in subscription TV are to understand which products drive penetration and price them accordingly, and to know which products can be priced at a premium. Using previous price changes and market research to understand demand elasticity is a useful approach that can add 10 to 20 percent to the bottom line in both TV and telephone services.
Telephone companies provide video, satellite operators offer PPV and NVOD, and cable providers deliver telephony
4. Exploiting the competitive advantage of each approach. Distribution technologies are converging in terms of the services they can provide. ADSL permits telephone companies to provide video entertainment over phone lines; digital compression and intelligent set-top boxes allow satellite operators to offer PPV and NVOD; and improved opto-electronic transmission and fiber upgrades enable cable providers to deliver telephony. Nevertheless, each technology retains its own competitive advantage.
Satellite providers should exploit their technology’s low cost and—since operations are subject to international treaties governing space rather than to national legislation—its ability to bypass local content restrictions. Satellite’s viability in rural and thinly populated areas that would be uneconomic for other technologies is another asset. Since many cable networks are saturated, satellite also enjoys a short-term capacity advantage, giving providers a golden opportunity to snap up new programs and be first to market with capacity-hungry applications such as NVOD.
Cable operators should exploit their medium’s interactivity. Networks are readily upgradable to provide a plethora of narrowband and broadband interactive services—a major point of differentiation from satellite. Cable also enjoys deep broadband capacity: hybrid fiber/coaxial cables can handle many more channels than a typical telephone or satellite network. Saturated cable networks should be quickly upgraded to expand capacity and provide new services such as PPV, NVOD, and ultimately VOD.
Cable providers should emphasize that cable users have no need of ugly satellite dishes, and that picture quality is far superior to anything produced by satellite or ADSL. Cable can offer all of the services provided by telephone and satellite, and can bundle services in ways that they cannot. Market research has shown that bundled telephony, television, and entertainment offerings are attractive to many consumers and represent a powerful marketing tool.
Potential fixed wireless providers should lobby for licenses, particularly in uncabled environments, to ensure a timely entry before two fixed-line infrastructures exist. Like satellite, wireless providers should exploit its relative viability in more thinly populated areas. Significant emphasis should be placed on communicating and reassuring customers of the quality and technical viability of this new product.
The main advantage for telephone companies is their extensive installed customer base. They can exploit it by using customer records in targeted database marketing and by conducting national advertising campaigns that would not be cost-effective for fragmented local competitors.
Influencing regulation
Regulation is the single most important determinant of profitability for a multimedia distributor
Regulation is the single most important determinant of profitability for a multimedia distributor. It influences the speed at which new services develop; in Benelux, for instance, cable companies are waiting for permission to offer telephone services. The timing of the necessary regulation will also influence the introduction of interactive multimedia because telephony will share the cost of upgrading the network.
It is regulation that defines the terms under which new entrants are allowed to compete in telecommunications: the charges and conditions for interconnection to the incumbent’s network, universal service obligations, and local access deficit charges to compensate the incumbent for unprofitable services or customers. It also determines how much freedom incumbents have in defending their position: for instance, how far they can reduce cross-subsidies from international to domestic traffic. If no such rebalancing takes place, new entrants will have more opportunities to cherry-pick, and incumbents will have less success in defending themselves. In Japan, NTT’s inability to rebalance prices quickly damaged its share price.
Incumbents also need the freedom to vary prices between different types of users with different telecommunications needs. Effective price differentiation can help to increase customer satisfaction, bring prices more in line with costs, and reduce competitive threats.
These important issues deserve substantial resources—especially at senior management level—to ensure that organizations are able to exert a positive influence on regulatory outcomes.
Given these diverse starting points, competitive dynamics, and local regulations, residential broadband distribution in Europe is bound to look like a patchwork quilt of approaches over the coming decade. Success will be partially determined by the starting point in each country but will also be the reward of those that take destiny into their own hands. A few operators that adhere to certain basic principles will set themselves apart from the rest of the pack. 
About the Authors
Scott Beardsley is a consultant in McKinsey’s Brussels office; Warwick Bray is a principal in the London office; and Marc van Rooijen is a principal in the Amsterdam office.