Saturday, December 24, 2005

BT's next-generation consumer offering
BT's next-generation consumer offering: does BT have the answer?
John Delaney
December 22, 2005, 12:30 GMT

The telco's entry into television is promising, but is accompanied by signs of hubris

On 8 December, BT launched its next-generation consumer offering, described as a range of services "which will help customers transform how they communicate, are entertained and manage their lives".

The core of the whole offering comprises two elements: ADSL broadband and the "BT Hub", a router that provides a wireless network in the home. The services that BT can deliver over this infrastructure fall into three categories:

* Communications. PC-based and phone-based VoIP services, with advanced applications such as network-based address books, unified messaging, video calling and high-definition voice calling
* Entertainment. Broadcast TV including PVR features, 'catch-up TV', archive TV, movies on demand, music on demand and interactive gaming.
* "Life management". ID protection, Internet protection and parental controls, home surveillance, and online content backup and management.

Comment: There's an old joke about a tourist who stops a local man to ask for some directions. The local replies: "Ah well... if you want to get to there, you shouldn't be starting from here." Similarly, if you are forming a company that hopes to be a major player in digital TV, you wouldn't ideally choose to do it in a market where your brand is associated with another line of business altogether, and where pay TV is already dominated by another company. However, in entering the market for TV in the UK, BT has to work with circumstances as they are, not as it would like them to be.

Within those limits, BT has put together a package of entertainment services that the mass market may well find appealing. It has made a good start with the three big content partners it has announced: BBC Worldwide, Paramount Pictures and Warner Music. We are yet to be convinced, however, about the broadcast TV element of content.

On the one hand, BT has wisely chosen to partner with Freeview, allowing it to tap into a large existing market. However, it's not clear whether BT will also be able to offer popular pay channels such as Sky One and Sky Sports. Without these, a large fraction of the potential pay-TV customer base will be unlikely to consider BT as its provider.

We are impressed by the ambitious scope of BT's next-generation offering. It encompasses some "futuristic" services that have been talked about for years, such as video communication, TV over telecoms lines, and hi-fi voice calling; it's good to see some dates on these things at last.

BT has made a good job of collecting this large and diverse collection of services into a coherent marketing proposition. It has also done well to emphasise the CPE aspects of the offering: it's always much easier to market a service if you buy it as a "box", like the BT Hub.

That said, however, it's one thing to communicate a large, diverse proposition in two hours to a group of industry experts, but quite another thing to communicate it to the mass market in a 30-second TV advertisement. It will be a big challenge to market the next-generation consumer offering in a way that is simple enough to appeal to the mass market. It is also likely that the increased complexity of the offering will lead to a big increase in the volume of calls to BT's call centre (rather than the 30-40 percent reduction that BT hoped for in its launch presentation).

The main elements of the next-generation offering are scheduled to launch during 2006. In that case, we don't think the initial addressable market will be as big as BT says it will. BT talks about a nationwide offering, but this turns out to be predicated on the assumption that 2Mbit/s of DSL access is enough.

Gavin Patterson, MD of the Consumer Group, asserted that with current compression technology you can deliver a broadcast-quality video stream over 2 Mbps, and indeed you can — but you can't deliver much else. If someone else is accessing the Internet at the same time, for instance, they're likely to find the experience falling well short of what one expects from broadband. The integrated bundle of home entertainment and communications services that BT was touting so heavily is, we believe, going to need a lot more access bandwidth than 2 Mbps if it is to live up to expectations.

An incumbent has some big advantages in the future market for converged communications and entertainment services: brand strength, strong customer relationships, and an established organisation for provisioning and support. BT has made a good job of building its offering around these strengths, and of avoiding the mistake that some telcos have made in the past of straying too far outside them. When questioned about rumours that BT was planning to acquire the TV channel ITV, chief executive Ian Livingston was encouragingly derisive.

BT closed its announcement events with a video, in which the following slogan was repeated seven or eight times: "BT has the answer". This sounded a bit smug, and smacked a little too much of hubris for our liking. Like all incumbent telcos, BT is still a long way from having all the answers. These days, however, at least it's making a better job of understanding the questions.

John Delaney is a Principal Analyst in Ovum's Consumer Group.

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