Capturing the benefit of media and telecom convergence in the GCC

The report found that content will play a key role in their differentiation strategy going forward.

Hilal Halaoui, a Principal with Booz Allen Hamilton said:

'The market for traditional telephony, whether fixed or mobile, is becoming increasingly saturated that it can no longer be a viable exclusive source of growth. On the other hand, convergence of the telecom sector with traditionally unrelated sectors has brought so many opportunities and threats - as telecom operators will have to battle with a wide array of new competitors, including traditional media companies, information technology players, and even industries such as financial services'.

'Differentiation has become more challenging, with technology being largely commoditized and accessible to all players in the market. To address this challenge, many operators will leverage telecom-media convergence to develop a unique and sustainable competitive advantage in their markets,' added Ghassan Hasbani, a Vice President at Booz Allen Hamilton.

In particular, the study found that there were a number of opportunities for operators in leveraging the potential of telecom-media convergence - a summary of the details follows below.

The Advent of Telecom-Media Convergence

Telecom and media is converging, especially with the proliferation of broadband technologies, both fixed and mobile. Operators are increasingly becoming broadcasters of a wide range of content to their subscribers - such as games, video, news, sports, weather, and music.

While popular in Europe, the convergence trend is not yet evident in the GCC region, although it is expected. There are seven key market and technology factors that will drive its acceleration:

1- Telecom Market Saturation
The telecom market in the GCC is nearly saturated, causing operators to look towards customer retention rather than winning new customers. Another challenge is that operators are finding declining average revenue per user (ARPU). 'Providing differentiated content services could significantly drive improvement in ARPU levels for telecom operators,' said Mohamad Mourad, a Senior Associate with Booz Allen Hamilton.

2- Telecom Market Liberalization
As all GCC markets are now liberalized, increasing competition requires operators to differentiate their offerings, in order to achieve competitive advantage. Content services provide a solid platform for service differentiation for telecom operators.

3- Telecom End-User Sophistication
Users in the GCC have high purchasing power with the average gross domestic product at $18,000. Such relative affluence has facilitated new technology adoption and created a large segment of highly sophisticated end-users.

Additionally, 33% of the total GCC population is below the age of 18, meaning content services can be geared to the technology-savvy youth segment that will constitute the bulk of users in the mid- to long-term future.

4- Threats from Disruptive Technologies
Disruptive technologies such as Internet protocol (IP) are placing increasing pressure on operators and forcing them to increase the diversity of their service offerings and to simultaneously reduce their tariffs.

Voice over Internet protocol (VoIP), for example, poses a significant threat to operators offering traditional voice services. 'In the GCC region, the threat, though not yet evident, is nevertheless imminent and is expected to grow with increasing broadband penetration,' commented Hasbani.

5- Proliferation of Enabling Network Technologies
The limited availability of broadband technologies has traditionally been an obstacle for the mass usage of content services, but such technologies are becoming increasingly accessible with the growth in the adoption of 3G and DSL services in the region.

6- End-User Device Convergence
Mobile phones, digital cameras, music and video players, and personal digital assistants (PDAs) are increasingly converging into one handset. Similarly, fixed line customer premises equipment (CPE) is converging with personal computers and television set-top boxes, with features including high storage capacity, video-on-demand capabilities, digital video recording support, multiple format decoding, security support, and digital rights management - enabling telecom-media convergence, as it allows users to consume content beyond the traditional devices.

7- Local Media Content and Channel Proliferation
The TV media sector is highly fragmented in the Arab world with the number of Pan-Arab free-to-air television channels growing at an accelerated rate with about 500 channels at the end of 2006 - many of which are targeted channels.

Targeted channels are gaining momentum and market share, while content production has also been increasing to accommodate the vast number of channels, with music content production being among the fastest-growing sector for audio and audiovisual content.

'Gaming is an overlooked content area, especially since games are so popular with the youth sector, which will become the core target market over the next few years,' said Halaoui.

Telecom Operators' shape the Content Landscape

By developing a clear understanding of the content value chain, telecom providers determine the best strategy for gaining a competitive edge as content can include information, entertainment, education, transaction, and communication, while the formats range from text, image, and audio to more complex content formats such as video, multimedia, and interactive services.

'Telecom operators must not only identify the right content to be offered, but must determine the optimal format, technology platform, end-user device and the right language for each content service,' stated Mourad. 'Operators must also enhance their understanding of the content delivery value chain and decide what part they intend to play in order to keep up with the competition. We have identified seven key activities required for effective content delivery'.

1- Content Creation and Production
The content delivery value chain begins with the creation and production of content, with production including both the commercial distribution of content as well as postproduction activities such as formatting, editing, censoring, translating, and dubbing.

Content producers are always ahead in understanding and shaping user preferences - vital for continued success in the media sector.

'Telecom operators in the GCC could become pioneers in adapting global content to local taste through 'Arabization' which includes cultural adaptation, subtitling or dubbing.
Operators can also play a major role in adapting and channeling regional content,' added Hasbani.

2- Content Acquisition and Management
Telecom operators must gain expertise in content acquisition and they must focus on bridging the knowledge gap in content acquisition and management.

Content management has traditionally been outsourced, but if telecom operators aspire to use content as a key differentiator, content management should be brought under their control.

Telecom operators should also invest in reliable digital rights management (DRM) software to avoid potential disputes with content producers.

'We find that telecom operators have been mastering the process of billing for years. It is a clear advantage that can be leveraged to extend into the territory of DRM, either alone or through teaming up and pooling capabilities with players from outside the telecom industry,' Halaoui said.

3- Content Aggregation
'Content aggregation includes activities such as content program scheduling, data feed monitoring, content updating, portal development, program guide develop¬ment, and advertising management,' said Mourad. 'Understanding customer behavior and demand patterns are key to offering the right content in the best time slots'.

Telecom operators should develop expertise in time-specific content, such as news, and content with a short life span, such as novelty ringtones or blockbuster movies, and develop
streamlined portals to facilitate the content purchasing process for the user.

In addition, operators must be willing to build on their capabilities in understanding customer behavior and emerging trends and preferences, to develop content offerings with actual customer insights.

4- Application Service Provisioning
Application service provisioning includes the management of content storage servers, related software, billing and customer relations management (CRM) systems, and interface applications and systems which have traditionally been outsourced.

'Differentiation in content delivery is increasingly critical and telecom operators must exercise control over these activities to drive innovation, and hence differentiation, as quality of service and quick time-to-market will be critical,' added Hasbani.

5- Service Access and Delivery
Service access and delivery is the core activity of telecom operators as it provides connectivity to end-users.

Appropriate technology for each content category must be developed with the aim of achieving the desired coverage and quality of service to minimize download time and to stimulate demand.

Telecom operators should carefully determine the most suitable technology required for effective content delivery.

6- Marketing and Sales
The customer segmentation for content services does not necessarily match that of traditional voice or data services and operators must direct their attention towards marketing mix development and data mining. Telecom operators should develop a different segmentation and marketing mix from their core activities to better capture content-related revenues.

'We realized that telecom operators can learn from traditional media companies how best to sell and market content, like developing and maintaining extensive libraries for each content genre, which are critical to ensuring customer loyalty. Other strategies include transparent pricing to boost usage and offering simple and secure payment mechanisms,' commented Halaoui.

7- Customer Terminal Management
'Customized end-user devices can enhance customer retention and facilitate access to desired content. Providing customized devices allows telecom operators to lock in subscribers and facilitate customer access to content portals. Expertise in supply chain management and after-sales service is key, especially for devices with short life spans, such as mobile handsets,' said Mourad.

Content Economics

Telecom operators derive revenues from content, based on content usage and end-user prices. Most telecom operators in the region traditionally followed a revenue-sharing model with their content providers, but operators are increasingly pushed to take on the full demand risk by acquiring such content in a simple one-off transaction - especially for premium content.

As a result, economies of scale will become increasingly important in the regional content game. In order to achieve scale, operators may decide to resell their acquired content to other non directly competing players across the Middle East - facilitated by the relatively homogeneous preferences and cultures across the Arabic-speaking Middle Eastern countries.

'We estimate the size of the content market delivered through telecommunications channels in the region will reach around $750m by 2010, up from the current level of less than $400m. While currently more than 99% of these revenues are mobile specific, we expect the share of triple play services to grow to about 6% of the overall market by 2010. Overall, the value of the content market will not likely exceed 3% of the overall revenues of telecom operators. The role of content services should be seen as a means of creating a differentiated competi¬tive advantage aimed at safeguarding core revenues and profits, but content alone, how¬ever, is not expected to become a considerable source of revenue growth for telecom operators,' Halaoui commented.

Conclusion

The key to success is in execution, and will require significant capability development and joint activities with traditional media players.

Operators could choose between developing the required capabilities in-house or acquiring existing experienced entities.

Alternatively, creating joint ventures with media players could be a solution for consolidating talent.

'In the end, irrespective of the method, one thing is certain: value chain consolidation is under way, and telecom operators are well positioned to play a lead role in driving it, should they decide to expand their role beyond pure connectivity provision,' concluded Hasbani.