BuddeBlog

by Gareth Powell

America Online has indicated it sees its future as a television company. It plans to invest in TiVo, a creator of personal television services. It will also work with TiVo to expand its interactive TV business.

TiVo allows users to create what is effectively their own television programming. A box sits on the TV and uses something like a very large hard disk drive to record programs in advance. It will then play them back in the order the viewer wants. It is possible to skip bits such as advertisements.

America Online is not the only believer in the concept. Among the TiVo backers are Microsoft co-founder Paul Allen, NBC, CBS, Philips Electronics, Disney and Cox Communications.

This is an important development because it takes America Online forward from personal computers into television sets and portable devices. Within the company this is known as the "AOL Anywhere" initiative.

America Online is under pressure in the Internet market because it is being attacked on several fronts. Internationally it has not done very well at all. Every time it arrives in a country it gives the existing Internet service providers a short, sharp shock – never in itself a bad thing – and they circle the wagons to repel the unwelcome invader.

Back in the United States and Canada the rate of expansion of AOL, while still high, may not be as high as other independent ISPs. It still is massively the leader of the pack. America Online added 5.1 million members in the last year alone and now has more than 17 million subscribers. But its share of the Internet access market is no longer growing as it once was. In fact, its market share may be going backwards.

AOL’s nearest competitor is probably MSN from Microsoft and that has less than two million members. (MSN is in seriously desperate straits, with no apparent increase in penetration over the past year. In the next few months Microsoft intends to launch an advertising blitz to try and change this. Its past track record suggests this will not work.)

Even though AOL has this massive lead, pretty well all the research firms agree that America Online’s figures are not moving the way they did in its glory years.

At the same time AOL is still locked in a battle with AT&T and others over access to cable lines so it can offer high-speed service. True, it has made deals with some of the Baby Bells to have access by way of ADSL, but that is not the same as cable because it does not have nearly the same amount of bandwidth.

AOL has also invested $US1.5 billion in Hughes Electronics which is the parent company of satellite TV and Internet services DirecTV and DirecPC.

If AOL is going to be a once and future television company it needs access. TiVo is part of that battle. AOL and TiVo will collaborate to bring consumers interactive events by combining TiVo’s personal television service with AOL’s interactive television offerings. And future versions of TiVo’s personal video receiver are expected to provide access to America Online.

This service will be AOL TV and it will offer members AOL’s interactive service on television.

After a study of the various industry proposals the ACA quantified the value of the USO (Universal Service Obligation) in July 1999 at $580.2 million.

The figure is, of course, less than a third of the Telstra claim, but higher than the current fixed costs. Telstra reacted positively to the announcement despite their original $1.8 billion claim.

Although Vodafone and Optus indicated disappointment they have not argued too vehemently against the figure.

In general terms I believe it is a good outcome. However, it now depends on the finalisation of the Report. Critical to the USO is a national blueprint on how and where the money should be spent. Not in an uncoordinated haphazard way, as is currently done through the Regional Telecommunications Development Fund.

Furthermore, to have a maximum effect it is critical that it will be offered on a competitive basis (eg through a tendering process). A difficult problem to resolve would be how to interconnect USO areas into the overall Telstra (trunk) network if Telstra doesn’t win such networks. Often services are bundled together. Could they split in a USO tendering and can individual services then still be offered in a commercially viable way?

- During the early 1990s the audiotex or premium rate market grew between 25%-30% and reached $80 million by the end of 1996. However, 1996 was a disappointing year and in 1997 growth in the market would have stayed flat, if it had not been for the relaxing of the policies relating to adult services.

- At the same time Telstra withdrew itself from the market as an active competitor and introduced more flexible pricing structures. The combination of all of this resulted in a revival of the industry in 1998, which broke through the $100 million barrier in late 1997.

- Growth has begun to flatten out again in 1999, with a bleak forecast for the future. Currently 50% of total revenue comes from adult services, but the new laws that will be introduced in February 2000 will make it much harder for these services to survive in Australia.

- Soon international calls will be as cheap as local calls and 90% of this industry will then have moved off-shore, where they will offer the same but far less restricted services without any influence from the Australian government. This is already happening with the Internet-based adult industry.

- Further growth will come from a broader voice services market that will include e-commerce (v-commerce), 1800, 13xx, call centres, etc. The focus will have to move away from being content-based to being services-based, bringing the audiotex SPs operating in this market far closer to the players in the telephony and Internet access markets.

Audiotex market revenues

Year Revenues ($million) Growth

1996 80 10%

1997 100 25%

1998 125 25%

1999 (e) 135 8%

(Source Paul Budde Communication, based on industry data)

- Revenue growth for 1999 is estimated at a high 9.3%, thanks to continuing monopolistic ‘rents’ in the mobile, fixed-to-mobile and local call markets;

- Growth for 2000 is predicted at even slightly higher level, however now mainly driven by the explosion in data services;

- Revenue in the fixed voice market is stagnating and will show negative growth from 2000 onwards;

- Telstra will be hardest hit by this. Its annual growth will drop to 1.7% in 2000, from 3.8% in 1999;

- New Telcos are struggling as they are stuck in the low margin voice-based services;

- Growth in new mobile subscribers will be, as in 1998, around 16% – once again well below international benchmarks;

- With call charge competition mobile subscribers will grow by between 20%-25% in 2000;

- Without price competition, mobile subscriber growth will continue at 1998/1999 levels;

- As from 2001 mobile call charges will be equal to, or below, fixed call prices;

- Internet revenues (ISP market) will reach $1.5 billion by early 2000;

- Growth in e-services are lagging approximately 12-18 months behind the USA. Breakthrough for Australia is expected in 2001. Internet-based retail sales should reach $1 billion by that year;

- New upcoming industry leaders are the e-companies. They include the top 50 ISPs, IT companies such as IBM, Advantra, EDS, GEIS, AT&T Easylink; Alta and BT Australia. Watch out for: ecorp, Liberty One and other non-traditional IT&T companies;

- Under the right price conditions (less than $50 pm) high-speed Internet subscribers could reach 250,000 by 2001. C&W Optus and Austar could have a 6-9 months’ lead in this market.

- Business is spending 40% pa more on data-related services than in 1998. This market will reach $7 billion by 2000.

These revealing figures and forecasts are contained in Paul Budde’s Telecommunications Strategies Reports, published this year for the twelfth time. The Reports are a mine of information and statistical data on the Australian telecommunications and information highway markets, such as Internet, pay TV, cable modems. The Reports, containing over 1,000 pages of market research information, comprise four volumes:

- Telecommunications Strategies in Australia;

- Carriers and Service Providers Australia (company profiles of around 100 companies);

- Information Highways in Australia (cable and pay TV, Internet and e-commerce and interactive video services);

- Market Strategies and Developments in Australia (regulations, marketing, pricing, global trends).

Price $1750. Available from Paul Budde Communication Pty Ltd

A six page executive summary is available in the Web Report: Australia – Market Analysis 1999 – 2000 (in the section Australia – Telecommunications Services).

Other relevant Web Reports to this section are:

- Australia – Industry – Revenue Overview

- Australia – Enhanced Services – Revenue (table)

- Australia – Public Data Market – Revenues and Trends

- Australia – Carriers and Service Providers – New Telcos – Market Overview, Revenues, SP Strategies

- Australia – Cellular and Mobile Communications Market – Mobile Communications – Statistical Overview (Size and Revenues)

- Australia – Carriers and Service Providers – Industry – Market Share Analysis

- Australia – Electronic Commerce – Online Services and Internet – Internet Market -Demographics, Statistics, Revenues

- Australia – Telecommunications Equipment Market – Market Statistics and Developments

Oftel recently explained its policy on how the market for broadband services is likely to develop in an article in Info , the journal of policy, regulation and strategy for telecommunications, information and media. The article focuses on the issue of access to BT’s copper loop and the regulatory issues that arise.

Changes will be driven by both technology and ongoing customer response and with the underlying principle that consumer interests are best protected by competition.

But Oftel recognises there are significant risks. Forcing a particular regulatory outcome may turn out to be unwanted by the customer and lead to investment that may not be rewarded. On the other hand:

Delaying provision where the dominant operator itself may take a risk-averse position could deny early access to new services, impair competitiveness and place consumers at a relative disadvantage.

From a regulatory perspective the issue is not to make supply dependent on regulation, not to second-guess consumer needs and not to be deterministic about the technology but at the same time to ensure customer demands are met and to encourage a wide range of alternative forms of delivery.

The most likely source of supply of higher bandwidth services to the residential and small business markets is via enhanced DSL technologies using existing copper loops.

With BT currently providing over 85% of the access lines for the residential and small business markets, and the need to upgrade the loop to cope with more than just basic telephony, Oftel has decided the situation requires regulatory action. Other companies should be able to provide higher bandwidth services instead of having to wait for other companies, such as BT, to upgrade its network.

Oftel outlined the five options for regulatory action, taking into account pricing issues. The article also covers industry response to the consultation document prepared by Oftel.