Opinion Paper

“Are You HD Ready?”

Current Situation and Prospects of HD Image

Distribution

2010 / 04

We make ICT strategies work

 “Are You HD Ready?”

Table of Contents
1 Executive Summary............................................................................................. 3
2 HDTV Is Becoming the Standard — Competitors Are Moving Ahead................ 4
2.1 Customers Are Interested in High-Definition Moving Images ...................... 4
2.2 The HDTV Value Chain Is Closing .............................................................. 4
2.3 Competitors Moving into Position ................................................................ 5
3 DSL: Technologically Inferior for Linear HDTV.................................................... 6
3.1 HDTV Requires Bandwidth — DSL at a Disadvantage Long-term.............. 6
3.2 HDTV Affects Network Expansion ............................................................... 6
3.3 In the Linear Sector: Me-too Positioning...................................................... 7
4 Opportunities for IPTV: HD Video-on-Demand and Premium Positioning.......... 8
4.1 Innovation Leadership in VoD ..................................................................... 8
4.2 Exclusive HD Contents — Vehicle for Pay TV Models ................................ 9
5 HDTV: Both a Necessity and an Opportunity .................................................... 10
6 The Authors ....................................................................................................... 11
7 The Company .................................................................................................... 12

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 “Are You HD Ready?”

1 Executive Summary

High definition television (HDTV) is on its way to becoming the television standard. HD-
capable hardware now finding its way into households is one of the factors furthering this
trend. Another is that the preconditions for HDTV are more and more frequently available in
the upstream added-value stages: content providers have made great strides in the
changeover to HD-capable production technology.

In addition, distribution is going through a transformation. Digitization of distribution channels

is progressing, and fully digital DSL networks are being expanded so that the bandwidths
required for the transmission of HDTV in the Internet protocol TV (IPTV) environment are
gradually becoming available. Advanced television markets such as Great Britain indicate
that there is a high demand for HDTV.

Satellite providers in particular have realized that HDTV is suitable as a distinguishing

feature in a largely saturated market. But cable network operators are already moving into
position.

At the same time, the window of opportunity for IPTV providers to use HDTV as a
distinguishing feature to set themselves apart from the competition is starting to close. High-
definition television is a special opportunity, and not merely a necessity, for IPTV in
particular. Being newcomers to the market, IPTV providers depend on innovations, much
more so than established cable and satellite network operators, to create competitive
differentiation, and offering a video-on-demand (VoD) service in HD quality is especially
suited to provide such differentiation.

Market players who want to offer content in HD quality must begin by assessing strategic
relevance:
„ First and foremost, it must be determined to which extent HDTV allows for competitive
differentiation.
„ An answer must also be found to the question as to when HDTV will have become a
market standard, i.e., when customers will regard the feature as the norm. Using HDTV
as a unique selling characteristic will be possible only in the present early market phase.
„ Then there is the question of the appropriate business and marketing model. Simple pay
models will undoubtedly be effective solely in the early market phase as well. So HDTV
alone should not be emphasized too heavily as a new source of revenue.
Fundamentally, however, HDTV is a powerful enhancement for a pay TV service, e.g., by
coupling HD quality with high-quality, perhaps even exclusive content.
„ Finally, technical requirements must be defined and examined with respect to feasibility.
One particularly important question for IPTV providers is availability of the required
bandwidths. So any decision about HDTV should always be made in the context of a
network’s general expansion strategy.

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 “Are You HD Ready?”

2 HDTV Is Becoming the Standard — Competitors Are

Moving Ahead
In 2006, only 20% of respondents knew what the term HDTV meant; in 2008, the figure had
climbed to over 60% — and it continues to rise. The expectations of television consumers
are growing as well. According to a recent Bitkom survey, more than 90% of respondents
expect a more intense television experience from HDTV. Asked why they are planning to
purchase a flat screen set, three out of four respondents ticked “because I want to watch
high-definition television.”

2.1 Customers Are Interested in High-Definition Moving Images

Purchases of HD-capable hardware are rising all over the world. In Germany, for example,
more than 80% of the 7.3 million television sets sold in 2008 were HD-capable, and Blu-ray
players, whether as stand-alone machines or as integrated console components, are
becoming increasingly popular in German households. In fact, HD consoles, with sales of
more than 800,000 units, represent the majority of Blu-ray players. Moreover, console and
PC makers have shown great interest in HD quality TV content. Moreover, the continuing
increase in screen sizes is encouraging interest in a high-resolution TV signal.

Comparable markets such as the USA, France, and Great Britain have high HDTV
penetration rates, indicating that HDTV is rapidly becoming the TV standard. In Great Britain,
just as one example, more than 30 channels are broadcasting in HD and more than 1.3
million television viewers are connected to a linear HDTV platform. A large majority of these
customers is also prepared to pay more for high-quality television — on average, over ten
euros more per month.

2.2 The HDTV Value Chain Is Closing

For a long time the industry worldwide had to deal with a “chicken-and- egg” problem. On the
one hand, TV content producers and aggregators were reluctant to make the necessary
investments in expensive HD studio equipment owing to the high costs and the low
penetration rates of HDTV hardware in households. Moreover, HDTV requires high network
capacities which in turn also cause high distribution costs. That is why HD recordings were
made primarily in genres with long term usability — especially feature films, documentaries,
high-quality reports, and international sports events.

On the other hand, end customers were slow to use HDTV services because of their low
level of availability and, in part, their great expense.

In some countries such as Germany, a rapid changeover to HDTV was hindered by the slow
progress in digitization — especially in the cable market. One example of the consequences
is the HDTV programming offered by the Munich media corporation ProSiebenSat.1 starting
October 2005. It never became profitable and was discontinued at the beginning of 2008.

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 “Are You HD Ready?”

Now, at the turn of the years 2009/2010, the situation has changed completely. A sufficiently
large market segment now owns HDTV-capable hardware, and television stations financed
by advertising (RTL Group, ProSiebenSat.1) have announced that they will begin
broadcasting in HDTV at the end of 2009/beginning of 2010, at the same time as the major
public television stations.

This development is being further accelerated by the aggressive market entry of Sky
Deutschland (formerly Premiere) with seven new HD channels in 2009, the planned launch
of an HD+ platform by the satellite operator Astra, and announcements that the service will
be expanded by the addition of four more HD channels in 2010. As the value chain closes,
HDTV is slowly developing into the TV standard of the future, so that none of the relevant
companies can afford to ignore it.

2.3 Competitors Moving into Position

As the HDTV market is becoming more established, TV distributors, especially satellite and
cable operators, are moving to increase their investments. The satellite operator Astra
currently offers the most comprehensive HDTV portfolio in Germany — in both the FTA (free
to air) and the pay-TV segments. TV broadcasters are purchasing more and more capacities
on Astra, especially because Astra's satellite platform offers the technological advantages of
satellite broadcasting, which enable bandwidths of up to 20 Mbit/s per channel to all
households in its territory.

Here and there, cable operators such as Kabel BW also offer a comprehensive HDTV
portfolio; in July 2009, Kabel BW was the only provider besides Astra which fed in both the
complete HDTV programming of Sky and an extensive free-to-air HDTV portfolio. This fast
entry of Kabel BW to the HDTV market was facilitated by its comparatively advanced level of
expansion in Baden-Württemberg using the cable standard DOCSIS 3.0, which enables a
higher total bandwidth per household in addition to a better reverse channel capability.

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 “Are You HD Ready?”

3 DSL: Technologically Inferior for Linear HDTV

3.1 HDTV Requires Bandwidth — DSL at a Disadvantage Long-term

From a technological viewpoint, classic broadcasting platforms such as satellite and cable
enjoy advantages over DSL-based transmission paths in the distribution of linear HDTV,
because “genuine” HDTV utilizing present technology requires a constant bandwidth of
about 10 Mbit/s per linear channel. This is a hurdle for DSL technology, especially with
regard to the so-called “last mile” to households. Satellite and cable are not subject to this
restriction. In contrast to DSL these technologies were designed right from the beginning for
the distribution of moving image content to a mass audience and can provide the required
bandwidths without any difficulty.

This is not likely to change in the future. Indeed, bandwidth requirements for HDTV will
presumably continue to increase in the future; among other factors, HDTV will be used more
and more on second TV sets as well as on recording devices, so that bandwidths of 20
Mbit/s will be necessary. And even this development is not the end of the road; the trend to
3-D TV which is already becoming apparent will take bandwidth requirements into different
orders of magnitude.

3.2 HDTV Affects Network Expansion

So how should IPTV providers deal with the high bandwidth requirements of HDTV with
regard to their network infrastructure? VDSL is one possible, albeit expensive, transition
technology which is capable (depending on the degree of network development) of satisfying
most HDTV customer requirements in the short to middle term. Moreover, market leadership
can be achieved temporarily for certain regions on the basis of fiber-to-the-home (FTTH) as
long as preconditions for the competing platforms (e.g., changeover to suitable set-top boxes
(STB) by the cable network operators) have not been created yet. However, a strategy of
this nature must be based on a general network expansion strategy. Owing to the expense
involved, a changeover to FTTH solely with an eye on HDTV is certainly not justifiable. But,
just as it does for many other applications, FTTH delivers all the preconditions for providing
linear HDTV in high quality and on a large scale.

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 “Are You HD Ready?”

3.3 In the Linear Sector: Me-too Positioning

For all of the reasons mentioned above, IPTV will be able to secure a market leader position
in the linear TV sector only in exceptional cases. Besides strictly technological factors, this
also has to do with the greater reach and consequently the larger number of regular
customers available to established satellite and cable operators, giving them advantages in
obtaining lower-cost linear HDTV content and in other areas. Satellite has yet another
strategic advantage for free-to-air (FTA) broadcasters; owing to the differences in the
business model (B2B customer relationship, i.e., broadcasters purchase satellite capacities),
FTA channels can be offered without charging monthly fees.

But because HDTV will become the established TV standard in the foreseeable future, and
because telco providers must act, a “me-too approach” is recommendable when it comes to
competitive positioning for linear TV. In this case, the most important linear HDTV channels
— especially public broadcasting and television financed by advertising — are offered.
Providers taking this approach do not focus on specialized channels for niche segments.
Instead, they offer a core portfolio of the most important HD broadcasters.

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4 Opportunities for IPTV: HD Video-on-Demand and

Premium Positioning
There is great consumer interest in being able to watch programs independently of time
constraints. While on-demand usage at the PC is taken for granted, it is only just starting to
become common at the television set. The time-shift function on digital television is already
extremely popular. Users are discovering the benefits of being able to decide for themselves
when they want to watch their favorite programs.

Leading IPTV providers have already started using this trend to their advantage and are
supplementing linear programming with VoD offers. Deutsche Telekom, for example, offers a
selection from about 3,000 video films which can be retrieved on a TV set, mostly in SD
(standard definition) format. But customer interest in high image quality is great for genres
typical of VoD, such as films and documentaries.

4.1 Innovation Leadership in VoD

In the non-linear sector, IPTV providers have an opportunity to utilize HD formats as a

characteristic to distinguish themselves from cable and satellite competition. Technological
restrictions mean that satellite platform customers must be satisfied with near-VoD services
which do not allow complete independence of use with respect to time. Another option is to
utilize DSL technology to create the reverse channel capability, which is a precondition for
genuine VoD. IPTV providers have an advantage over cable operators due to the fact that
their network technology, DSL, is by nature fully digital. The changeover for cable networks
in particular and the distribution of set-top boxes is expensive and requires customers to
take the initiative; that is why its progress has been sluggish.

VoD programming in HD quality gives IPTV providers the opportunity to position themselves
permanently as innovation leaders, while maintaining their lead over the competition. They
can address in particular the segment of young customers so highly prized by advertisers as
well as the “early adaptors” who are so important for generating popular use by creating new
stimulus and by offering help with buying decisions for less sophisticated customers.

There are other advantages in maintaining and increasing market leadership in the non-
linear sector through a high proportion of HD programming. For example, it serves to ward
off effectively competing Net-TV services. Net-TV brings content “over the top” from the
Internet to the TV screen. There is a threat that over the long term the IPTV infrastructure will
be substituted in this way. But for the foreseeable future, the weak point of Net-TV is its
transmission quality. Although technological enhancements in the recent past have
substantially improved this element, the quality of service cannot be guaranteed for
transmissions based solely on the Internet. HD formats in the context of IPTV make the
difference in quality even more striking.

Finally, IPTV providers have the opportunity to pursue an integrated VoD strategy. This
means making programming available to PC users as well as to television audiences. VoD
programming retrievable on the Internet which can be received in HD quality on the
television set opens up interesting upselling opportunities for the “TV proposition”.

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4.2 Exclusive HD Contents — Vehicle for Pay TV Models

Can new revenue sources be developed with the aid of HD content? The example of the
British market has shown that customers are definitely prepared to pay more for better
picture quality. But this willingness to pay more will decline as time goes by because, parallel
to market penetration, customers will begin to view HD quality as the norm — just as color
television is not given a second thought today. But no one will pay extra for a feature which
is taken for granted.

Nevertheless, it will be some time until HDTV has developed into the market standard and
pushed aside standard-definition TV (SDTV). In Germany, for example, the share of
households with HDTV capability will not exceed 15% within the next three years. Still,
decisions which will determine the future market position are being made today. Only now,
when HDTV is still in the early phases of its development, is there a chance to set oneself
apart from the competition and exploit consumers’ willingness to pay. This applies equally to
all providers and it affects linear and non-linear formats (VoD).

Being newcomers to the market, IPTV providers, more than established cable and satellite
operators, depend on the successful acquisition of new customers. And in a saturated
television market, that means enticing customers away from the competition. That will simply
not work unless customers are given compelling reasons to move. HD in combination with
exclusive content is such a compelling reason, because high-definition picture quality and
exclusivity are two components which, when brought together, turn the television experience
into something extraordinary for which customers are prepared to pay, provided the content
is also popular. Deutsche Telekom has recently taken this path by broadcasting soccer
matches live in HD which the company markets exclusively. This was an important step in
furthering its position as a pay TV provider and in cementing its position in the premium
segment.

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5 HDTV: Both a Necessity and an Opportunity

Potential HDTV providers must essentially give serious thought to the following key
questions:

1. How should we assess the strategic relevance of HDTV? The most important issue
here is the position HDTV holds as a differentiation factor. Satellite providers have the
opportunity to secure a competitive advantage in the linear programming sector due to
technological preconditions (i.e., higher available bandwidths and wide-area reach).
IPTV providers can achieve a strong position in the non-linear sector in particular.
Moreover, they have the opportunity to exploit high-definition television as a way to
solidify their innovation leadership.

2. When is the right point in time to introduce HDTV programming? The point in time
the service is introduced has a decisive impact on the effect realized by the HDTV
programming. If services are launched too early, they will find little acceptance in the
market (e.g.Pro7Sat1 in Germany). But reacting too late means lagging behind market
development. Any market launch should be preceded by an analysis of the extent to
which the HDTV value chain has been closed. What is more, the acceptance of HDTV
on the market will depend on the dynamics of the competition. One recommendation for
a better assessment is to derive HDTV market scenarios in which the positioning of
relevant market players is taken into account.

3. What business and market models are suitable? The willingness of consumers to pay
extra for HD quality is limited. In addition, this willingness will only be temporary, i.e. it
will only last as long as consumers do not take HDTV for granted. So HDTV should not
be overrated as a new source of revenue. Strategic benefits should be at the forefront of
deliberations, e.g., HDTV is highly suitable for strengthening a pay-TV service during the
early market phase.

4. What technological preconditions must be met? HDTV forces content providers to

undertake an expensive and time-consuming transformation of their means of
production. Satellite, cable, and IPTV providers must meet the requirements for
transcoding the broadcast HDTV signals. In addition, they have to make sure that
consumers can receive the HD content, and they have to give support to their
customers, e.g., in obtaining (new) set-top boxes. The additional expense of set-top
boxes for consumers should be an important element of the marketing model as well.
Finally, for IPTV providers there is the specific issue of sufficient availability of
bandwidths. In summary, HDTV decisions should not be made in isolation from the
network expansion strategy.

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6 The Authors

Falk Wöhler-Moorhoff is Managing Consultant in the Competence Practice Strategy &

Marketing. After earning his degree in business administration, he started his professional
career with a three-year stay in Singapore as territory manager. He then worked for a start-
up company in the e-commerce sector for two years before joining Detecon in 2001.

His project work is in the sector of innovation and focuses on topics related to telco-media
convergence. You can reach Falk Wöhler-Moorhoff at +49 160/8845344 or

falk.woehler-moorhoff@detecon.com

Tobias Hiddemann is Consultant in the Competence Practice Strategy & Marketing. He

works on corporate strategies and elements of strategic marketing in the telecommunications
field within the scope of the international “European Business Programme” (EBP). His
project work is concerned primarily with launch and post-merger integration projects,
especially in the areas IPTV, HDTV, and the topic of the future, “3-D TV”, including its
significance for IPTV providers. You can reach Tobias Hiddemann by calling +49
151/11816582 or writing to

Tobias.Hiddemann@detecon.com

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7 The Company

We make ICT strategies work

Detecon is a consulting company which unites classic management consulting with a high
level of technology expertise.

Our company's history is proof of this: Detecon International is the product of the merger of
the management and IT consulting company Diebold, founded in 1954, and the
telecommunications consultancy Detecon, founded in 1977. Our services focus on
consulting and implementation solutions which are derived from the use of information and
communications technology (ICT). All around the globe, clients from virtually all industries
profit from our holistic know-how in questions of strategy and organizational design and in
the use of state-of-the-art technologies.

Detecon’s know-how bundles the knowledge from the successful conclusion of management
and ICT projects in more than 160 countries. We are represented globally by subsidiaries,
affiliates, and project offices. Detecon is a subsidiary of T-Systems International, the
business customer brand of Deutsche Telekom. In our capacity as consultants, we are able
to benefit from the infrastructure of a global player spanning our planet.

Know-how and hands-on expertise

The rapid development of information and telecommunications technologies has an

increasingly significant influence on the strategies of companies as well as on the processes
within an organization. The subsequent complex adaptations affect business models and
corporate structures, not only technological applications.

Our services for ICT management encompass classic strategy and organization consulting
as well as the planning and implementation of highly complex, technological ICT
architectures and applications. We are independent of manufacturers and obligated solely to
our client's success.

Detecon International GmbH

Oberkasselerstr. 2
53227 Bonn
Telefon: +49 228 700 0
E-Mail: info@detecon.com
Internet: www.detecon.com

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