Evolution of Hybrid TV and Over The Top (OTT or internet) TV

ALAN QUAYLE BUSINESS AND SERVICE
DEVELOPMENT

TV D EL I V E RY
E VO LU TI O N: H Y BR I D
TV A ND OV ER TH E TO P
(I N TER N E T) T V S TATU S
R E PO RT
REVIEW OF THE TECHNOLOGIES,
ECOSYSTEMS AND INDUSTRY‘S
ACHIEVEMENTS IN HYBRID TV AND OVER
THE TOP (INTERNET) TV.

CONTENTS

FORWARD .................................................................................................................................... 6

EXECUTIVE SUMMARY ........................................................................................................... 7

BRIEF HYBRID TV GEOGRAPHIC MARKET REVIEW ................................................................... 8
EMEA.............................................................................................................................................. 8
AMERICAS........................................................................................................................................ 9
ASIA PACIFIC ................................................................................................................................... 9
KEY LEARNING FROM HYBRID TV DEPLOYMENTS .................................................................... 9
TELCO CHALLENGES IN THE TV ECOSYSTEM ........................................................................... 10
IMPACT OF TECHNOLOGY ACROSS THE TV ECOSYSTEM ......................................................... 11
FUTURE SCENARIOS ..................................................................................................................... 12
OTT AND INTERNET TV .............................................................................................................. 13
RECOMMENDATIONS FOR PAYTV PROVIDERS ......................................................................... 14
RECOMMENDATIONS FOR IPTV / HYBRID TV SUPPLIERS ....................................................... 15
RECOMMENDATION FOR STB APPLICATION DEVELOPERS...................................................... 15
RECOMMENDATIONS FOR INVESTORS ........................................................................................ 16

INTRODUCTION AND BACKGROUND ............................................................................... 17

INTRODUCTION............................................................................................................................. 17
DEFINITIONS ................................................................................................................................ 18
WHY HYBRID TV IS EXCITING FROM A SUPPLIER’S PERSPECTIVE ......................................... 20
HYBRID TV STANDARDIZATION ACTIVITIES ............................................................................. 21
THE HYBRID STB ......................................................................................................................... 22
BRIEF HYBRID TV GEOGRAPHIC MARKET REVIEW ................................................................. 25
EMEA............................................................................................................................................ 25
AMERICAS...................................................................................................................................... 25
ASIA PACIFIC ................................................................................................................................. 26

UNDERSTANDING THE TV ECOSYSTEM .......................................................................... 27

PRODUCERS / DISTRIBUTORS AND STUDIOS ............................................................................... 28
BROADCASTERS............................................................................................................................ 29
CABLE NETWORKS....................................................................................................................... 30
ADVERTISERS ............................................................................................................................... 31
CANOE VENTURES ......................................................................................................................... 32
ADVERTISERS AND THE NETWORK PVR ....................................................................................... 33
PAYTV PROVIDERS ...................................................................................................................... 34
DEAL STRUCTURES ...................................................................................................................... 35

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IMPERFECT COMPETITION AND THE BATTLE BETWEEN NETWORKS AND PAYTV ................ 36
TELCO CHALLENGES ................................................................................................................... 37
IMPACT OF TECHNOLOGY ACROSS THE ECOSYSTEM................................................................ 37
FUTURE SCENARIOS ..................................................................................................................... 38

HYBRID TV AND OTT TV DEPLOYMENTS: TELCO / SATELLITE / CABLE ............ 40

AT&T HOMEZONE ...................................................................................................................... 40
VERIZON FIOS ............................................................................................................................. 41
BT VISION ..................................................................................................................................... 43
ORANGE TV .................................................................................................................................. 44
CANAL+ LE CUBE ........................................................................................................................ 46
DETSCHE TELEKOM T-ENTERTAIN ............................................................................................ 47
TELECOM PORTUGAL MEO ......................................................................................................... 48
TELEFONICA O2 CZECH REPUBLIC O2TV ................................................................................ 49
HANSENET ALICETV (NOW TELEFONICA O2) .......................................................................... 50
FASTWEB, TELECOM ITALIA, JAZZTEL AND TELEFONICA ...................................................... 50
COMHEM ...................................................................................................................................... 50
TELECOM NEW ZEALAND AND TIVO ......................................................................................... 51
TELECOM ITALIA OTT TV CUBOVISION................................................................................... 51
LEARNING FROM HYBRID TV DEPLOYMENTS ........................................................................... 52

HYBRID TV AND OTT TV BUSINESS MODELS ................................................................ 54

DRIVERS FOR HYBRIDTV ............................................................................................................ 54
BROADCASTER PARTNERSHIP? ................................................................................................... 54
BUSINESS MODEL ......................................................................................................................... 55
OPERATOR HYBRID TV SURVEY ................................................................................................ 55

INTERACTIVE SERVICES AND STB APPLICATIONS / WIDGETS .............................. 59

EBIF AND TRU2WAY.................................................................................................................... 59
EBIF .............................................................................................................................................. 59
TRU2WAY ...................................................................................................................................... 60
DVB-MHP (MULTIMEDIA HOME PLATFORM) AND GEM........................................................ 60
WTVML ....................................................................................................................................... 61
CE-HTML .................................................................................................................................... 62
OTHER STB APIS ......................................................................................................................... 63
VERIZON CASE STUDY ................................................................................................................. 63
SKY UK CASE STUDY ................................................................................................................... 65
INTERACTIVE SERVICE AND APPLICATION / WIDGET ROADMAP ............................................ 66

OVER THE TOP PROVIDERS ................................................................................................ 67

OVER THE TOP TV OPTIONS ...................................................................................................... 67
TRADITIONAL TV GOES ONLINE ................................................................................................. 70

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COMPARING UK OTT PROVIDERS ............................................................................................. 71
BBC IPLAYER ................................................................................................................................ 71
SKY PLAYER .................................................................................................................................. 72
ITV PLAYER .................................................................................................................................. 72
4OD (CHANNEL 4 ON DEMAND) .................................................................................................... 72
DEMAND FIVE................................................................................................................................ 72
PROJECT CANVAS ........................................................................................................................ 72
CONSUMER ELECTRONICS MANUFACTURERS ........................................................................... 74
SHARP ............................................................................................................................................ 74
TOSHIBA ........................................................................................................................................ 74
PANASONIC .................................................................................................................................... 74
LG.................................................................................................................................................. 74
WINDOWS MEDIA EXTENDER ....................................................................................................... 74
PHILIPS ELECTRONICS ................................................................................................................... 75
SAMSUNG....................................................................................................................................... 75
SONY .............................................................................................................................................. 75
INTERNET TV AND BRINGING IT BACK TO THE TV.................................................................... 75
MINIWEB........................................................................................................................................ 76
BOXEE............................................................................................................................................ 77
TIVO .............................................................................................................................................. 77
WALMART / VUDU ......................................................................................................................... 78
APPLETV ....................................................................................................................................... 79
AMAZON ON DEMAND .................................................................................................................. 79
CUSTOMERS’ CRITICAL MATH ...................................................................................................... 80
NETFLIX ......................................................................................................................................... 80
GOOGLETV.................................................................................................................................... 81
MAPPING THE LANDSCAPE .......................................................................................................... 82
SOCIAL NETWORKS AND TV ....................................................................................................... 84
SOCIAL TV .................................................................................................................................... 84
ONLINE TV NETWORKS............................................................................................................... 86
HULU ............................................................................................................................................. 86
ALSO RANS ................................................................................................................................... 87
CONCLUSIONS .............................................................................................................................. 87

FUTURE OF HYBRID TV & RECOMMENDATIONS ........................................................ 89

MARKET FORECASTS ................................................................................................................... 89
SERVICE ROADMAPS .................................................................................................................... 90
RECOMMENDATIONS ................................................................................................................... 91
RECOMMENDATIONS FOR PAYTV PROVIDERS ............................................................................. 91
RECOMMENDATIONS FOR IPTV / HYBRID TV SUPPLIERS ............................................................ 92
RECOMMENDATION FOR STB APPLICATION DEVELOPERS ........................................................... 92
RECOMMENDATIONS FOR INVESTORS ........................................................................................... 93

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TA BLE O F FI GU RE S
Figure 1. STB Breakdown by Revenue ........................................................................................................... 8
Figure 2. Example Hybrid TV Deployments: Europe ..................................................................................... 8
Figure 3. Rating Technology Impact on TV Ecosystem Members .................................................................12
Figure 4. Review of Future Scenarios, based on industry interviews ............................................................13
Figure 5. Battle Across the TV Landscape ...................................................................................................14
Figure 6. Mapping the Hybrid TV Landscape ...............................................................................................19
Figure 7. Total Pay TV Market Size (also includes Free Sat and Free Cable) .............................................20
Figure 8. Split between Pure and Hybrid TV Subscribers.............................................................................20
Figure 9. STB Breakdown by Revenue ..........................................................................................................23
Figure 10. Example Hybrid STBs (Picture sources: ADB, Amino, Pace, Pirelli, Motorola, Netbox,
Thomson, Yuxing, Sagem, Entone, Telsey) ....................................................................................................24
Figure 11. Example Hybrid TV Deployments: Europe ..................................................................................25
Figure 12. TV Ecosystem ...............................................................................................................................28
Figure 13. Change in Ad Spending in US (source Nielsen) ..........................................................................30
Figure 14. Advertising Value Chain ..............................................................................................................31
Figure 15. Trend in PayTV Subscription and Advertising Revenues ............................................................32
Figure 16. Global Growth in PayTV .............................................................................................................35
Figure 17. Examples of Deal Structures in the Value Chain .........................................................................35
Figure 18. Rating Technology Impact on TV Ecosystem Members ...............................................................38
Figure 19. Review of Future Scenarios, based on industry interviews..........................................................39
Figure 20. Verizon FiOS Architecture and Migration Plan (source Verizon) ..............................................42
Figure 21. Verizon FiOS Customer Numbers (source Verizon) ....................................................................42
Figure 22. How OrangeTV Delivers on Service Ubiquity (source Orange).................................................44
Figure 23. Simplifying the Purchase decision – Regardless the customer will get OrangeTV (source
Orange) .........................................................................................................................................................45
Figure 24. Orange TV Subscribers (source France Telecom) ......................................................................46
Figure 25. CanalSat Proposition (source CanalSat) ....................................................................................47
Figure 26. What are your drivers for Hybrid TV? ........................................................................................56
Figure 27. What are the Barriers to hybrid TV? ...........................................................................................58
Figure 28. Applicability of Hybrid TV...........................................................................................................58
Figure 29. Simplified EBIF Architecture .......................................................................................................59
Figure 30. Verizon’s STB interactive Technologies ......................................................................................63
Figure 31. Verizon Architecture ....................................................................................................................64
Figure 32. Verizon Widget Bazaar and Twitter Widget (source Verizon) .....................................................64
Figure 33. Example of WTVML Page............................................................................................................65
Figure 34. SkyNet Overview ..........................................................................................................................65
Figure 35. Plurality of OTT Options .............................................................................................................68
Figure 36. Trends in the Evolution of TV ......................................................................................................68
Figure 37. TV Landscape ..............................................................................................................................70
Figure 38. BBC iPlayer Demographics (source BBC) ..................................................................................71
Figure 39. Internet TV’s short History ..........................................................................................................76
Figure 40. Mapping the InternetTV on the TV Landscape ............................................................................83
Figure 41. TNO Field Trial (Source TNO) ....................................................................................................84
Figure 42. TNO Results (source TNO) ..........................................................................................................85
Figure 43. Commercial Opportunities Enabled by Social TV (Source TNO)................................................85
Figure 44. Battle Across the TV Landscape .................................................................................................88
Figure 45. Market Estimate of TV Subscriber Growth between pure-play and Hybrid Subscribers ............89
Figure 46. Data Table for TV Subscriber Growth ........................................................................................89

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F O R WA R D

Hybrid TV is not new; it‘s been within the industry‘s lexicon for many years. Back in 2004
hybrid TV was shown in many presentations as part of the industry‘s roadmap. So the transition
should not be a surprise, however, for many executives the shift to hybrid TV has been a quiet
revolution. Especially given two of the telco industry‘s most successful TV deployments, Verizon
FiOS (2.9M customers in Q4 2009) and Orange TV (2.1M customers in 2009), are both hybrid TV,
more specifically Hybrid Broadcast Broadband (HBB) TV. The whole of the payTV industry is now
taking notice of what this means.

The report will spend time on definitions, but for the purposes of this section; a payTV operator
covers IPTV (Telco TV), Cable TV, Satellite TV and Terrestrial TV.

This report also examines the state of Over The Top (OTT) TV (also known as Internet TV),
and the launch of Hybrid Broadcast Internet (HBI) services, such as Canal+ Le Cube and Telecom
Italia‘s CuboVision. Which rather than using a managed IP network use the internet. These
developments are opening up new battle fronts in the payTV landscape. This segment is evolving
rapidly so the report can only capture a snapshot.

The Telco TV (IPTV) market, though growing, remains less than 10% of the total payTV market
through to 2013. However, as cable, terrestrial and satellite providers examine interactive TV
options, they will likely go hybrid. A hybrid TV solution opens up a far broader market opportunity
that just Telco TV. That is part of the reason behind Ericsson buying Tandberg, Cisco buying
Scientific Atlanta and Technicolor‘s (previously called Thomson SA) growth across the payTV
industry.

The payTV market is predicted to reach 575M subscribers in 2012, compared to telco IPTV of
45M subs. The hybrid TV market is much bigger than just Telco TV, hence why it needs to be on
the agenda of all telco / TV suppliers. This report also examines the suppliers of both hybrid TV
solutions and hybrid STBs (Set Top Box).

An important section for all readers from the telco industry is the one that explains the TV
ecosystem and its terminology, which does cause some confusion with the telco lexicon. Neither
IPTV nor hybrid TV can be treated as an isolated industry; they‘re the delivery pipes for the much
larger, complex and well established TV industry. Hence understanding the TV ecosystem is critical
to appreciating the importance of hybrid TV, what created its success, and the attributes it brings in
helping payTV operators maintain their role in the evolving TV ecosystem.

This report brings together work performed on hybrid TV over the past year through over 200
operator and supplier interviews and online questionnaires, gathering information on deployment
experiences, market requirements, competitive landscape, and technology trends.

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E X E C U T I V E S U M M A RY

Hybrid TV is the delivery of a TV service through both broadcast and IP, for example many
European telcos use both the free to air digital terrestrial TV (DTT) for broadcast services
complemented by a network-centric IPTV service over a managed IP network (e.g. BT Vision) or a
network-agnostic service over the internet / unmanaged IP network (e.g. Telecom Italia‘s
Cubovision.)

BT Vision and Telecom Italia‘s CuboVision demonstrate the two main categories of hybrid TV:

 HBB TV (Hybrid Broadcast Broadband) is defined by the presence of a hybrid STB that
is part IPTV, using a managed IP network; and part broadcast, receiving the broadcast
digital content from a non-IP service such as Digital Terrestrial, Digital Cable, or Digital
Satellite.

 HBI TV (Hybrid Broadcast Internet) is defined by the presence of a hybrid STB that is
part IPTV, using the internet (unmanaged IP network); and part broadcast, receiving the
broadcast digital content from a non-IP service like Digital Terrestrial, Digital Cable, or
Digital Satellite. This is also referred to as Telco OTT (Over The Top) TV.

Related TV delivery categories include:

 Telco TV or pure IPTV is defined by a STB that only receives and displays video over a
‗managed IP‘ network, also called network-centric TV.

 Internet TV or Over-The-Top (OTT) TV only uses the open Internet to transport
video. Examples include Hulu and Amazon ondemand video service on TiVo, also
termed network-agnostic TV.

Hybrid TV is at the confluence of Broadcast TV, Network-centric TV (Telco TV) and Network-
agnostic TV (Internet TV). It is now table-stakes for any IPTV-based service. Hybrid TV is widely
deployed with a total of about 25M customers globally at the end of 2009.

Hybrid TV also expands the IPTV market for suppliers beyond pure-play Telco IPTV
deployments into the Satellite, Cable and Digital Terrestrial TV markets. This greatly expands the
revenue opportunity beyond the 46M subs of the Telco IPTV market by 2012, into the 575M subs of
the Satellite, Cable and Terrestrial markets by 2012.

Two of the most successful TelcoTV deployments are Verizon FiOS and Orange TV (France
Telecom), with 2.9M and 2.1M subscribers respectively as of the end of 2009. What they have in
common is they‘re both hybrid TV deployments. And in both those countries the satellite TV
providers are also adding hybrid TV capabilities to compete. A recent trend and one likely to be
explored through 2010 and 2011 is Telcos launching HBI (Hybrid Broadband Internet) services.
Telecom Italia is launching a HBI TV service called CuboVision, presenting a new battle front in the
payTV landscape.

Examining the split in sales (revenue) of STBs, shown in Figure 1, there appears to be a
significant shift in the market to hybrid STBs, whether they are HBB or HBI. The bulk of the
growth comes from Satellite TV providers adding interactive capabilities, though in the model it

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assumes many cable operators follow Verizon‘s lead with a Hybrid Cable strategy. North American
cable operators remain the most significant uncertainty if they will maintain their current strategy or
follow Verizon with a hybrid approach. Regardless, IPTV is in their strategy, it‘s just not yet clear if
they‘ll use hybrid TV as a stepping stone. OTT TV is expected to grow, but remain niche; generally
OTT services will be provided through consumer electronics such as TVs and DVRs, with service
platforms embedded into those devices, e.g. Vudu‘s (now Wal-Mart) plan to embed their technology
in consumer electronics.

Figure 1. STB Breakdown by Revenue

STB Split (sales) 2009 2013
Pure IPTV/Cable/Satellite 93% 73%
Hybrid 6% 25%
OTT <1% 2%

BRIEF HYBRID TV GEOGRAPHIC MARKET REVIEW

EMEA

Figure 2 provides a sample of European hybrid TV deployments, not all operators have
published their IPTV customer numbers so in some cases an estimate is made based upon earlier
quarter results and comparable market conditions. While Orange has shown reasonable growth
through 2009 of 650k customers Telecom Italia, Fastweb and BT have barely reached one tenth of
that growth. It is not just technology choice that impacts a Telco‘s success; the local market
conditions have an even greater impact.

Figure 2. Example Hybrid TV Deployments: Europe
Subs STB per
Country Operator 2009 (Est) sub Total STB Notes
Czech Republic Telefonica 175,000 1.1 192,500 Moto and ADB STB including DTT
Denmark Telia Stofa 25,000 1.1 27,500 Cable and IPTV - Moto VIP1920-9C & VIP1970-9C
France Canal+ (Le Cube) 100,000 1 100,000 Satellite/IP hybrid set-top box from Pace

France France Telecom 1,200,000 1.1 1,320,000 IPTV & DTT (Thomson) - but not all STBs are hybrid
France France Telecom 900,000 1.1 990,000 Orange Satellite and broadband service
Kudelski-owned Nagravision - widget and SDV
France Numericable 20,000 1 20,000 solution - annouced late 2009
Germany Sky 40,000 1.2 48,000 Satellite and IP (really OTT video)
Germany O2 32,000 1.2 38,400 IPTV & DTT (ADB-3800TW)
Germay Duetsche Telekom 800,000 1.2 960,000 Motorola VIP1616E
Greece On Telecom 50,000 1.1 55,000 IPTV & DTT (Sagem)
Italy Fastweb 390,000 1.1 429,000 IPTV & DTT, Telsey hybrid STB
Italy Telecom Italia 415,000 1.1 456,500 IPTV & DTT, Telsey Hybrid STB
Jordan Orange Satellite and IPTV - Netgen STB
Cable based solution using Netgem STB - launched
Monaco Monaco Telecom end of 2009
Norway Get Cable Cable Hybrid
Spain JazzTel 37,477 1.1 41,225 IPTV & DTT (ADB STB)
Spain Telefonica 589,551 1.1 648,506 Moto and ADB STB including DTT
Sweden ComHem 25,000 1.5 37,500
U.K. BT 450,000 1.7 765,000 IPTV & DTT - Pace hybrid STB
Total EU 5,249,028 6,129,131

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AMERICAS

Verizon dominates hybrid TV deployments with 2.9M FiOS TV customers at the end of 2009.
It uses a Hybrid Cable solution. It is unclear whether the US Cable operators will also follow
Verizon. AT&T‘s hybrid TV deployment with DISH failed and the numbers of customers
subscribing as reported by some analysts attributed all of the DISH subscribers to the hybrid TV
service when over 86% of customers were only taking satellite, not the hybrid TV service. US
Satellite operators DirecTV and DISH are launching HBI (Hybrid Broadband Internet) TV services.
LATAM is currently planning hybrid TV deployments.

ASIA PACIFIC

Dasan Networks is the main hybrid STB supplier to South Korea's two main hybrid Telco
providers, KT and SK Broadband, which both use a Hybrid Telco solution, and are at 1M and 850k
hybrid TV subscribers at the end of 2009 respectively. Also in Korea, DBS (Digital Broadcast
Satellite) operator SkyLife announced that it will launch Satellite and IPTV combined services in July
2009.

KEY LEARNING FROM HYBRID TV DEPLOYMENTS

Most IPTV operators have either deployed or are planning / evaluating hybrid TV. Hybrid TV
is becoming the dominant delivery mechanism for TelcoTV. Only those operators with fiber to the
home or VDSL (Very High speed Digital Subscriber Line) can consider a pure IPTV solution, e.g.
NTT and AT&T U-Verse. Verizon chose a hybrid approach for its FTTH (Fiber To The Home)
solution, to avoid technology risk, meet customers‘ base expectations, and enable a smooth migration
to all-IP when customer demand and economics dictate.

Operators are not partnering with broadcasters to deliver hybrid TV, because of the difficulty in
partnering with a payTV competitor, AT&T‘s HomeZone service demonstrated the problems of
such a partnership.

Cable operators in Europe are adding IPTV via MoCA (Multimedia over Cable); its not clear US
cable operators will follow such an approach. Satellite TV operators in Europe and the US are
adding OTT interactive video services with progressive download (HBI).

A few Telcos (e.g. Orange TV and Portugal Telecom) have acquired Satellite capacity to deliver a
comprehensive TV service across their country. However, most Telcos have taken advantage of the
free to air DTT service to complement their IPTV offer.

Telecom New Zealand provides an example of a hybrid service where they have partnered with
TiVo. TiVo provides the STB and interactive services, while broadcast TV is provided by DTT.
Such TiVo-partnering is becoming more common with Virgin Media and RCN also following this
route. It will be interesting to see if other small operators follow this strategy to market, rather than
making the investment in a managed IP network and the difficulty in making the necessary content
deals with a small customer base.

Most operators remain disappointed in the lack of customer take-up for interactive services, i.e.
VoD (Video on Demand). Penetration remains <10% penetration for most operators. Most
operators are examining ways to improve consumption.

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Operators in the strongest position are telcos with a Satellite and IPTV solution (e.g.
Orange/Telecom Portugal); and Hybrid Cable operators (e.g. Verizon, Com Hem). As they address
the key issues of simplicity in:

 purchase, one click

 installation, one box

 customer service, one number

They do not disappoint customers with limited geographic availability. They do not have any
partnership risks. They can deliver the full package of SD/HD (Standard Definition / High
Definition) channels customers expect with control over the access to avoid potential additional
charges.

Second tier hybrid solutions are:

 Satellite and OTT (e.g. Canal+) has no control over the broadband connection, hence
requires progressive download and could incur additional charges for broadband data
use. Content delivery network dimensioning is key for service quality with OTT services

 IPTV and DTT (e.g. BT Vision) has limited channel line-up compared to Cable and
Satellite, requires customers to ‗purchase‘ shows (this requires a change in behavior),
limited HD capability, and limited geographic coverage which leads to customer
disappointment.

 DTT and OTT partnership (e.g. Telecom New Zealand.) TNZ is simply a pipe
provider; in a more competitive market TiVo would likely go OTT as in the US.
Content delivery network dimensioning is key for service quality with OTT services.

All operators interviewed plan to continue their hybrid TV strategy into the medium term (next 5
years) at least. All are evaluating the role of video delivery to the PC and mobile within their existing
customer base. Note payTV providers are constrained by the limitations imposed by the content
owners on how their content is distributed.

Hulu and BBC iPlayer have much greater freedom of operation as they are run by the content
owners. This limits the payTV provider‘s ability to delivery OTT TV to any internet connected
customer, without significant charges. However, CuboVision from Telecom Italia provides an
example an operator exploring this model.

TELCO CHALLENGES IN THE TV ECOSYSTEM

Licensing of TV programming is relatively complex compared to most telecom negotiations.
Multiple parties must approve a content deal. Recurring payments are required for a variety of
players, including studios, unions, actors, etc.

There are few ‗fixed‘ prices most items are negotiated where audience reach, its relevance to the
prgramming, demographics and bargaining power all impact the charges. A variety of business
models are used including shares, splits, rates and commissions which are usually negotiated annually.

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In most regions cable and satellite own the vast majority of payTV homes; thus have a stronger
bargaining position than telcos.

In the UK much popular programming and distribution is owned by Sky/Fox. OFCOM (UK
regulator) is attempting to force a wholesale pricing model to break their monopoly of control over
popular content. But this is an exception in the market, and highlights the critical issue of a country‘s
specific situation with respect to TV in determining a telco‘s success. Telecom Italia suffers the same
problems as BT in payTV competitors owning content rights as well; however, France Telecom has
been able to build a strong position in payTV thanks to a more even competitive environment.

There is also a fundamental shift taking place, content owners are looking to the internet as a
way of removing the middleman of payTV providers: cable, satellite or telco. Telcos are trying to
break into a rather insular TV ecosystem, with a weak bargaining position (few customers). Hence
channels are weakening while the content owners are strengthening. This will continue to squeeze
margins for Telcos in payTV, and makes scale critical to success as that enables being able to buy
exclusive rights to popular local content (generally local sports rights.)

IMPACT OF TECHNOLOGY ACROSS THE TV ECOSYSTEM

There are a number of technologies impacting the ecosystem, as shown in Figure 3. Examining
each in turn:

 Internet video allows direct customer access; Studios (e.g. Disney, Time Warner) are
actively exploring this, e.g. Hulu which will be discussed in the OTT TV section.
This allows the content owners to have a direct relationship with the customer; note
Disney has done this for many decades.

 DVR (Digital Video Recorder) is increasingly popular across all IPTV offers;
however it reduces advertising viewers / effectiveness. As will be discussed in the
nPVR (network-based Personal Video Recorder) section it can empower the payTV
provider to take over some of the advertising revenue. For the producers is reduces
report fees and allows customers to ‗own‘ content rather than buy. For TV
Networks (creators of TV Channels, e.g. Discovery channel) is reduces effectiveness
of ad revenue which is a core component of their revenue.

 Consumer electronics such as TVs, DVRs, Apple TV, TiVo, PS3, Wii, and Xbox
enable consumption of video outside the existing value chain direct from the
Producers, e.g. Sony Store through the PS3. The on-device stores promote direct
consumption of content (e.g. Amazon onDemand or iTunes). These stores
understand the scale game and provide an efficient channel for content owners to
deliver directly to the consumer.

 Place shifting remains niche because of the technology involved. The main
beneficiary is the payTV operator which can offer as a service.

 IPTV: Weakens payTV providers bargaining position, as there are more competitors
negotiating over content.

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Overall content owners (Studios) are strengthening their position thanks to technology.
Operator must focus on how to make nPVRs and place shifting (TV Everywhere) more attractive to
maximize their position in the value chain. Taking Sky UK as an example, they have 62%
penetration of Sky+ DVR service (5.9 million homes, as of Q3 ‘09). The user experience is excellent,
press record once for the program, twice for the season pass. Season pass records all showings of a
program. So there are ways for payTV providers to focus on their core strength in the value chain,
which is the hours their customers spend watching TV.

Figure 3. Rating Technology Impact on TV Ecosystem Members

FUTURE SCENARIOS

During a series of industry interviews completed from Sept ‘09 through Feb ‘10 a number of
future scenarios were discussed with operators where they were asked to rate the probability, likely
timeline and discuss the reasons for their prediction. The results of which are shown in Figure 4.

There was general consistency in the responses across payTV operators and geographies.
Fragmentation is the most likely scenario in the near term with multiple channels weakening the
payTV providers‘ positions; content owners will use all available channels to explore their
effectiveness and return. PayTV margins will continue to erode as TV Networks continue to raise
carriage fees and customers remain unwilling to accept subscription fee increased on the basic
packages, as well as bundling with data and voice services further discounting the TV service.

The scenarios considered of medium probability include internet video going mainstream, but
this was seen as a long term trend and not winning out-right, rather becoming a preferred delivery
mechanism for some customers; especially those that prefer programmatic selection than channel
selection. Consumer Electronics becomes a service platform was considered medium probability but
remaining niche, e.g. Sony Store on PS3 will be used by PS3 gamers, but will not be a consumption
model for the masses. The web retailers were seen as the most significant uncertainty, some viewed
them as the most significant threat, and others saw it only for VoD for those customers with a
‗service platform‘ in their home, e.g. PS3, TiVo, DVR, Internet capable TV.

‗Business as usual‘ and ‗telecom operators dominating‘ were seen as unlikely scenarios.

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Figure 4. Review of Future Scenarios, based on industry interviews

Scenarios Description Probability Reason
Content owners will act as arms suppliers - use all
Multiple channels, channels and use the bargaining weakness of so many
Fragmentation
content owners channels to increase its margins as well as bypass them
dominate, confusion High over the web.
Sony is in a unique situation with the PS3, it can deliver
Consumer Customers move to VoD and 'download to own' from its extensive content
Electronics consumption of video library. Devices are more likely to be co-opted by the
Dominates from their PS3, Wii, Medium - content owners, e.g. BBC iPlayer on the Wii, or by web-
TiVo and Apple TV niche retailers.
Deals cut are at the sufferance of the content owners - if
Likes of Amazon on current deals impacted their other revenue lines, they
Web Retailers
Demand become Medium - would react. But as Amazon understands web retailing
Dominate
customers preferred medium they can not ignore and if customers express a preference
site. term they will follow the money.
Internet gets to the TV,
Internet Video and consumers People's habits change very slowly, internet video will be a
Dominates change their viewing Medium - part of customer's viewing habit. For some it will replace
habits long term MSO / DBS, >10 years before early majority are impacted.

Business as Usual Existing ecosystem Value chain is already changing, MSOs and Broadcasters
continues Low are working on adapting their business models
Telcos are in a weak position, and it will be weakened
Telcos Dominate Customers adopt the even as their customer numbers grow due to
bundle Low strengthening of the content owners position.

OTT AND INTERNET TV

In the battle across the TV landscape, see Figure 5, its clear content power is critical. Essentially
online TV networks can only be successfully run by the content owners. The wildcard in this
landscape is the customer, will they change their TV consumption behavior, and if so how fast. It‘s
clear some customers are moving towards programmatic consumption, but will it remain anything
more than a niche? For most content owners the current lucrative business model is likely to be
tough to move away from, as witnessed by the excessive salaries earned by ‗stars‘ compared to the
average citizen‘s wage.

Can the other Consumer Electronics manufacturers copy Apple in getting the user experience
right and building a store? Or will they focus on being a service platform for other web-based stores,
e.g. GoogleTV, Amazon on Demand, Netflix, Nokia Ovi and Microsoft. Its likely Apple will remain
the exception rather than the rule; hence Device Power and Computing Power may join forces to put
payTV providers under increased competitive pressure.

PayTV providers‘ strength today comes from their network, the hours customers spend watching
TV over their networks, and an established and sophisticated business model. So the skill comes in
ensuring they remain the content owner‘s best path to cash from the customer. Hence ensuring
continued high levels of consumption (viewing times), and leveraging their network-related assets
and services to maintain an edge, this is discussed further in the payTV provider recommendations.

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Figure 5. Battle Across the TV Landscape

Content Power

Studios

Broadcast / YouTube,
Cable Networks Facebook
Hulu
Google,
Network Telcos & Amazon,
Computing
Power MSOs Customers Power
Microsoft

TiVo
Consumer
Electronics
Manufacturers

Device Power

RECOMMENDATIONS FOR PAYTV PROVIDERS

Regardless of access technology hybrid TV must be a core part of all payTV providers‘ strategies.

PayTV providers‘ strength today comes from their network, the hours customers spend watching
TV over their networks, and an established and sophisticated business model. So the skill comes in
ensuring they remain the content owner‘s best path to cash from the customer. Hence ensuring
continued high levels of consumption (viewing times), and leveraging their network-related assets
and services to maintain an edge.

In reviewing the principles of greater consumption and how the PayTV providers can
differentiate:

 Recommendations

 From sophisticated algorithms, to simple things such as top rated, ―last night‘s
TV,‖ or ―what‘s new‖ – given the bounded problem PayTV operators should
be able to match Amazon‘s engine.

 Package up-sell, essential it‘s related to viewing habits. Local content matters,
payTV operators have the edge of their subscription-based business model (e.g.
Sky UK winning the Premier League rights.)

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 Community (Social TV)

 The ability to communicate and share with friends on STB, PC or mobile (TV
Everywhere) both real-time and off-line. Social communications is key, deliver
in a user friendly way across multiple platforms. Telcos should be solving this
as a general communications problem, so should be well placed to leverage their
solutions.

 Search integrated into the EPG and available across PC, mobile and STB

 PC remains the best search tool for programmatic content, discover on the PC
and view wherever (TV Everywhere.) Telcos have potentially an edge in the
payTV business as they understand all three channels and how to create a good
experience.

 Integrated security and content protection across the network and devices to keep
customers safe as their service becomes interactive.

For the payTV provider focusing upon the user is going to be critical to remain relevant in the
emerging TV landscape – as in the limit it‘s the customer that‘s going to decide.

RECOMMENDATIONS FOR IPTV / HYBRID TV SUPPLIERS

Hybrid support should be a core capability of all IPTV solutions, across the backend systems,
STBs and middleware.

Solution providers should look to the broadcast industry as potential customers especially
Satellite TV providers.

Standardization in solutions is critical. Hybrid TV should be treated as an opportunity to
harmonize solutions across the payTV and possible the consumer electronics space.

Integrated security and content protection across the network and devices to protect customers
as their devices come online.

Suppliers must aim to be the strategic partners of the payTV providers, supporting them with
new services and user experience innovations, enabling them to remain relevant to their customers.
Else there is a long-term risk of Internet TV / CE and Internet Stores taking a significant role and
reducing margins across the industry.

RECOMMENDATION FOR STB APPLICATION DEVELOPERS

Currently HbbTV has the industry‘s attention. Its supporters claim DVB MHP/GEM had its
chance; technology and customers‘ expectations have moved on. Operators appear more
circumspect, given the operational headaches in deploying the latest technology. We‘re likely to see
the CE manufacturer‘s take the lead on the implementation of CE-TML, if it works reliably at scale,
and customers enjoy the experience operators will likely follow.

Developers should look to CE developer ecosystems in building CE-HTML applications, while
operator developer ecosystems will likely be initially MHP/GEM focused, so developers should look
to build across both platforms as it will likely take 3/5 years before there is clarity on which platform
wins in the market.

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RECOMMENDATIONS FOR INVESTORS

Look for companies that have hybrid solutions applicable across a broad segment of payTV
operators. As the pendulum swings to hybrid solutions there will likely be opportunities for trade
sales into NEPs in middleware, STBs, recommendation engines, security and content protection
across the network and devices, social TV, STB app stores, and anything that improves the
customer‘s experience.

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I N T RO D U C T I ON A N D BA C KG RO U N D

INTRODUCTION

Hybrid TV is the use of a broadcast and IP connection for the delivery of a TV service. Hybrid
TV is not new; in 2008 the majority of IPTV STBs (Set Top Box) shipping in Europe had digital
terrestrial TV (DTT) tuners in addition to an IP connection. In 2004 hybrid TV was shown in many
presentations as part of the industry‘s roadmap, so the transition should not be a surprise, however,
for many the shift to hybrid TV has been a quiet revolution.

The purpose of this report is to present the currently state of play in the increasingly complex
payTV landscape with respect to hybrid TV; understanding the reasons behind the slow adoption of
Telco‘s payTV service. And given the complex TV ecosystem and rapidly developing technologies
what the future holds for hybrid TV not only within the Telco TV industry, but to the broader
broadcast industry and the emerging Internet TV (Over The Top TV, OTT TV) technology.

Pure-IPTV (also known as TelcoTV) has generally not proven attractive to customers; their
expectations are set by the broadcast TV service they receive on Satellite, Cable or over the air.
Those expectations include channel line-up, picture quality and geographic availability. Hence most
successful Telco TV deployments have used hybrid TV (using both broadcast TV and IPTV) to meet
customers‘ requirements.

Hybrid TV is at the confluence of Broadcast TV, Network-centric TV (Telco TV) and Network-
agnostic TV (Internet TV). It is now table-stakes for any IPTV-based service. Hybrid TV is widely
deployed with a total of about 25M customers globally at the end of 2009.

Hybrid TV also expands the IPTV market for suppliers beyond pure-play Telco IPTV
deployments into the Satellite, Cable and Digital Terrestrial TV markets. This greatly expands the
revenue opportunity beyond the 45M subs of the Telco IPTV market by 2012, into the 575M subs of
the total payTV market by 2012.

The STB vendors and STB middleware vendors have primarily supported hybrid TV solutions;
though we are now seeing the solution providers such as Ericsson, Huawei, ALU (Alcatel Lucent)
and Thomson focus on delivering pre-integrated hybrid TV solutions across TelcoTV, Cable and
Satellite. Currently there is a standardization ―battle‖ between industry groups such as HbbTV,
DVB, EBU, the open IPTV forum, and Project Canvas. The current bespoke approaches will limit
the market, it is important that the industry focus on achieving commonality across all delivery
methods as through the coming decade the payTV industry will be squeezed on margins between the
content owners raising prices and the customers unwilling to pay more for their subscription.

Two of the most successful TelcoTV deployments are Verizon FiOS and Orange TV, with 2.9M
and 2.1M subscribers respectively as of the end of 2009. What they have in common is they‘re both
hybrid TV deployments. And in both those countries the satellite TV provider is also adding hybrid
TV capabilities to compete. A recent trend and one likely to be explored through 2010 and 2011 is
Telcos launching OTT TV services. Telecom Italia is launching an HBI (Hybrid Broadcast Internet)
service called CuboVision, presenting a new battle front in the payTV landscape.

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DEFINITIONS

At first sight there would appear to be little cause for confusion on what hybrid TV means, it‘s
simply the combination of broadcast TV and IPTV for the delivery of a TV service. However, there
are many mis-understandings given the variety of broadcast technologies and the variety of ways TV
can be supported over IP. My objective in this section is to make clear the terms used in this report,
to better help the reader segment the quite fragmented hybrid TV landscape.

Hybrid TV is the delivery of a TV service through both broadcast and IP, for example many
European telcos use both the free to air digital terrestrial TV (DTT) for broadcast services
complemented by a network-centric IPTV services over a managed IP network (e.g. BT Vision) or a
network-agnostic service over the internet / unmanaged IP network (e.g. Telecom Italia‘s
Cubovision.)

BT Vision and Telecom Italia‘s CuboVision demonstrate the two main categories of hybrid TV:

 HBB TV (Hybrid Broadcast Broadband) is defined by the presence of a hybrid STB that
is part IPTV, using a managed IP network; and part broadcast, receiving the broadcast
digital content from a non-IP service like Digital Terrestrial, Digital Cable, or Digital
Satellite.

 HBI TV (Hybrid Broadcast Internet) is defined by the presence of a hybrid STB that is
part IPTV, using the internet (unmanaged IP network); and part broadcast, receiving the
broadcast digital content from a non-IP service like Digital Terrestrial, Digital Cable, or
Digital Satellite. This is also referred to as Telco OTT (Over The Top) TV, though the
rest of this report I will use the term HBI TV for consistency.

Related TV delivery categories include:

 Telco TV or pure IPTV is defined by a STB that only receives and displays video over a
‗managed IP‘ network, also called network-centric TV.

 Internet TV or Over-The-Top (OTT) TV only uses the open Internet to transport
video. Examples include Hulu and Amazon on demand video service on TiVo, also
termed network-agnostic TV.

A focus of many payTV networks is TV Everywhere, enabling a subscriber to receive their
service on a PC and mobile phone, in addition to the STB. To the PC and mobile phone the service
is generally delivered via unicast IP, not a broadcast multiplex. A broadcast TV provider can deliver
a video service to the customer‘s PC over the internet; this is not considered hybrid TV. The hybrid
TV definition focuses upon the core TV service the customers buy and view on their TVs in the
home, not ancillary service such as TV Everywhere.

There is an increasingly unclear need for managed IP for TV delivery because of: broadband
capacities increasing; compression technologies allow HD quality video within 4 Mbit/s; and content
delivery innovations such as INUK‘s simulcoding for rate adaptive delivery enable streaming TV
over unmanaged IP. As an example, Telecom New Zealand partners with TiVo for their TV service
delivery and does not use a managed IP network. This explains the growth in the use of HBI TV
from satellite, and why some telcos are also adopting this approach, e.g. Telecom Italia‘s CuboVision.

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With the basic HBB and HBI definitions, let‘s now go a little deeper, Figure 6 shows the hybrid
TV landscape, it sits at the intersections between Broadcast TV, Network-Centric TV and Network-
Agnostic TV:

 Broadcast is the traditional delivery mechanisms of Satellite, Cable and Terrestrial
(over the air);

 Network centric is Telco IPTV; and

 Network agnostic is OTT or Internet TV.

At the intersections of these delivery mechanisms resides hybrid TV.

At the intersection of Broadcast and Network Centric (termed HBB, Hybrid Broadcast
Broadband) lies:

 Hybrid Telco is the combination of Digital Terrestrial TV and IPTV, e.g. BT Vision;

 Hybrid Cable is the combination of Cable TV and IPTV, e.g. Verizon FiOS; and

 Hybrid Satellite is the combination of Satellite and IPTV, e.g. Orange TV.

At the intersection between Broadcast and Network-Agnostic is the HBI TV category:
Terrestrial / Satellite + OTT. Examples include Canal+ Le Cube, INUK, and TI‘s CuboVision. The
final intersection is between network-centric and network-agnostic, which though technically feasible
is not yet a focus of any business model.

Figure 6. Mapping the Hybrid TV Landscape

Broadcast Network-Centric

One way Cable Hybrid Telco
Terrestrial TV (Terrestrial + IPTV)
Telco IPTV
Hybrid Cable
Satellite TV
(Cable + IPTV)
Hybrid Satellite
(Satellite + IPTV)

Terrestrial /
Satellite + Telco / Cable
OTT + OTT

Over The Top (OTT) TV
(Internet TV)

Network-Agnostic

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WHY HYBRID TV IS EXCITING FROM A SUPPLIER’S PERSPECTIVE

The Telco TV (IPTV) market, though growing, remains less than 10% of the total payTV market
through to 2013, shown in Figure 7. However, as cable, terrestrial and satellite providers examine
interactive TV options, they will likely go hybrid, and hence a hybrid TV solution opens up a far
broader market opportunity, see Figure 8, were there are about 25M hybrid TV subs today, growing
to 150M sub by 2013. That‘s why we‘ve seen the consolidation of Ericsson and Tandberg, Cisco and
Scientific Atlanta and Technicolor‘s (previously called Thomson SA) growth across the payTV
industry.

The payTV market is predicted to reach 575M subs in 2012, compared to telco IPTV of 45M
subs, so the addressable market for hybrid TV is potentially vast. We‘ll explore market sizes and
addressable revenue later. My point here is simply to highlight that the hybrid TV market is much
bigger than just Telco TV, hence why it needs to be on the agenda of all telco / TV suppliers.

Figure 7. Total Pay TV Market Size (also includes Free Sat and Free Cable)

700

600

500
Subscribers (M)

Satellite
400 DTT

300 Cable
IPTV
200

100

0
2008 2009 2010 2011 2012 2013

Figure 8. Split between Pure and Hybrid TV Subscribers

700

600
HybridSatellite
500 Hybrid DTT
Subscribers (M)

Hybrid Cable
400 HybridIPTV

300 PureSatellite
PureDTT
200 Pure Cable
Pure IPTV
100

0
2008 2009 2010 2011 2012 2013

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HYBRID TV STANDARDIZATION ACTIVITIES

There are many bodies working on the standardization, interoperability, and harmonization of
hybrid TV including:

 Open IPTV Forum, http://www.openiptvforum.org/

 ETSI MCD (Media Content Distribution), http://www.etsi.org/

 EBU (European Broadcast Union), http://www.ebu.org/

 HbbTV industry partnership, http://www.hbbtv.org/

 ATIS IIF (IPTV Interoperability Forum) http://www.atis.org/IIF/

 Broadband Forum http://www.broadband-forum.org/

 DVB MHP / GEM (Multimedia Home Platform / Globally Executable MHP) are two
related sets of Java based open middleware specifications

 Project Canvas, http://www.projectcanvas.info/

Hybrid Broadcast Broadband TV or ―HbbTV‖, is a pan-European industry-led initiative aimed
at harmonizing the broadcast and broadband delivery of entertainment to the end consumer through
connected TVs and set-top boxes. Founding members include Astra, IRT (Institut für
RundfunkTechnik), ANT, Philips, OpenTV and French HD Forum; today the membership is much
broader, www.hbbtv.org has the full list. The HbbTV specification is based on elements of existing
standards and web technologies including OIPF (Open IPTV Forum), CEA, DVB and W3C (CE-
HTML).

HbbTV represents one solution but it is not the only one. Its specification was submitted to the
ETSI standardization process at the end of 2009. The EBU members have been able to comment
on the draft specification and a large majority of their comments have been taken into account. EBU
have indicated the wish for a smooth standardization process and quick adoption of the HbbTV
standard. HbbTV largely satisfies the service and system EBU‘s requirements. EBU consider that
HbbTV has adopted a simple, pragmatic evolutionary (step-by-step) approach and does not seek
over-complex solutions from the very beginning.

The essence of the HbbTV specification, published by ETSI is:

 CE HTML is a language for creating user interface pages for Consumer Electronics
(CE) devices such as televisions. These CE-HTML pages are typically placed online
and are based on a 10-foot user interface for easy control from a distance. It is
profiled on XHTML and associated standards with special CE-HTML extensions.

 OIPF (Open IPTV Forum) Java Script Extensions for TV

 DVB Broadcast IP signaling.

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Currently HbbTV has the industry‘s attention. Its supporters claim DVB MHP/GEM had its
chance; technology and customers‘ expectations have moved on. Operators appear more
circumspect, given the operational headaches in deploying the latest technology. We‘re likely to see
the CE manufacturer‘s take the lead, if it works reliably at scale, and customers enjoy the experience
operators will likely follow.

Within the DVB MHP/GEM group there is some consternation that the wheel is being re-
invented given the coverage of their standard across most of the hybrid TV space; there is also a
degree of concern on the maturity of CE HTML/Flash based solutions compared to DVB
MHP/GEM. The purpose of this report is not to get into a technical discussion, rather simply
report on the current standard of standardizations, that simply operators have choices in standards
based hybrid TV, and it‘s really up to them to decide which is more appropriate.

The BBC noted back in 2008 that it must support 14 different video formats and four different
Digital Rights Management or DRM formats to ensure that its online ‗catch-up TV‘ service, the
iPlayer, will work across different internet and mobile platforms. This fragmentation was part of the
BBC‘s motivation for a single specification to access its content. Project Canvas appears to be stuck
is some political wrangling, while HbbTV has maintained its momentum and is now published
through ETSI.

THE HYBRID STB

The key component of a hybrid TV deployment is a hybrid STB. Worldwide spending on IP
set-top boxes (STBs) is expected to grow from $2.4B in 2009 to roughly $3.5B in 2013. These figures
take into consideration the growth of over-the-top TV and the integration of virtual STBs directly
into TV sets. Though STBs will remain the de facto device for video presentation in the home, and
for most IPTV deployments the STB accounts for between 50-60% of network capex (capital
expenditure)

There are currently about 5-7 manufacturers with a worldwide presence, with another 10-15
manufacturers strong in their respective regions and/or among domestic customers. Across all
payTV STBs, Motorola and Cisco are the leaders in the market, with Thomson in third place.
Specifically for IPTV STBs the top four suppliers are Motorola, Cisco, Huawei, and Amino.

Motorola has historically been the leader in supplying STBs to the cable industry and has been
able to transfer this experience in developing STB to the telco IPTV market. Motorola acquired
Swedish STB developer Kreatel back in 2006. Kreatel, like Amino, was an early developer of IPTV
STBs for the telco market and has customers throughout Western Europe. Motorola took the Linux-
based Kreatel software and ported it onto its own hardware, allowing Motorola STBs to interact with
a wide range of IPTV middleware offerings. Motorola main IPTV customers include AT&T,
Verizon, TeliaSonera, and KPN.

Following Motorola are Huawei, Cisco, and Amino. Huawei's STB deployments are in China,
with significant volumes in China Telecom and China Unicom. Cisco, like Motorola, is consistently
one of the world's leading STB suppliers to cable operators (thanks to the acquisition of Scientific
Atlanta). Cisco‘s customers include Belgacom, TELUS, Deutsche Telekom, Croatia's T-Com, and
SES Americom.

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Typical STB pricing for TelcoTV range between $100-160:

 Europe being at about $130;

 North America at $160; and

 APAC/CALA (Asia Pacific / Central and Latin America) at $100 due primarily to
the lower HD and DVR demand in those regions.

Hybrid TV STBs tend to have two price bands, the Hybrid Telco and Satellite being $100-140,
and the Hybrid Cable being $140-200. OTT STBs have a large variation in price between $150 and
$300 depending on memory, functionality and volume. The figures are based on operator and STB
supplier interviews undertaken in Q3 and Q4 of 2009.

Examining the split in sales (revenue) of STBs is shown in Figure 9. There appears to be a
significant shift in the market to Hybrid STBs, whether they are HBB or HBI, the bulk comes from
Satellite TV adding interactive capabilities, though in the model it assumes many cable operators
follow ComHem with a Hybrid Cable strategy. North American cable operators remain the most
significant uncertainty if they will maintain their current strategy or follow Verizon to a Hybrid
approach. Regardless IPTV is in the strategy, it‘s just not yet clear if they‘ll use hybrid TV as a
stepping stone. OTT is expected to grow, but remain niche; generally OTT services will be provided
through the consumer electronics such as TVs and DVRs.

Figure 9. STB Breakdown by Revenue

STB Split (sales) 2009 2013
Pure IPTV/Cable/Satellite 93% 73%
Hybrid 6% 25%
OTT <1% 2%

Some telcos are starting to find their early momentum in signing up new subscribers waning.
Verizon, AT&T, PCCW, Fastweb, and others all have shown signs of slowing subscriber growth,
which has reduced their demand for new STBs. Some of the slow down is likely due to economic
conditions which are slowly improving, but cable and satellite competitors have also responded with
updated services and pricing.

Worldwide hybrid telco STB revenue reached about $700M in 2009, with EMEA and APAC
dominating. Typical STB pricing was $110-120, though it‘s expected to drop through the next 2/3
years at a rate of 3-5%. ADB leads telco hybrid STB market with 30% of revenue; Dasan Networks
is in second place for revenue at 16%. ADB is EMEA's primary provider of hybrid STBs, with
contracts at Telefonica and BT; Dasan Networks is the primary supplier to South Korea's two main
hybrid IPTV providers, KT and SK Broadband.

Worldwide hybrid cable STB revenue reached about $400M in 3Q09, with Verizon, the world's
largest deployment dominating that figure; and its main supplier, Motorola, with near 100% market
share. Typical STB pricing was $120-$140.

Hybrid TV has been around for many years, and especially in the STB domain there are many
choices. Figure 10 shows some of the available STBs, simply to demonstrate the breadth of Hybrid
STBs available on the market.

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Figure 10. Example Hybrid STBs (Picture sources: ADB, Amino, Pace, Pirelli, Motorola, Netbox,
Thomson, Yuxing, Sagem, Entone, Telsey)

Hybrid Telco ADB-3800/10TW Advanced HD STB Amino Mood 400-020 Series HD STBs Pace DiT5750 / DiT7421 HD Hybrid IP STB

Pirelli DVR100 STB Motorola VIP1616T HD DVB-T/IP Dual DTT Tuner NETBOX N8000 SERIES

Thomson DBI2210E / DBI8500E Yuxing YX-5912T - Hybrid HD STB Sagem ITAD81 HD

Hybrid Cable (DVB-T) Motorola VIP1920-9C & VIP1970-9C Netgem NETBOX N7000 SERIES Motorola VIP1920-9C & VIP1970-9C (Telia Stofa)

Hybrid Cable (QAM) Motorola Hybrid QAM/IP HD Set-Top (Verizon) Entone Amulet IPTV Receiver

Hybrid Satellite Pace DS830 (Sky Germany) Pace Canal+ Le Cube

Hybrid Internet Telsey blobBox (Inuk)

Hybrid Telco Gateway Entone Hydra IP Video Gateway Entone Janus IP Media Hub

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BRIEF HYBRID TV GEOGRAPHIC MARKET REVIEW

EMEA

Figure 11 provides a sample of European hybrid TV deployments, not all operators have
published their IPTV customer numbers so in some cases an estimate is made based upon earlier
quarter results and comparable market conditions. While Orange has shown reasonable growth
through 2009 of 650k customers Telecom Italia, Fastweb and BT have barely reached one tenth of
that growth. It is not just technology choice that impacts a Telco‘s success; the local market
conditions have an even greater impact.

Figure 11. Example Hybrid TV Deployments: Europe

Subs STB per
Country Operator 2009 (Est) sub Total STB Notes
Czech Republic Telefonica 175,000 1.1 192,500 Moto and ADB STB including DTT
Denmark Telia Stofa 25,000 1.1 27,500 Cable and IPTV - Moto VIP1920-9C & VIP1970-9C
France Canal+ (Le Cube) 100,000 1 100,000 Satellite/IP hybrid set-top box from Pace

France France Telecom 1,200,000 1.1 1,320,000 IPTV & DTT (Thomson) - but not all STBs are hybrid
France France Telecom 900,000 1.1 990,000 Orange Satellite and broadband service
Kudelski-owned Nagravision - widget and SDV
France Numericable 20,000 1 20,000 solution - annouced late 2009
Germany Sky 40,000 1.2 48,000 Satellite and IP (really OTT video)
Germany O2 32,000 1.2 38,400 IPTV & DTT (ADB-3800TW)
Germay Duetsche Telekom 800,000 1.2 960,000 Motorola VIP1616E
Greece On Telecom 50,000 1.1 55,000 IPTV & DTT (Sagem)
Italy Fastweb 390,000 1.1 429,000 IPTV & DTT, Telsey hybrid STB
Italy Telecom Italia 415,000 1.1 456,500 IPTV & DTT, Telsey Hybrid STB
Jordan Orange Satellite and IPTV - Netgen STB
Cable based solution using Netgem STB - launched
Monaco Monaco Telecom end of 2009
Norway Get Cable Cable Hybrid
Spain JazzTel 37,477 1.1 41,225 IPTV & DTT (ADB STB)
Spain Telefonica 589,551 1.1 648,506 Moto and ADB STB including DTT
Sweden ComHem 25,000 1.5 37,500
U.K. BT 450,000 1.7 765,000 IPTV & DTT - Pace hybrid STB
Total EU 5,249,028 6,129,131

AMERICAS

Verizon dominates hybrid TV deployments with 2.9M FiOS TV customers at the end of 2009.
It uses a Hybrid Cable solution. It is unclear whether the US Cable operators will also follow
Verizon. AT&T‘s hybrid TV deployment with DISH failed and the numbers of customers
subscribing as reported by some analysts attributed all of the DISH subscribers to the Hybrid service
when over 86% were only taking satellite, not the Hybrid service. US Satellite operators DirecTV
and DISH are also launching HBI (Hybrid Broadband Internet). Within LATAM (Latin America)
several operators are planning hybrid TV deployments.

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ASIA PACIFIC

Dasan Networks is the main Hybrid STB supplier to South Korea's two main hybrid Telco
providers, KT and SK Broadband, which both use a Hybrid Telco solution, and are at 1M and 850k
hybrid TV subscribers at the end of 2009 respectively. Also in Korea, DBS (Digital Broadcast
Satellite) operator SkyLife announced today that it will launch Satellite and IPTV combined services
in July 2009.

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U N D E R S TA N D I N G T H E T V E C OS Y S T E M

A root problem for operators in launching TV services has been their lack in understanding of
the TV ecosystem. This section reviews the ecosystem and the challenges it presents to operators
which has in part driven their focus to hybrid TV.

The TV ecosystem is mature, with well established relationships and its own nomenclature. It is
quite different to the equally self-contained telecoms ecosystem. A key difference is in telecom
pricing is clear, published and comes with standard contracts. In the TV ecosystem everything is
negotiated, scale matters, everyone in the chain takes a cut, and advertising funds about half the
industry.

Figure 12 shows a high level view of the TV Ecosystem. A common problem telcos have with
the nomenclature is how the term network is used. Basic networks or premium networks, also know
as cable networks create TV channels such as Discovery or the History Channel by commissioning
Studios and Producers to create TV shows.

Cable Network TV channels are only available through payTV providers (not available over the
air). The name was created before today‘s myriad of payTV providers with their ‗networks.‘ These
basic and premium networks do not own an access network, rather distribute their TV channels to
the headend of the payTV operators: MSOs (Cable), Telcos (IPTV), and Satellite TV.

Broadcast networks and broadcast stations, also know as broadcasters, create TV channels, such
as ABC, BBC, and CBS; that are available over the air. That is any TV with an aerial can receive the
channels, it does not require a payTV provider. The broadcasters commission Studios and Producers
to create TV shows. They own Broadcast Stations that transmit the ‗over the air‘ signals. Broadcast
Networks also provide their TV channels to payTV operators. Generally payTV operators are
required by their license to carry these Broadcast channels.

The payTV operators own what telco-people consider to be the network. They include cable TV
operators, also called Multi Service Operators (MSOs); telcos, IPTV operators; and Satellite TV
operators, also called Direct Broadcast Satellite (DBS).

Underlying this industry are the advertisers, which funds the industry as about $160B annually.

The structure shown in Figure 12 is essentially the same in all countries, only scale is different
and some functions are under the same organization, e.g. the role BBC plays across studio, producer,
network and broadcaster. America dominates the media industry, with only China and India coming
close in achieving critical mass for international media industries

Bundling of TV channels, content and rights creates many custom deals across the ecosystem.
There is no standard contract, virtually everything is negotiated. This is also an ecosystem that is
slow to change, where long established personal relationships matter. Telcos have struggled, and
continue to struggle to break into this established ecosystem. Also this ecosystem is slow to respond
to technology innovation; as content owners become more confident in a direct to consumer model
over the internet; and service platforms such as TVs and DVRs open up, such invariance to change
could be their downfall.

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Figure 12. TV Ecosystem

Advertisers
Agencies, Media
Buyers and Brands

Producers / Basic Networks
A&E, Discovery, TNT,
Distributors UK Gold, Sky1 Satellite
Sony Pictures TV, DirectTV, Sky
King World, Warner Premium Networks
Bros TV, BBC HBO, Showtime Cable
Comcast, Cox,
Studios VoD Aggregators Rogers, Virgin media
Disney, NBC, iN Demand, TVN
Universal, 20th Telcos
Century Fox, Warner Broadcasters Verizon, AT&T, BT,
Bros, BBC ABC, BBC, CBS, France Telecom
NBC, Fox, ITV

PRODUCERS / DISTRIBUTORS AND STUDIOS

Examples in this category include Viacom, Sony Pictures, and Disney. Producers / production
companies pitch their ideas to the network executives (Cable Network or Broadcast Network) for
initial selection. Then through initial rolls, pilot episodes and audience testing successful shows are
commission for a season, usually a run of 10-12 episodes.

Alternatively the Broadcast or Cable Network can identify a gap in the programming and then
commission a production house. This tends to occur less often. An oft quoted example is when Fox
commissioned David E. Kelley to produce a show that would appeal to young, urban women at a
slot where they lost share (mainly men) to sports – he created Ally McBeal.

Generally the Cable or Broadcast Network will invest in development costs. A one hour
primetime drama costs $3m-8m per episode to produce; one hour comedy costs $1m-2m; while a
one hour reality TV show costs $250k-400k, hence why such cheap programming plagues so many
TV channels.

US has well established ecosystem with both national and world-wide syndication business that
creates a significant barrier to entry for other countries, only China and India can generate a similar
scale. The BBC is able to produce a few shows based on its national license fee, but it lacks scale to
compete with the US

Syndication is where Broadcast / Cable Networks shows repeats of shows shown on other TV
Channel. Syndication allows the show to be repeated on other Networks in the same country or in

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other countries. Payment can be by cash or advertising slots which the show‘s producer sells.
Residuals are payments made to the producer (80%) and actors (20%) for any repeat showing –
hence shows must be tracked. Free to air broadcasts use audience estimates. Also audience size can
impact charges; that is lower audience figures results in higher per viewer charges, i.e. the content
owner ensures a minimum. Given the payTV operator‘s revenue is directly proportional to audience
this has cause many Telco TV services to struggle with profitability as customer numbers come
below target.

Networks like ITV in the UK create TV channels such as ITV3 and ITV4 to repeat the
syndicated shows to improve viewership and hence improve advertising revenues. Separately
negotiated are rights for DVD rentals / sales, NVOD, VOD for cable, VOD for internet, and other
merchandizing. Hence the cost basis for a payTV‘s content can be quite difficult to calculate.

BROADCASTERS

Broadcasters are granted a license to broadcast TV over the air. In the US there is a network of
affiliates (over 1500), that is broadcasters who carry other networks signals in addition to their own
because of how licenses were granted. History has a big impact on this industry that has been in
continuous operations since the 1940s. My purpose is to help provide some insight into the industry
as an outsider looking in.

Network affiliate (or affiliated station) is a local broadcaster which carries some or all of the
program line-up of a television or radio network, but is owned by a company other than the owner
of the network. This distinguishes such a station from an owned-and-operated station (O&O), which
is owned by its parent network.

Because over the air audience is small (1500 stations), carriage fees have been falling for Stations,
that is the money paid to them by Broadcast Networks. Instead Broadcast Networks have been
increasing fees to cable and satellite operators. Broadcast licenses are granted nationally or regional, a
national license will have regional content requirements

In many countries the Broadcast Network owns the Broadcast Stations. In the US it is a
collection of owned and affiliate stations, each operating in a ‗designated market area,‘ which
approximates to major urban areas, e.g. NYC, LA, Cincinnati, Chicago. Advertising is sold both
nationally by the broadcast network and locally by the broadcast stations

Broadcasters are quite profitable with >40% margins, in the US they generate roughly $30B in
revenue. The Broadcast Network produces prime-time content, and the stations fill up the schedule
outside prime time with local news, sports and syndicated shows (repeats). A national 30 sec ad slot
can cost up to $1M during a show like America Idol, while typically it‘s in the range of $300-600k

In the US, Broadcast Networks are considering whether to cut the broadcast stations (audience is
diminishing) and just use cable, satellite and the internet. However, in most Western European
countries there is a strong over the air service, where the focus is on using the internet to
complement their broadcast service, e.g. the BBC iPlayer.

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CABLE NETWORKS

There are approximately 300 cable networks in the US. These are not MSOs, rather TV
channels that are available over payTV networks. Approximately 85% of US homes subscribe to
payTV. Cable now accounts for over 60% of prime-time viewers, the other 40% being across
broadcast and satellite.

Advertisers have recognized this shift as Cable Networks advertising spend over the first half of
2009 increased spending while the rest of the market fell by 15%, see Figure 13. US Cable Networks
generate $21B in ad revenue (2008), compare to the $18B (2008) broadcasters earn for a much
smaller audience.

This is an example of bargaining power, broadcasters negotiate as 5 networks, while there are
hundreds of cable networks which weakens their position. With the growth in IPTV providers,
network bargaining power will further weaken. Cable Advertising is sold nationally; cable networks
leave some slots available to local networks, which is a source of revenue that provides an incentive
to carry the channel. For viewers of US TV, those are the lower quality adverts that tend to insert
themselves part-way through national advert and be for a local car dealership.

Cable Networks are also paid on a per-sub per-month basis for the right to carry a channel by
the MSOs and Telcos. Agreements span 5-7 years, can be quite difficult to negotiate, there have
been many public arguments. MSOs typically pay $20 per sub per month for programming. Cost of
programming is the major driver for the rise in CableTV pricing over the past decade.

Premium Networks charge an additional fee (direct to subscriber) and focus on movies/sports
and are usually advertising free. Premium channel either operate a revenue share, fixed fee per sub,
or fixed fee per network with the payTV provider. Again there are many custom deals. Last year
was tough for ad spending, but cable bucked that trend as shown in Nielsen‘s figures in Figure 13.

Figure 13. Change in Ad Spending in US (source Nielsen)

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ADVERTISERS

Advertisers underpin the whole of the TV value chain, Figure 15 shows the trend between
advertising spend and subscription fees. In North America subscription feed exceeded advertising
revenue in 2006, this happening in Europe in 2009. However, this combination of subscription and
advertising enables the creation of quality content, and as a business model is tough to break into.

Advertisers (Brands) hire agencies to create campaigns as well as create the ads. Advertisers
generally work on commission basis on a % of campaign spend, though latterly the model is moving
to a retainer or ROI (Return on Investment) as brands become much more focused on results than
simply how much is spent.

Advertisers are quite traditional, it‘s an old industry, and this provides a major impediment to
new technologies / business models being adopted in the industry. Advertisers focus is the 30 sec ad
on a given TV channel reaching a specific geo-demographic.

The Cable industry has created Canoe Ventures which is the cable industry‘s attempt to provide
a common way for the advertisers to better target their ads and also enable interactive advertising.
This is discussed in the following weblog article, http://www.alanquayle.com/blog/2009/03/why-
the-mobile-industry-needs.html. Examining the mobile industry, to date advertising has failed
because the industry does not understand the advertisers and their needs, hence if Canoe Ventures
can succeed it will be a template for other industries.

Media planning and buying is the most relevant part of the Advertising industry to the TV value-
chain, this is performed by specialist ―media-buyers.‖ They aggregate inventory (advertising slots)
across multiple campaigns to lower costs. About 10 years ago most media buyers were spun-out of
agencies, now they‘re being bought back into the large agencies to create full-service agencies.

Figure 14. Advertising Value Chain

Advertisers (Brands)

Agencies Producers
Media Buyers

Cable Broadcast
Cash Flow
Networks Networks
Content Flow

MSO, DBS Stations

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Full-service agencies tend to work on a combination of fee-based and commission based
compensation. The fee is paid by the entity for which the marketing is being done. The
commission is a payment from the network or payTV provider to the agency and is usually about
15% of the cost of the advertisement.

Full-service, or media-neutral advertising agencies produce work for many types of media,
creating integrated marketing communications, also termed through-the-line (TTL) advertising. The
"line", is the traditional marker between the media that pay a commission to the agency and the
media that do not. Full-service agencies are also known as traditional advertising agencies for the
client, wherein the client satisfies almost all their advertising or promotional needs with the same
organization. This type of agency provides advertising services such as strategic planning, creative
development, production, media planning, media buying, and other related services such as sales
promotional activities, direct selling, design, and branding, etc.

As mentioned at the start of this section the trend is for subscription revenues to exceed
advertising revenue, as show in Figure 15, where in 2006 in the US subscriptions exceeded
advertising revenue, and similarly last year (2009) in Western Europe similar inversion. It‘s clear the
subscription/advertising model is not going away, but subscribers are becoming an important aspect
of the value chain, and hence their decisions/preferences will impact the value chain more greatly.

Figure 15. Trend in PayTV Subscription and Advertising Revenues

140

120

100
Industry Rev $B

USA PayTV
80 US Ad Rev

60 EU PayTV Rev
EU Ad Rev
40

20

0
2006 2007 2008 2009 2010 2011 2012

CANOE VENTURES

Canoe Ventures is backed by most of the US cable companies, including Comcast, Cox,
Cablevision, Charter, Bright House, and Time Warner. Its purpose is to make cable's advanced
advertising applications easier to buy and use, and on making the results easier to measure. This is
quite a customer focused mission; not one mention of technology or esoteric audience qualifiers.
The head of Canoe Ventures is David Verklin, the former CEO of Aegis Media Americas. Critically
they‘ve brought in an ad-man, so the organization understands what the customer (advertising
industry) needs.

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Evolution of Hybrid TV and Over The Top (OTT or internet) TV

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