IPTV: The battle for pay TV

IPTV is, at its simplest, television programming delivered via an internet connection (see panel). A month after its launch, there has been little fanfare for BT's service - advertising begins in earnest in the coming weeks - but the technology BT Vision is pioneering promises to shake up the pay-TV marketplace, both for viewers and advertisers.

BT Vision subscribers will essentially receive a souped-up version of Freeview. It will use the digital terrestrial service as a base, then aim to sell a range of content - from sport and films to kids' shows - on demand via a set-top box. While several broadcasters are experimenting with distribution of programming to PCs via their websites, the only comparable IPTV player in the UK is HomeChoice. So far, it has been restricted to London and Stevenage and 50,000 customers, though owner Tiscali plans a rebrand as Tiscali TV and a national roll-out from the first quarter of 2007.

There seems to be plenty to get excited about. IPTV allows consumers much greater control over what they watch and when they watch it, through facilities such as video on demand and catch-up TV, which enables people to watch programmes they missed earlier in the week at a time that suits them. While some of these services are available via cable and satellite, the bandwidth afforded by the internet provides viewers with greater - and more cost-effective - scope to construct their own personalised schedules from a vast array of providers.

Yet the potential benefits for advertisers could eclipse those for consumers. IPTV, it is argued, will offer fresh methods of marketing not available on existing pay-TV platforms such as Sky Digital and NTL, including the ability to target TV ads to a greater degree. Advertisers will be able to pick out specific demographic and geographic groupings, or even existing customers, according to the Internet Advertising Bureau. The interactive nature of the medium means advertisers can gain immediate and accurate feedback on who is responding to the ads in order to evaluate campaign effectiveness and plan future activity. This could help build deeper, richer relationships with consumers, who will, say IPTV's advocates, be able to move seamlessly from a standard 30-second slot to a longer, more informative ad, and ultimately to make online purchases.

That is the theory. To date, the reality has proved somewhat more limited. Admirably, BT refuses to overhype the offering in the short term, and BT Vision's services will be rolled out gradually. 'I strongly believe in this platform, but it will take time to develop and we don't want to promise too much up front,' says Antony Carbonari, director of interactive and commercial media at BT. 'We are very pragmatic about what we can and can't do, and there is a roadmap of developing functionality.'

Yet Carbonari believes that even with a relatively small customer base, BT Vision will appeal to advertisers keen to experiment and appear cutting-edge. He expects to attract advertising in some shape or form from this spring, including sponsorship of on-demand programming. By the middle of the year there will be more tools to make the advertising compelling, including dedicated advertiser locations (DALs) and dedicated advertiser channels (DACs).

With a DAL, a viewer can press a red button during a traditional 30-second ad to see an extended version, text, and so on, adding to their exposure to the advertising message. 'You can have DALs on other platforms, but the unique selling point of IPTV is that we are the "always-on" back channel because we are online, so response and navigation are very quick. We believe this will increase viewers' propensity to interact', says Carbonari.

While a DAL is linked to a broadcast ad campaign, a DAC will be available 24 hours a day, fully searchable through the BT Vision menu. It might even have its own channel number.

The DACs are likely to feature not only news and information about the brands running them, but also programming sponsored by them, and will provide advertisers with a chance to promote the benefits of their services to already-interested parties.

The internet platform means there is unlimited scope to create DACs, and 'the economies for advertisers to do that using IPTV are quite favourable', says Carbonari. A further advantage of IPTV-hosted DACs is that viewers can get them on demand, rather than having to wait for a scheduled time slot. An advertising management system that allows targeting and reporting will be available toward the end of the year.

Some of the claims for IPTV will sound familiar to marketers who witnessed the launch of interactive TV (iTV) on digital platforms (principally Sky) a few years ago. It is true that iTV offers many of these benefits already - DALs are established and Audi, for example, has a DAC on Sky. But interactive campaigns via iTV have so far proved of limited appeal to marketers - the red-button industry is worth just £20m a year, according to digital consultancy Decipher.

One of the major factors hindering interactive TV has been the cost, not least of accessing bandwidth. Crucially, IPTV should be able to deliver campaigns at a lower cost, opening them up to more marketers. Indeed, HomeChoice, despite its limited reach, has already attracted advertisers such as Honda that are keen to experiment with IPTV.

Of course, whether IPTV goes on to offer marketers a true alternative to Sky and NTL depends on the success of BT Vision and HomeChoice - and that is far from guaranteed.

BT had little choice but to extend into TV. It is fighting in a market fixated on convergence - the idea that content will be delivered to a single box and distributed around the home. BT Vision is an attempt to tap into the nascent consumer demand for phone and TV delivered over the internet and a response to players such as Sky and Carphone Warehouse entering the broadband market and the decline in BT's core fixed-line telephony business. The rationale is that the more services a firm can offer a household, the more likely that household is to stay with that company.

Lars Godell, principal analyst at Forrester Research, believes telecoms firms such as BT should view IPTV as a defensive, rather than a profit-generating, activity because of uncertainty about how popular the technology will prove. But Gartner analyst Sue Richards argues that BT's decision to enter the market is significant, and marks a step-change from a small-scale IPTV operator such as Tiscali. 'Broadband only took off when BT pushed it,' she points out. 'If it throws its weight and money at IPTV, that could be pretty powerful.'

BT is cautiously optimistic about the success of the service, expecting it to break even by 2010, based on a combination of advertising and subscription revenue. Within the next three to five years, BT Vision is aiming for about 3m customers, and is initially targeting its existing 3m-plus broadband subscribers. It claims to have wooed more than 50,000 already.

In the spring, it will extend its promotional efforts to Freeview's 7m customers, whom it hopes might be tempted by pay-per-view or a basic subscription package. The focus will then shift to tempting Sky and NTL subscribers who resent paying for content they don't watch.

Analysts argue that trying to build a healthy niche is preferable to an all-out assault on Sky and NTL. 'The UK pay-TV market is probably the most competitive in the world, so it is very difficult to break into,' says Annelise Berendt, senior analyst at Ovum. 'BT's targeted and stepped approach is very clever. Trying to compete head-on with Sky, which has, among other things, exclusive football rights, would require huge resources.'

Key to its success will be the quality of its content. Its business model relies on selling shows on-demand - but it must have something viewers are willing to pay for. BT Vision is already lining up content it hopes will attract such viewers, through deals with US studios including Disney, Dreamworks and Paramount. It has also secured music video deals with MTV and Sony BMG, and won the right to broadcast 46 'near-live' Premier League football games through a deal with Irish pay-TV firm Setanta.

Further major content deals are in the pipeline, but it is also considering speciality lifestyle content. 'There are lots of small, passionate special interest groups in areas from fishing to classic cars to bird watching, for whom we can provide niche content and highly targeted advertising,' says Carbonari.

Tiscali, meanwhile, is keeping its cards close to its chest in terms of the opportunities open to advertisers after the national roll-out of the rebranded HomeChoice. It has already provided DALs and DACs to a range of advertisers, but the feeling among analysts is that HomeChoice was ahead of its time when it launched in 1999, and will now struggle to compete.

So where does this leave marketers? Jonathan Wilson, senior account director at Red Bee Media, which has been making interactive ads for six years for clients such as Boots and HSBC, warns against jumping on the bandwagon for the sake of it. 'IPTV adds to the set of tools marketers can use to communicate their brand, but they have to ensure it supports the campaign objectives,' he says. 'You need to focus on what the medium can do in terms of reach and brand-building, rather than getting hung up on the technology itself.'

This is a view echoed by Andrew Constable, head of media at Coors. The beer brand has run three red-button TV ads on Sky, with 400,000 viewers interacting with its latest campaign, and Constable has yet to be swayed by the case for IPTV over Sky's offering. 'We are aware of the IPTV platform, but the prospect of being able to do anything there is probably a year away,' he says. 'Just because the technology is supposedly better does not guarantee a better result. Success comes from how you use it.'

The danger for both BT Vision and Tiscali is that by the time they build significant presence, their rivals will have raised their game. The launch of BT's service is already proving to be a catalyst for faster development of interactive ad opportunities.

For example, Sky will employ the broadband capability it acquired through the purchase of Easynet in 2005 in the launch of a video-on-demand service later this year via its 2m-plus Sky+ boxes. The boxes have space to insert ads that are directly relevant to the household. Sky is also planning to offer free bandwidth to advertisers to tie them into its interactive TV platform.

So, despite its clear potential, IPTV is far from a safe bet. The technology is untried and untested on a national scale, and the number of households accessing TV in this manner will be limited for some time to come. It is, after all, not yet proven that there is actually consumer demand for these services.

That said, advertisers should follow developments closely, as it is in their interests that IPTV bears fruit. Adrian Carpenter, head of Starcom Plus, concludes that marketers themselves can help determine whether IPTV gets off the ground. 'You can only establish what the consumer wants through trial and error,' he says. 'Advertisers and agencies can either sit and wait, or get involved in the beginning and help frame the offering.'

ESSENTIALS - IPTV

- TV content can be delivered over the internet in two ways: it can be accessed from a website on a PC (internet TV), or it can be supplied to a set-top box to be watched on a TV (IPTV). BT Vision and HomeChoice both use the latter system.

- An IPTV system is delivered via an internet connection but does not link up with the web. It is a closed network, known as a 'walled garden'.

- Because IPTV is delivered over a web connection, it sits naturally with phone and internet packages in a 'triple-play' bundled telecoms package.

- IPTV's benefits include catch-up TV, which allows viewers to watch a programme from a broadcaster's schedule free of charge at their convenience, and video-on-demand, which allows viewers to access programmes or films whenever they like. There is often a charge for this.

- The BBC conducted an experiment that allowed 5000 people to access BBC TV and radio content for up to seven days after broadcast. It found that most on-demand viewing took place between 10pm and 11pm.

DATA FILE - THE CONTENDERS

BT Vision

Launched: December 2006

Subscribers: n/a

What it offers consumers: About 40 Freeview free-to-air channels, on-demand film, music and TV shows, near-live football and catch-up TV. Free set-top box for those signing up to BT's broadband package. Paid-for content is charged on a pay-as-you-go basis.

What it offers advertisers: Sponsorship of on-demand programming, interactive ads around programmes and advertiser channels.

NTL (to be renamed Virgin Media)

Launched: Digital TV in 1998

Subscribers: 3m

What it offers consumers: More than 120 channels, including Sky Sports and Movies. TV-on-demand - a library of films, TV shows, music videos, along with a pick of the last seven days' TV.

What it offers advertisers: Sony recently launched the first 30-second ad on the TV-on-demand service for its Bravia TV. Virgin Media will increase opportunities once its service has been successfully rolled out to all customers.

HomeChoice (to be renamed Tiscali TV)

Launched: 1999

Subscribers: 50,000

What it offers consumers: More than 90 TV channels, including free-to-air and Sky Sports and Movies. On-demand access to TV shows, movies and music videos, along with a replay TV service.

What it offers advertisers: Targeted advertising and measured response through a range of packages, including dedicated advertiser locations and channels. Has created channels for clients including Honda and What Car?

Sky Digital

Launched: 1998

Subscribers: 8.3m

What it offers consumers: Multi-channel digital TV, offering six genre mixes of basic channels plus Sports and Movies. Sky+ allows pre-recording of programmes and will be upgraded this year to offer programmes on demand.

What it offers advertisers: Interactive, opt-in ads, traditional spot ads, broadcast sponsorship and dedicated advertiser channels. Ads on websites including Sky News and Sky Sports.