BT’s TV-driven success shows importance of understanding telco innovation

Emeka Obiodu, Principal Analyst – Industry, Communications & Broadband

BT recently released its full-year 2013/14 results showing that strong growth in its Consumer division helped offset poor performance in its other divisions. The Consumer division grew its revenues by 4% in the year, bolstered by strong take-up of TV and broadband services and its fewest number of fixed line losses in five years.

The trigger for this success is evidently BT Sports, a £2bn gamble aimed at halting the loss of broadband customers to rivals, especially BSkyB. Although BT is getting widespread praise now for its 2012 strategic gamble, too much emphasis was placed on whether BT could build a straightforward business case for generating new profits from selling sports TV to customers. That was never BT’s game plan.

BT’s bigger challenge was to secure its future as the pre-eminent broadband provider in the UK. This should be a stark lesson for utility-style industries that sell products and services that hardly change; strategic innovation is often much more important than product innovation.

The most important innovations for telcos are strategic

It is no surprise to us that BT has scored a strategic success with its decision to embrace a business model innovation for its TV service in 2012. While many commentators fretted about how BT would recoup the financial outlay, the company opted to give the sports TV channels away for free to its broadband customers. In doing so, BT changed the narrative: TV is now the commodity; broadband, especially fiber broadband, is now the premium. With BSkyB’s offer of free or subsidized broadband, the narrative in the market was that broadband was the commodity product while TV was the premium product.

These actions are in line with the findings of Ovum’s ‘How Telcos Innovate’ research project (see “Understanding How Telcos Innovate”). It remains clear that telcos must embrace a more holistic view of innovation. BT’s move to focus on an innovative business model, and the success that has come with it, exposes the limitations and dangers of the culturally-dominant, product-based view of innovation.

We summarised this broader strategic remit of innovation in our “net innovation benefit” metric, encouraging telcos to consider both new revenues and saved revenues in their innovation efforts. For example, the strategy of offering unlimited voice minute bundles is generally accepted to have helped telcos neutralize the OTT threat. BT now provides another example; even if the new strategy does not translate into instant profits, it has scored a huge success by using its innovation to protect and defend the future of its broadband business.

BT’s results provide empirical evidence of the success of its new strategy

BT’s recently released annual results show the progress in its Consumer division – the home of its TV services – since it adopted its TV strategy in 2012. In the year just ended, the division recorded 4.5% revenue growth, the only BT division to achieve growth in the year. In doing so, it increased its contribution to BT’s overall revenues from 21% to 22%. Broadband and TV revenues grew by 24% in the last quarter, helping consumer ARPU rise by 7% to £391 per year. BT now has 3 million direct BT Sport customers who watch via satellite, BT TV, online, or via its mobile app. An additional 2 million customers watch via wholesale deals with rivals such as Virgin Media.

BT claims it has signed up an additional 1.3 million fiber customers in the year and has now extended fiber coverage to 19 million homes, about two thirds of the UK. It added 249,000 fiber customers in the last quarter, its best ever quarter, and took 79% of all retail DSL and fiber broadband net additions in the market. Even the perennial trend of consumer fixed line losses has slowed, with only 49,000 lines lost in the last quarter, BT’s best performance in five years.

BT has used its deeper pockets well

There is often a concern that large organizations are incapable of innovative thinking. But when used appropriately, the financial muscle of large organizations can help them take big bets that much smaller companies cannot afford. BSkyB’s aggressive push was beginning to pose a threat to BT’s retail broadband business, and making it difficult for BT to convince customers to take up its more expensive fiber offer. With its deeper pockets (BT’s annual revenues are about £19bn compared to BSkyB’s £7bn), BT was able to mount a high-risk fight-back.

From June 2012, BT paid £738m per annum for a package of rights to English Premier League football, acquired ESPN’s TV assets in the UK, accumulated further sports content, and assembled a high-profile team to showcase its sports coverage. In November 2013, it agreed to pay £900 million for an exclusive three-year deal to show the UEFA Champions League.

For BSkyB and others, it is back to the drawing board to draw up a counter-attack strategy. BT may have secured sought-after sports content but BSkyB still dominates the pay-TV market and has rights to key non-sports content; for example it is the UK’s sole distributor of HBO programming. Meanwhile, BT’s anticipated foray into the mobile market could disrupt its strategic focus. Given that BT is the only one of Europe’s big former incumbent telcos without its own mobile network, its re-entry into the mobile market is sure to take up a lot of managerial attention.

The post BT’s TV-driven success shows importance of understanding telco innovation appeared first on Ovum.

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