The rise of the digital-content market

The digital-content market is growing rapidly. It is forecast to reach USD135 billion a year by 2010, more than double the USD55 billion it is today. Much of this growth is attributable to the shift from traditional to emerging channels, rather than a significant rise in consumer or advertising expenditure. Although overall consumer spending on media and entertainment services is projected to increase at a compound annual growth rate (CAGR) of 6.2 percent between 2006 and 2010, the online component is expected to increase by 18 percent. The potential losers include distributors of physical content formats, such as DVDs, and traditional advertising channels.

This exponential rise in demand for digital content is attributable to five interrelated factors: technological improvements; the diffusion of high-speed broadband access; the popularity of online and wireless content; the increasing trend toward user-generated content; and the success of online advertising. On the technological front, for example, bandwidth speeds have soared from 56 kilobits per second (kbit/s) to 10 megabits per second (Mbit/s) and more, over the past decade, while compression technologies such as H.264 and MPEG-4 have made it possible to deliver broadcast quality video at lower speeds. The cost of software, storage and content creation tools, such as PCs and digital video cameras have also plummeted.

The prospective market for IPTV video is large. Fewer than four million households currently have IPTV, but the number of subscriptions is expected to rise to over 30 million by 2010, generating annual revenues of USD9.3 billion. Demand for mobile TV is likely to be lower, but annual sales could reach USD9.2 billion over the same period.

The economics of digital music distribution are even more compelling, because the delivery costs are lower and it provides access to a wider range of titles - the long tail of content that is viable online. Digital music is the most popular form of online content, thanks partly to the launch of integrated media players like the Apple iPod and next-generation mobile phones. Online distribution is also much cheaper and easier than physical distribution, which is one reason why global licensed digital music distribution revenues are forecast to reach over USD20 billion by 2010.

Demand for online and wireless video games (particularly networked games, where many people can play the same game at the same time) is likewise growing rapidly, with revenues expected to reach USD15.5 billion a year by 2010, while the global market for mobile gaming is forecast to reach USD11.2 billion a year, and that for mobile gambling USD7.7 billion a year, over the same period.

Investments in digital content market

One of the biggest risks that telecom providers have to confront is the cost of upgrading their networks. If they are to move from voice telephony to multimedia services, they will need to make substantial additional investments in their infrastructure, since IPTV, VoD and HDTV consume an enormous amount of bandwidth. Most operators initially plan to deliver IPTV over DSL, which is capable of delivering bandwidths of up to 8 Mbit/s, although 1.5-3 Mbit/s is more typical.

Even with higher compression rates like MPEG-4, delivering multi-room TV and the like, as well as voice, gaming, Internet surfing and other communication services suggests that every home must have a bandwidth of 20 Mbits/s.

Picture perfect

HDTV is emerging as a key differentiator in the TV video market. The quality of the images is much more detailed and much sharper than that provided by conventional TV, because it uses a higher concentration of pixels. But transmitting the extra pixels also requires much greater bandwidth. One HDTV channel could take up as many as five to eight standard channels without compression. Several U.S. cable and satellite broadcasters, including Comcast, Time Warner, Cox and DirecTV, have been offering HDTV for a few years. Overall HDTV penetration in the U.S. is forecast to exceed 80 percent by 2010.

The digital-content market offers the traditional telecom operators some significant opportunities for adding value, but it also carries perils, not least of which are the scale of the capital expenditure required to deliver advanced video services and the danger that some technologies or services, such as conventional TV, may soon become obsolete. Operators will need to manage their network investments wisely, given that the business rationale for implementing optical fiber depends on achieving extremely ambitious penetration levels and content sales. Telecom providers may also be underestimating the risk that popular content will become much more expensive as competition increases. Several media powerhouses are already trying to bypass the industry altogether by going direct to consumers. We believe that most operators should try to diffuse this threat by entering into partnerships with such companies, since the opportunities for telecom providers in content production are limited and the industry's role in the world of digital content is itself a source of contention.