Exploring the effects of developments in data compression on the satellite video market in Western Europe

(1)

(2)

Exploring the effects of developments in data compression

on the satellite video market in Western Europe

Author Maarten Leo Hanssen

Date 22nd of June, 2007

City Groningen

Organization SES Global (Luxembourg)

Supervisor Mr. C. De Hauwer

Educational institute University of Groningen (The Netherlands)

Faculty of Management and Organization Department of International Business Landleven 5, 9747 AD Groningen

(3)

Preface

One of my hobbies is distance running. Jeroen de Lange Boom, a friend of mine, knows that and in March 2005 he forwarded me an e-mail from PricewaterhouseCoopers informing students about an upcoming event in which the organization would select a certain number of students to train and participate in the half marathon of Budapest. Unfortunately, I registered too late. However, when I told that to Jeroen, he made a phone call and suddenly I was first on the reserve list. The next day I got a phone call that I could enter in the event and about six months later I was in Budapest, enjoying a glass of wine on a cruise ship on the river Danube. I met an interesting man on the ship called Robert Vernimmen and he told me about this company where he was working in Luxembourg: SES Global. If I ever heard from this company… Another three months later I was presented my own office in Château de Betzdorf, Luxembourg.

I would like to thank a number of people that were of help along the way in finishing this thesis. First of all, thank you Jeroen for pointing out the opportunity and grabbing the phone. Second, thanks to Robert Vernimmen, for telling me about SES, introducing me to Christophe De Hauwer and running with me. You showed me how to die in the last mile. Also, my sincere thanks to Christophe De Hauwer and Philip Mordecai. Christophe, thank you for trusting me with that model. Phil, thank you for showing me what working in a commercial environment is all about and for explaining me the world of mass media. Then to all people from the château: thank you for everything, especially the champagne in the courtyard… As well, thanks to my supervisors from the university: Jos van Kesteren and Caroline Quispel. Mister Van Kesteren, I always have to think five times before I understand what you are saying, but in the end (I think) I get it (and not forget it).

In the end, my sincere gratitude goes to my parents. Thank you for your everlasting patience. I appreciate it.

Maarten Leo Hanssen

(4)

Management Summary

Problem context and methodology

This thesis is the result of a six months internship at SES Global in Betzdorf, Luxembourg. SES Global is a world leader in satellite communications. In this traineeship a model was designed to forecast the demand for satellite capacity for the global video market. The global market can be divided into six parts of which the most important for the organization is Western Europe. For this market there was an information need with respect to changing market conditions as a result of improved data compression technology. Therefore it was decided that in addition to the traineeship a research project was to be put into effect. The goal of this project was to give insight in which direction the satellite video market in Western Europe is heading, and to provide recommendations on possible ways to strategically manoeuvre to relevant developments. The research question was as follows:

What effects have current developments in the field of data compression techniques on the future of the Western European satellite video market and how can SES optimally manoeuvre to these effects?

To answer this research question, the project was divided into three sub questions each carrying its own analysis: a partial market analysis with a PEST-analysis, an impact analysis using a revised competitor strength grid, and a scenario analysis. The sub questions are listed below.

1.a What does the satellite video market look like in terms of product, size, market share, number of competitors and regional dispersion?

1.b What are the current relevant developments in the Western European satellite video market resulting from improved data compression techniques? 2. How well are DTH operators in different regions within Western Europe equiped to deal with these developments?

3. What could possible future scenarios for the satellite television market look like and how do these possible future scenarios relate to SES’s current competitive situation?

(5)

Results

The PEST-analysis revealed four relevant developments that have penetrated the satellite video market as a result of ever improving data compression techniques:

1. HDTV; 2. IPTV; 3. DTT;

4. Closing of the global release gap.

HDTV and the closing of the global release gap are positive drivers of satellite infrastructure. HDTV stands for high definition television and it offers the consumer an enhanced viewing experience by enlarging the number of pixels. Because it requires more data capacity per channel broadcasted, satellite is the ideal data transfer mode because all other infrastructures lack the bandwidth capacity. The global release gap is the actual time gap between the premiere of a film in the cinema and the appearance of it on DVD and television. This time gap is constantly getting smaller as a result of piracy and an improved viewing experience at peoples homes. As a result, viewers often subscribe for some form of pay-tv and wait for the production to appear on television, which benefits DTH operators.

IPTV and DTT are the main negative drivers of satellite television. IPTV offers the viewer various interactive options which make it an attractive consumer offer. Cable and DSL are best suited as infrastructures for IPTV as they can handle more uploading signals which are required for IPTV. DTT is the follow-up of analogue television. Although no serious content offers are likely to occur on DTT, it is still a considerable substitute for satellite as it is actively promoted by the European Union. It is cheap and local broadcasters see it as a viable option.

The impact analysis using the competitor strength grid solely analysed the impact and immediacy of the four drivers of the market mentioned above. The main DTH operators in Western Europe all have their own monopolized market situation (with the exception of Scandinavia and Germany) and also have to deal with different market situations because data infrastructures, demographic structures and viewing cultures differ. As a result, they are not equally well equiped to deal with the four drivers of the market as explained in the preceding paragraphs. Viasat (Scandinavia), Canal Digital (Scandinavia), Nova (Greece), and Digital + (Spain) face difficult environments. The

(6)

other operators are not necessarily better equiped for dealing with the recent developments; they are however in better competitive position because of less developed competing infrastructures and slow take-off of new developments and innovations. TV Cabo (Portugal), Easy.tv and Premiere (both from Germany) are in the best competitive position to manage the threats coming from IPTV and DTT and to exploit the opportunities in HDTV and the closing of the global release gap.

The scenario analysis presented and analysed three possible future scenarios for the DTH market in 2012:

1. Evolution of the Status Quo;

2. Revolution towards another content provision system; 3. Accelerated convergence of TV, stereo and PC.

The scenarios differ in the impact and immediacy of events. Scenario 1 creates an image of a market in which IPTV has no real market share yet and in which more and more HDTV channels emerge. Scenario 2 shows a rapidly changing market situation in which satellite is not the leading television infrastructure anymore, but just one piece of the big puzzle. Scenario 3 goes even further to suggest a completely different home media viewing situation. Consumers do not have separate equipment anymore but use their home media installation for all content reception. This mostly works in combination with a triple or quad game offer, which benefits most terrestrial infrastructures but not satellite. Analysis of SES’s current projects suggests that the organization itself actively pursues the Evolution scenario.

Recommendations

Recommendations can be given for the short and the long term. On the short term SES needs to build on the success of HDTV, by finding a way to provide more channels to the end viewer fast. There are not enough HD channels available to gain serious subscription growth for DTH operators. The most obvious way to do this is by acquiring a DTH operator because this gives SES a ready subscription base, content base and direct influence in the content that is being broadcast. In the long term IPTV will be the main way of experiencing television. Therefore, SES needs to find a way to play a role in the IPTV offers. The best way to do this is by building IPTV Super Head Ends and providing the capacity of it to local terrestrial operators that have a direct connection to

(7)

List of Tables and Figures

Tables

Table 1.1 Data Gathering

Table 3.1 Main drivers of HD

Table 3.2 Strategic uncertainty versus impact and immediacy

Table 4.1 European digital transition progress report

Table 4.2 West European cinema visits scaled

Table 4.3 Two variables determining HDTV CSG score in a region

Table 4.4 HDTV quantified in the competitor strength grid

Table 4.5 IPTV subscriptions as indicator of negative driver of satellite television

Table 4.6 Final Competitor Strength Grid for DTH operators

Table 4.7 CSG Scores per Satellite Operator for 2005 data

Figures

Figure 1.1 SES Group structure after the New Skies Acquisition

Figure 1.2 Conceptual model: the role of the demand forecasting model in the

organization

Figure 1.3 Conceptual model for Western Europe

Figure 1.4 Process model for quantitative modelling

Figure 1.5 Process model for qualitative analysis

Figure 2.1 Competitors in terms of channels broadcast

Figure 2.2 Eutelsat Activities

Figure 2.3 Hispasat Activities

Figure 2.4 SES Global Activities

Figure 2.5 Telenor activities

Figure 2.6 DTH Operators scattered through Western Europe

Figure 2.7 DTH subscribers per platform in 2005

Figure 3.1 Five Forces Model complemented by PEST-drivers

Figure 3.2 Strategic uncertainty categories

Figure 3.3 DTT offers throughout Western Europe

Figure 3.4 Strategic Uncertainties categorized

Figure 4.1 DTT offers throughout Western Europe

Figure 4.2 DTT penetrations as a percentage of terrestrial-only households

Figure 5.1 Scenario Analysis

(10)

List of Abbreviations and Definitions

• ADSL: Asymmetric Digital Subscriber Line; an advanced form of DSL

• Cable head-end receiver: This is the organization or the technical team that facilitates the receiving of the signal when it is not being sent directly to the home but goes to the end consumer by a cable or other sort of terrestrial network. They are also responsible for the signal quality but than for the terrestrial part of the route

• CSG: Competitor Strength Grid

• “Designing is, taking into account the specific limitations, the choosing of a model of a desired future system in an environment that realizes goals.”1 This definition is chosen because it recognizes the limitations that are applied here. Furthermore, it is consistent with the other methodological literature

• DSL: Digital Subscriber Line

• DTH: Direct-to-Home (television signal)

• DTT: Digital Terrestrial Television; the analogue television signal follow-up • DVD: Digital Versatile Disc or Digital Video Disc. There are already advanced

forms in the market like HD DVD and Blu-Ray • EPG: Electronic Program Guide

• Footprint: The area on Earth that a satellite beam covers is called the footprint • FTA: Free-to-Air (television signal)

• FTTH: Fibre-to-the-Home; hybrid data infrastructure of cable and glass fibre • Global Release Gap: The time that elapses between the premiere of a film and

the appearance of it on DVD and on television • GPRS: General Package Radio Service • GPS: Global Positioning System

• HDTV: High Definition Television

• HSDPA: High-Speed Download Packet Access • IPTV: Internet Protocol Television

• ISDN: Integrated Services Digital Network • ISP: Internet Service Provider

• LCD: Liquid Crystal Display; form of television interface hardware

(11)

• MPEG: Motion Pictures Expert Group; MPEG-2 and MPEG-4 are both data compression techniques

• Multiplex: Multiplexing is the activity of receiving multiple signals and bundling them into one signal which is sent to a receiver of some sort on Earth

• NTSC: National Television Standards Committee (television standard used in America and Japan)

• PAL: Phase Alternating Line (television standard used in large parts of the world) • PC: Personal Computer

• PDA: Personal Digital Assistant

• PPV: Pay-per-View (television channels)

• Satellite video market: In this research project the satellite video market is contained of all DTH (Direct-to-Home) providers

• SECAM: Séquentiel couleur à mémoire, French for "sequential color with memory" (television standard used in large parts of the world)

• STB: Set-top box or digital receiver for processing digital television signals • Telco: Telephone company

• TFT: Thin-film Transistor; form of television interface hardware

• Transponder: processes the signal that comes in from Earth in such a way that it can be sent to another place on Earth by not losing too much quality

• TV: Television

• UMTS: Universal Mobile Telecommunications System

• Uplink provider: This is the organization or the technical team that facilitates the sending of a satellite signal to the satellite itself. It is not responsible of the satellite but only for the quality of the signal

• VoD: Video-on-Demand; form of interactive television which allows for specific content to be viewed at demand

(12)

1 Problem Statement

1.1 The SES Group

1.1.1 What is the SES Group?

SES stands for Société Européenne des Satellites and it is a network of satellite operators located throughout the world. It operates through its wholly and partially owned regional operating companies and controls a fleet of around forty spacecraft.

SES is owned by a small base of large shareholders of whom the most important are GE Capital, Luxembourg state, and a limited number of international financial institutions and investors. In 2005 SES made revenues of € 1.258 billion and a profit of € 381.9 million and towards the end of 2005 SES acquired New Skies Satellites, which is currently the fifth largest satellite operator in the world, for the amount of $ 1.16 billion.

Figure 1.1 therefore resembles the SES Group ownership structure after the New Skies acquisition. Appendix 1 shows the geographical markets of SES’S operating companies. This shows that the SES Group truly is a global company. SES employs some 1,000 people. SES Global is the management holding company of the group. It defines and coordinates the strategy of the group companies and allocates resources to pursue the individual and combined strategies.2

Figure 1.1 SES Group structure after the New Skies Acquisition 3

(13)

The main business that the SES group of companies is involved in is the leasing of capacity on satellites. Every satellite contains a certain number of transponders each of which has a certain capacity for receiving and sending data. Demand for satellite capacity is always expressed in numbers of transponders (TPX).

The market for satellite services can be divided in several segments:

1) Voice and data excluding Internet (1,162). This mostly includes international and intercontinental telephone calls and customers are mainly telephone companies;

2) Internet trunking (395). This includes all Internet traffic. Customers are Internet providers;

3) Direct-To-Users (DTU) satellite commercial services (462). This segment includes corporate networks, IP access and military traffic;

4) Video (2,355). This includes all direct-to-home signalling (i.e. with a dish on the roof) but also to all cable head-end receivers (e.g. Casema in The Netherlands). The worldwide demand for transponders per segment in 2004 has been put between brackets.4 Data for 2005 is not yet available. In the context of SES, the Video transponder market segment is the main market with some 80 % of her revenues pertained in it.

The Video market can actually be split up into two segments, namely the video broadcasting segment and the video contribution segment. Video broadcasting consists of three types:

1) Direct-to-Home (DTH) TV platforms that offer multiple (tens to hundreds) channels over satellite bundled in one package that consumers have to pay for; 2) Multiplexes: these are services offered by uplink providers5 to optimize bandwidth costs for broadcasters. In short, it includes gathering several channels on one transponder. This way, different platforms who broadcast the same channel share the bandwidth costs (economies of scale);

4

“World Satellite Communications & Broadcasting Markets Survey. Market forecast to 2014,” Euroconsult 2005, p.9

(14)

3) Individual TV channels: these are channels that are available separately from packaged pay-TV offers. They can be free of charge (Free-to-Air or FTA) or under subscription (pay-TV).

The video contribution segment can also be split up into two activities: permanent contribution feeds and occasional contribution feeds. Video contribution actually means contributing a video signal to a terrestrial network or between two or more parties who exchange video signals one an occasional or permanent base. Of the two segments, the video broadcasting segment is the largest with 1,705 transponders leased in 2004 versus 650 transponders by the contribution segment.

1.1.2 Structure within SES Global

As previously stated, SES Global is the managing holding company for the entire group. It therefore has quite comprehensive financial, legal and tax departments. The Corporate Development (CD) department has multiple roles in that it is responsible for identifying new opportunities, initiates and organizes projects that add value to the company as a whole, coordinates strategies and growth plans for all companies within SES and furthermore, it manages the portfolio of SES investments within the non-100% owned entities.

Within Corporate Development four departments exist: Services Development (SD), Regional Development (RD; not to be confused with R&D), Space and Technology Development (STD) and Strategic Market Development (SMD). For an overview of the CD structure have a look at Appendix 2. SMD has a red dotted borderline around it to indicate that this is the department where the research will take place.

One of Strategic Market Development’s roles is to assess global market places and assess competitor strength by developing forecast models and so forth, which aim to take into account the most important drivers of the market from a technical and consumer perspective, and from a governmental and regulatory perspective. It advises management and the companies that operate in relevant regions and its models are being used within the separate companies as well.

(15)

1.1.3 Actual problem situation

One of the main tasks of SMD is to construct forecasts or plans that quantify all kinds of factors that influence the market. In this role, it develops models for all four segments described in paragraph 1.1.

The most important model, due tot SES’S reliance on the video broadcast business, is the one made for the video market. This model was constructed three years ago and has since then (on an internal review) outperformed any other forecast for this market. The current model has given very good information that has been used as input for management decisions. However, the market for satellite capacity is very dynamic. It serves a great deal of all communications needs around the world. Demand for satellite capacity is therefore heavily dependant on demand for communications means. Variables that influence that demand are constantly changing because technical innovation still thrives. The current model has been updated multiple times but now has problems in coping with new drivers of the market. For example, technical innovations that greatly influence demand are the introduction of HDTV. HDTV uses about four times more satellite capacity than a normal TV signal, causing total demand to rise. Also, the use of new compression techniques allows video content to be transported over Internet Protocol. These developments are all caused by new data compression techniques that allow for more data to be processed by the same data carrier: satellite, cable or some other form of terrestrial network.

Besides the new drivers of the market that cannot be inserted into the existing model, there are other problems. The existing model has severe issues in maintenance because of its sheer complexity. These problems are partly caused by the fact that the creator of the model does not work at SES any more and with his leaving, a lot of specific tacit knowledge about problem solving within the model has left the organization.

This situation is not preferable for the organization and therefore it was decided that the existing model would be redesigned to have the same forecasting abilities as the original butalso be smaller (i.e. less variables so less calculations) and less difficult to maintain. A characteristic of this forecasting model is that it uses market information from preceding years, to predict demand for years to come. This implies that the model needs to be updated each year. Because the model has to be updated each year and the

(16)

market is undergoing structural changes, the organization feels the need for research that explores the developments of the key driver of the market and the effects that this driver has on the market: data compression.

This research will not involve the global market, but will only include the Western European market. This has three reasons:

1. The research is bounded by a certain time frame;

2. Western Europe is technically the most advanced and effects will be noticed in this market fastest;

3. The organization can supply sufficient information for this region. In this project Western Europe is defined as the following countries: Norway, Sweden, Finland, Denmark, Ireland, the United Kingdom, The Netherlands, Belgium, Luxembourg, Germany, France, Switzerland, Austria, Portugal, Spain, Italy and Greece.

SES feels that the research can best be performed by the same person that updates and redesigns the current forecasting model. This way, no relevant information will be lost. Second, the report that results from the research can also be used as a guide when updating the model.

1.2 Research model

In this paragraph the methodological approach of the research project will be briefly discussed. According to De Leeuw business administrative research is “the systematical search for solutions for business administrative problems.”6 A problem situation can be defined as “every situation that can give management cause to strive for improvement or renewal.”7 In this situation it means there is an information need concerning specific developments in a market.

There are different kinds of research.8 This project will consist of the following ones: 1. Practical research: it does not aim to provide general knowledge but explicit

knowledge about market developments which will probably not be generally applicable;

2. Policy or strategy supporting;

6

De Leeuw, 2001:2

(17)

3. Explorative research: although the current market situation is well known by the company, many questions exist about future developments in the macro environment. The project aims to provide different possible scenarios.

This research will also be participative. Due to the specific in-depth technological knowledge surrounding the problem, intensive interaction will be needed between problem owner (that is: SES Global SMD) and problem solver (that is: the researcher) all along the process of solving the problem.

Within business administrative research a distinction can be made between a classical approach and a designing approach. The latter is often used in quantitative minded projects, like designing information systems and data bases.9 The classical approach, which will be used in this case, consists of five consecutive steps which can be summarized as follows:

1. Problem statement;

2. Research set-up in a more narrow sense; 3. Data gathering;

4. Analysis; 5. Reporting.

1.3 Problem statement

What is being researched and why? These are the questions that need to be answered in the problem statement. Or in other words; what is the goal or objective and relevance of the research project?

1.3.1 Research objective

The objective of this research project is to give insight in which direction the satellite video market in Western Europe is heading, and to provide recommendations on possible ways to strategically manoeuvre to relevant developments.

1.3.2 Research question

To operationalize this objective into a research question would produce a broad multitude of sub questions and a research project of too large a scale. This is why there

(18)

is a focus on those developments that stem directly from improved data compression technology. This results in the following research question:

What effects have current developments in the field of data compression techniques on the future of the Western European satellite video market and how can SES optimally manoeuvre to these effects?

1.3.3 Sub questions

The sub questions split up the research question into specific questions that each answer part of the whole research question.10 The first sub question has been divided into two parts. Sub question 1a asks the fairly general question of what the market looks like. This is a relevant question for it is necessary background knowledge when looking at the other sub questions. Sub question 1b then goes about exploring the relevant developments in the market outlined in 1a.

1.a What does the satellite video market look like in terms of product, size, market share, number of competitors and regional dispersion?

1.b What are the current relevant developments in the Western European satellite video market resulting from improved data compression techniques?

After having identified the relevant developments, their consequences for competitors are investigated. Sub question 2 thus follows up on 1a and 1b:

2. How well are DTH operators in different regions within Western Europe equiped to deal with these developments?

The last sub question looks at the future of the market by questioning how the market could develop in light of the developments spoken of under sub questions 1b and 2. This question is only relevant when these possible futures are related to SES’s current position:

3. What could possible future scenarios for the satellite television market look like and how do these possible future scenarios relate to SES’s current competitive situation?

(19)

1.3.4 Conceptual model

Representational decisions

When approaching a problem bundle, a conceptual model can visually clarify what the real problems are and what the role of a certain entity within the organization is. The conceptual model in figure 1.2 helps to explain the role of the current demand forecasting model in the SES Group and the role of this research project that accompanies it. To all parts of the organization, the role of the demand model is the same: it is a tool in making decisions in the field of strategy and budgeting. The functions of the model used by these separate parties are the same. They all have the objective of being the best in the market in terms of turnover, net profit, and providing the best service to customers as possible. Therefore, the organization will be viewed as one profit maximizing entity.

When looking at the system in which the organization functions, relevant legislative powers, governments and competitors, as well as customers can be taken into account. This will be done on different levels. When dealing with the conceptual model on a global basis, it means dealing with a number of different regions which can all be divided into separate countries. The conceptual model can thus deal with reality on different levels of aggregation.

Modelling decisions

In the first place, in the paragraph above it was already stated that the goal of this conceptual model is to explain the role of the demand forecasting model in the SES Group. This goal is clear. The conceptual model therefore is an abstract model of a concrete system. Second, it is also known that the current forecasting model has problems reacting to and explaining new developments in the market. These problems cause the forecasting model not to function properly, disabling its function of helping management to make the right (profit maximizing) decisions. The second goal of the conceptual model is therefore to state the area wherein lies the problem and its solution. Thirdly, the arrows from the “reality cloud” to market and technical information and then on towards the demand model also illustrates the process of gaining insight in the direction the market is going: the main goal of this research. The conceptual model is represented in a schematic way.

(20)

Management Reality Demand forecasting model Market information Technical information

Although the model has to be able to work at different aggregations it is still necessary to demarcate the field in which a solution to the problem is to be found. The research takes place within Strategic Marketing Development. However, external users of the model will be consulted when necessary.

Figure 1.2 Conceptual model: the role of the demand forecasting model in the organization

In this model, the arrows present on the one hand information flows, on the other hand they present manipulations from management and other entities back to reality. Reality is presented as a cloud for information is fuzzy and disconnected. One level higher are balloons representing market and technical information in a more condensed or concrete form. These are reports that are bought from consulting firms but also regulations issued by (local) governments or other legislative powers, and census data from different

regions.Market and technical information in its condensed form are the direct inputs for

the demand forecasting model. The outcomes of the model are used as an input in the decision making process from management.

All parts of the conceptual model have been given general names for a reason. In this way it offers multiple ways of looking at the organization at different aggregations. For example, one can look at the North-American market and so take North America as reality, SES Americom’s management as the relevant management and fill in the relevant drivers for market information and technical information in North America, which are different than for Africa or Eastern Europe. One can also look at the global market and take the world as reality, SES Global management as relevant management and look at all the drivers for the market at a global scale.

(21)

Strategic Marketing Development SES Global

and SES Astra

Western European DTH Video Market Demand forecasting model Western Europe Market information Technical information

For this qualitative research accompanying the demand model for Western Europe, the Western European market is reality and SES Astra and SMD within SES Global are relevant management. Because reality can be interpreted extremely broad, it is chosen to look at just one aspect of reality: the developments arising from improved compression technology. This creates the following conceptual model to work with (see figure 1.3).

Figure 1.3 Conceptual model for Western Europe

1.3.5 Product and process limitations

Product

Firstly, the answers to the sub questions and the main question will have a definitive qualitative character. One may presume that the answers to these questions may be of a highly quantitative nature. However, as the study of Business Administration has the main focus on qualitative research methods and my background in the exact field is limited, research will mainly focus on the effects of market developmental issues.

Secondly, the market discussed in this thesis is the satellite video DTH market with the DTH operators and satellite operators. The market will be looked at from a macro perspective. That means that the focus will be on developments that have the potential to change the market as a whole. Substitute products like TV reception via cable or DTT will only be discussed wherever developments in these areas change the market structurally. Also, when looking at the market using Michael Porter’s Five Forces Model,

(22)

suppliers will not come up for discussion, for they are satellite producers and producers of professional hardware. Including these parties in the discussion would create too complex a study.

Process

The project will take place within SMD. Although one would normally begin redesigning and updating the current demand model after thorough preliminary research, the organization expects in this case that the processes of modelling and qualitative research will be conducted simultaneous. This may have negative consequences for the quality of the demand model. Namely, indicators that are quantified in the demand model need a proving ground (id est: they need to be tested to reality). Also, new factors are overlooked this way: the developments discussed in this thesis are not incorporated in the new demand model.

The research needs to be conducted in a scientifically sane way, for the thesis which is based upon it will be part of the graduation process at the University of Groningen. Furthermore, the thesis has to be finished before August 2007.

1.4 Process models and definitions

1.4.1 The demand forecasting model in process

This part of the research project is all about understanding what is going on in the market and putting that knowledge in a model. The process of going from initial problem situation to the final model can be put into a model as well. This is called the process model. This process model visually represents the process from the initial problem situation to end product.

Figure 1.4 Process model for quantitative modelling

Qualify and assess variables Quantify variables Design regional models Divide market in regions Test regional models Construct aggregate model Test aggregate model Time

(23)

When looking at the model in figure 1.4, the dotted arrow at the bottom of the figure represents the time. However, the blocks that represent the activities that have to be performed are drawn chronologically but not on scale. The model shows that first variables will be qualified that characterize and influence the market. Because these variables can differ per region of the world, the global market will be split up into different regions. These two processes are interconnected. After that, the variables will be quantified per region after which separate models can be made for the regions individually. These models can then be tested to previous years. This will give information on which basis further improvements can be made to the models. When the separate models work correct, they will be put together and tested again.

1.4.2 The qualitative analysis in process

To be able to answer the research question a partial external analysis will be performed. According to Aaker 11 a complete external analysis consists of four parts, namely:

1. Customer analysis; 2. Competitor analysis;

3. Market/submarket analysis; 4. Environmental analysis.

In this research project, the first three aspects will be looked at from the perspective of new developments later discussed in the environmental analysis. Only the relevant aspects of the market are highlighted. They will be looked at insomuch just to create an image of what the market looks like, to construct an image of the status quo. This is done in sub question 1a (chapter two). The fourth aspect, the environmental analysis will be performed thoroughly. Sub question 1b (chapter three) looks at the environmental trends surrounding and influencing the market. An impact analysis is used to look at the effects discussed. Using the leading indicators that come up in the first part of this environmental analysis, a comparison of the future conditions of the regional markets of the DTH competitors will be performed in sub question 2. This will be quantified in a competitor strength grid (chapter four).

The leading indicators that were used in the comparison of competitors are also used to construct several scenarios of the future market. This makes up for the third sub

(24)

question which is dealt with in chapter five. The whole qualitative process is graphically shown in figure1.5.

Figure 1.5 Process model for qualitative analysis

In this research proposal and conceptual model quite a few terms are used. Most of them speak for themselves. However, some need specific clarification. A list of abbreviations and definitions has been submitted right after the list of contents.

Environmental analysis SQ 1a Partial customer, competitor and market analysis SQ 2 Competitor Strength Grid SQ 3 Scenario analysis SQ 1b Identification of developments and impact analysis

(25)

1.5 Data gathering

In the table underneath, the sub questions have been coupled to the data gathering method and information sources.

No. Sub question Information

sources Research method Applied literature 1a

What does the satellite video market look like in terms of size, market share,

number of competitors and regional dispersion? Literature, Internet, Corporate database Partial market analysis -“Strategic Market Management”, (D. Aaker) 1b

What are the current relevant developments in

the Western European satellite video market resulting from improved

data compression techniques? Literature, Internet, Corporate database, informal conversation Environmental analysis using PEST-classification and impact analysis - 5-Forces Model (M. Porter); - PEST-analysis 2

How well are DTH operators in different regions equiped to deal with

these developments? Literature, Internet, Corporate database Revised Competitor Strength Grid -“Strategic Market Management”, (D. Aaker) 3

What could possible future scenarios look like

and how do these scenarios relate to SES’s

current competitive situation? Literature, Internet, Corporate database Scenario analysis -“Scenarios, The art of Strategic Conversation”, (K. van der Heijden)

Table 1.1 Data Gathering

Data gathering and processing

To obtain information about general market dynamics, public information has been used from competitor websites, research agencies in the field of data carrying infrastructures and market penetration of consumer electronics innovations. For a list of these websites

(26)

see the Bibliography section at the end. Market shares have been calculated using the corporate database and the demand forecasting model for Western Europe. Data has been processed using Microsoft Excel 2003. Also, employees who are experts in the field of satellite applications have been consulted on various technical subjects. These conversations had a very informal character, were not scheduled, and were meant to get a more detailed understanding of the specific technical workings of satellite infrastructure and its influence on commercial offerings.

Choice of literature

To answer sub question 1a, a partial market analysis is performed using a framework provided by Aaker. Aaker divides external analysis in four parts of which market analysis is only one. A complete market analysis is not a necessity in this project. However, a global understanding of what the market looks like is necessary to understand the implications of current developments in the market as described in later chapters. Aaker has been used to be consistent with other chapters using the same framework.

Sub question 1b identifies and analyses four relevant developments in the market and does so using a PEST-framework. This framework is used because it categorizes developments in political, economical, socio-cultural and technological factors. It is also compatible with Porter’s Five Forces model that is also used. Porter’s Five Forces model is however not used to analyse the market, but merely to sketch the market situation. Theorists have always been divided into two groups that make a significant distinction in their reasoning about strategy. One group says that differences in performance between competitors can be attributed to differences in resources. This is the so-called inside-out perspective. The other group emphasises the power and opportunities of the market. This is the so-called outside-in perspective. Michael Porter is a front-runner of the second group. As this research focuses in on important market developments, it needs a theoretic framework that is based on the outside-in reasoning.

Porter recognizes five forces underlying performance in a market: the threats of suppliers, buyers, substitutes and complements, new entrants, and the power of the existing rivals. This sub question also analyses the impact of drivers using an impact analysis as provided by Aaker. An impact analysis in this form looks at impact and

(27)

immediacy of drivers and scales the drivers in one of four quadrants. This is done to be able to compare the importance of the four drives among each other.

Sub question 2 aims to compare all DTH competitors in Western Europe on their likelihood to be able to compete in their markets under the influence of IPTV, HDTV, DTT, and the closing global release gap. For this, a revised competitor strength grid (CSG) is used. Where a normal CSG compares competitors on their strengths, this version of the CSG compares the competitors on penetration of new developments in their home markets and the likelihood of competitors to cope with this.

Sub question 3 states different future market scenarios and their possible consequences for DTH and satellite operators. Van der Heijden supplies literature on this exact topic and provides a procedure for scenario analysis; 1) identify scenarios, 2) relate these scenarios to existing or proposed strategies, and 3) estimate scenario probabilities.

Hamel and Prahalad12 do provide literature on the topic but have a looser approach of

thinking about strategic scenarios. Pierre Wack is also known as an authority in the field of scenario development. He wrote about his experiences developing future scenarios for Shell.13_{His experiences however are mainly in developing scenarios in constant} dialogue with a group of people. This process-like approach is not feasible since brainstorming sessions with groups of five persons or more were not realizable. Also, the scenarios as they are now have strict boundaries as to their developments because they only deal with four known developments. Wack’s planning scenarios are far more comprehensive. That is why Van der Heijden was chosen.

This chapter provided the context of the research project at hand and discussed the methodological issues. It also gave a brief explanation of the applied literature. A more detailed or extensive explanation comes back in the chapters in which the literature is applied. The next chapter goes on to sketch the satellite market and its competitors on two levels: the DTH operators and the satellite operators.

12

G. Hamel& C.K. Prahalad wrote “Competing for the Future” which is widely seen as a good book on the subject of strategic thinking about the implicit future, the explicit future being the future events that are already known

13

P. Wack wrote “Scenarios: the gentle art of re-perceiving: one thing or two learned while developing planning scenarios for Royal Dutch Shell” (1984).

(28)

2 The Satellite Video Market in Western Europe: a

Quick Sketch

2.1 Introduction

This chapter serves as an introduction to the rest of the research project. Its aim is to give a clear image of what the market looks like. In light of the sub questions to come, it introduces the players in the market. To do this, it asks the following sub question: What does the satellite video market look like in terms of product, size, market share, number of competitors and regional dispersion?

2.2 What is the consumer end product?

The consumer end product actually is content. The consumer wants to view a certain program or has specific content needs. This can be anything ranging from sports, culture, news, adult channels, (kids) entertainment to education, etc.. There are three main ways to receive this television content in a home: 1) through cable, 2) through a terrestrial network, and 3) via a satellite dish. All these three means can facilitate a digital or an analogue signal and all three are used throughout Europe. They can be seen as substitute products. SES sells satellite capacity to different parties but has DTH pay-tv operators as her major clients. It considers cable and DTT as competitors. Therefore, in this report the consumer end product is television content via satellite.

When a person wants to view television, there are numerous options. Someone can only watch the free-to-air (FTA) channels which are (as the name does suspect) free of charge, or decide to pay for additional channels (pay-tv). Pay-tv operators offer packages of tv-channels which are typically composed of three parts:

1. Non-subscription or FTA channels: a base part which is the same for each package and often is obligatory to offer for the operator. These are often national/public channels which are sponsored by government (e.g. BBC1, NED1) and commercial channels which operate on the basis of advertisements income (e.g. RTL4, Nickelodeon);

2. Subscription or pay-tv channels: an additional part which can be chosen by the consumer himself and is dependable on personal interest. For

(29)

Satellite pay channels broadcasted in 2005 in Western Europe Telenor 123 Eutelsat 473 Hispasat 172 SES Global 683

Figure 2.1 Competitors in terms of channels broadcast

example, Sky in Great Britain offers several packages: Kids, Variety,

Knowledge, Style and Culture, Music, and News and events;14

3. Pay-per-view channels (PPV) which have to be paid per time the consumer views this channel. These channels are movie channels, special event channels, and adult entertainment channels.

The non-subscription or FTA channels can be viewed by just connecting the television to the reception mode (cable, satellite dish or DTT). The subscription and PPV channels are encrypted. To be able to use them the consumer has to install a receiver (also called decoder or set-top box) which enables receiving these channels. Installing a satellite dish often involves installation costs which is one of the reasons for a barrier of exit for the consumer.

2.3 Who are the direct competitors and buyers?

2.3.1 The Satellite Operators

The General Picture

The Western European market has only four major competitors: Eutelsat, Hispasat, Telenor, and SES via its wholly owned daughter companies SES Astra and SES New Skies. The major reason for this can be found in high barriers to entry as launching satellites is expensive and risk full. In addition to this, regulations are strict as many governments in the world consider satellites as a (potential) weapon. Of these four companies, Eutelsat and SES Global are the largest in number of employees, revenues, satellite fleet, and channels broadcast. This can also be seen in the pie chart in figure 2.1. This figure only shows the channels that are part of a pay-tv package and are broadcasted by the

satellite operators. Telenor and

Hispasat make up for about 8.5 % and 11.9 % of the market respectively. This can be attributed to several facts:

Telenor (from Norway) is a

multinational media company which uses its satellites for multiple uses and

(30)

Portfolio of Activities for Eutelsat in 2006 Others 3% Multi-usage 9% Professional Data Networks & Value-added Services 21% Video Applications 67%

Figure 2.2 Eutelsat Activities (Source: Corporate brochure Eutelsat 2006)

not only for satellite television. It also controls large terrestrial data networks through which it also broadcasts television signals. Hispasat on the other hand is a sole satellite operator which focuses on Spanish and Portuguese speaking countries, which limit its activities to Southern Europe.

Eutelsat

Eutelsat was founded in 1977 as an intergovernmental organization. It is

based in Paris, France, and

concentrates its activities mainly in the European and Middle East Region. Eutelsat currently employs some 470 people worldwide. The company does not only perform video broadcasting services, but is also active in broadband services, telecom, and mobile and

maritime communication. The satellite fleet exists of 23 spacecraft of which 19 are fully owned. This is a large fleet, especially since it is largely concentrated in one area above the Earth. This causes Eutelsat to have a reliable image in Europe: there is enough back-up capacity in case of complications.

Eutelsat has shown stable growth over the past few years. In 2006 its revenues grew with 4.6 % from € 739.6 mln. to € 773.7 mln.. Main part of this revenue comes from the video applications that totalled € 528.6 mln., which accounts for about two-third of total revenues (see figure 2.2). Among Eutelsat’s clients in the pay-tv segment are major players like BSkyB from England, TPS from France, Nova from Greece, and Sky Italia. According to its corporate website more than 2,100 video channels are broadcasted in 2005 worldwide, of which 473 are Western European DTH pay channels. “In European Union countries served by the HOT BIRD™ and EUROBIRD™ 1 positions, the number of channels grew by 16.7% year-over-year, from 1,051 channels to 1,227. Expansion was driven notably by the increased offer from blue chip pay-TV platforms, including SKY Italia, BSkyB, and TPS.”15

(31)

Portfolio of Activities for Hispasat in 2005 IP Services for Europe and America 13% Non-IP Data Services 15% Video Services for America 7% Video Services for Europe 65%

Figure 2.3 Hispasat Activities (Source: Hispasat System Presentation October 2005)

Hispasat

Headquartered in Madrid, Spain, this is one of the leading satellite operators for Spanish and Portuguese speaking areas in the world. The organization is active in Latin and North America as well as Europe. Hispasat has five operational satellites in orbit with a sixth scheduled to become available at the end of 2006. Total revenues equalled € 99.7 mln. in 2005. That is about 18.1% more than in 2004. Objective is “becoming the leading satellite operator in Spanish and Portuguese language markets.”16 However, when looking at figure 2.3 one can notice that most activities and revenues are occurred in Europe. Europe only has a limited market potential, Spain and Portugal being the only countries fitting the desired target areas. In these areas TV Cabo (Portugal) and Digital Plus (Spain) are the major DTH operators and both are exclusive client at Hispasat. Conclusion is that Hispasat wants to expand its activities in Latin America. This conclusion is consistent with the strategicline that was set out: “Hispasat’s growth in the medium term is focused on expanding into America through marketing of the Amazonas satellite – at 61° West- and in diversifying its services towards government communications.” When considering that Eutelsat is a major shareholder in Hispasat with 27.69%, this goal becomes even more understandable. Both operators earn about 66% of total revenues by selling video capacity and services in Europe.

SES Global 17

Based in Luxembourg, SES Global is the leading satellite operator in the world. It has a fleet of about 40 satellites and achieved total revenues of approximately € 1,258 mln in 2005. This is a growth of 16.7% in comparison to prior year. The company is active in a large diversity of satellite services but the video segment creates the main part of revenues (see figure 2.4). Looking at the Western European market, SES Global is the biggest player. Active through its wholly owned subsidiaries SES Astra and SES Sirius, it broadcasted 1,097 channels in Western Europe in 2005. Of these channels 683 are

16

Note: General information, numbers, figures, and quotes come from www.hispasat.com

(32)

Portfolio of activities for Telenor in 2005 Mobile 58% Fixed 20% Broadcast 8% Other 14%

Figure 2.5 Telenor activities (Source: Telenor annual report 2005)

Portfolio of activities for SES Global in 2004 Data 14% Other 3% Video 83%

Figure 2.4 SES Activities (Source: SES Global presentation November 18th , 2005)

DTH pay channels (see figure 2.1). SES’s dominant position becomes clear by looking at its client base, which includes the leading DTH operators in the areas they serve: BSkyB (Great Britain), Premiere (Germany), Canal Satellite (France), Digital Plus (Spain), Canal Digitaal (The Netherlands), and Viasat (Scandinavia). Key objective for the organization coming years is to increase its DTH market share. The reason for this is that SES believes that this market is growing. Positioning yourself strong now, creates a solid ground for long-term future plans.

Telenor Satellite Broadcasting 18

Telenor Satellite Broadcasting (TSB) is part of the Norwegian Telenor Group. Telenor was established as a public corporation in 1994, and privatised partly in 2000. This company is actually one of the largest mobile operators worldwide with more than a hundred million subscriptions connected, and 58% of total revenues earned in this segment. Group revenues in 2005 totalled € 8.59 billion 19 and

around 27,600 people were employed. A relatively small part of total revenues was earned by satellite broadcasting (see figure 2.5). This can be explained by pointing out that TSB is mainly active in Scandinavia in which it the number one provider of pay-tv through its wholly owned subsidiary Canal Digital. It is a local player which owns two satellites and also uses capacity on a third satellite. TSB broadcasts approximately 200 channels of which 123 are part of pay-tv packages. Key objective for TSB is “to further strengthen broadcast’s position in the Nordic Region.” Current information suggests that TSB is doing well to achieve this objective as Canal Digital acquired the rights to

18_{Note: General information, numbers, figures, and quotes come from www.telenor.com} 19

(33)

broadcast the Norwegian Premier League en first division soccer games for 2006, 2007, and 2008. This is premium content and indicates that over the coming two years Canal Digital will gain pay-tv subscriptions.

2.3.2 The DTH Pay-TV Operators

The General Picture

Pay services for television are not uncommon in Europe. There are a lot of companies offering pay-packages by cable or DTT. However, the number of suppliers is limited when we look at satellite offerings. Only twelve companies have satellite pay-tv offerings throughout Western Europe. Of these twelve companies, one is a new entrant to the market. This entrant, Easy.tv, has not yet got a substantial number of subscribers. The absence of a more competitive satellite market can be attributed to the high penetration of cable and other terrestrial technologies such as ADSL and its predecessor ISDN. To make satellite television profitable economies of scale have to be found in the number of subscribers which is relatively low in comparison to American DTH operators. This implies few competitors.

When looking at figure 2.6, the even coloured areas represent monopolies and the blocked areas represent a duopoly in Scandinavia and two merging parties in France.

DTH Operator Region Color

CanalSat France Pink

Canal Digital Scandinavia Blue

Canal Digitaal The Netherlands Orange

Digital + Spain Yellow

Easy.tv Germany and Austria Violet

Nova Greece Turquoise

Premiere World Germany Violet

Sky UK Ireland and the UK Lime

Sky Italia Italy Teal

TPS France Pink

TV Cabo Portugal Red

Viasat Scandinavia Blue

(34)

C a n a l D ig ita l C a n a l D ig ita a l C a n a lS a t & T P S D ig ita l + E a sy .T v N o va P re m ie re W o rl d S ky D ig it a l S ky I ta lia T V C a b o V ia sa t 0 1.000 2.000 3.000 4.000 5.000 6.000 7.000 8.000 9.000 in t h o u s a n d s

DTH Subscribers per Platform

Figure 2.7 DTH subscribers per platform in 2005

The monopolies per region exist because the investments in premium content can only be justified by enough subscriptions. The principle of economies of scale applies here. The monopolies are actually limited by the language and cultural barriers that exist between different countries. The attraction of content is partly dependent on the language in which it is spoken (What is the fun in viewing James Bond in Russian when you cannot understand Russian?). However, the reason that Viasat and Canal Digital are active over all countries in

Scandinavia lies in the fact that viewing cultures (although not exactly similar) are compatible and it is the only way to make activity

in this region economically

viable.20 In the Nordic region, Viasat and Canal Digital compete for an equal market share: 789,000 subscriptions for Viasat and 907,000 for Canal Digital at year-end 2005.21

In France, CanalSat and TPS have been competing for many years, although they are now in the process of merging. According to the same logic, Germany should also have a blocked area. However, there is no information on subscriber numbers yet available for this newcomer (Easy.tv). Assumption is that it is no full-fledged competitor yet.

2.3.3 The connection between DTH operator and Satellite operator

DTH operators generally do not own or operate satellites. Only sufficient economies of scale justify launching satellites and operating them full-time. Separate DTH operators do not generate enough demand to justify such an investment. Therefore, they lease satellite capacity from the satellite operators using long-term contracts. These contracts extend to over ten years or often the normal working life of the satellite which can last up to eighteen to twenty years. These contracts last that long mostly because of the risk that is run by launching a satellite. Over the last three years, SES has lost two satellites

(35)

due to launching failures.22 These risks have to be accounted for in the contracts. The satellite operator and DTH operator are thus tied to each other in terms of their economical performance. When the DTH operator performs badly, the satellite operator is affected by that also.

2.4 Summarizing conclusion

This chapter was meant to answer the sub question: What does the satellite video market look like in terms of product, size, market share, number of competitors and regional dispersion? The market in which satellite operators are active is a business-to-business market. The clients are the DTH operators who have the connection with the end consumer (the television viewer at home). It can be called an oligopoly. However, the two largest competitors, SES and Eutelsat, control nearly 80 per cent of the market so it could also be called a duopoly. These two satellite operators also serve the largest DTH operators in terms of channels: Sky UK has contracts with both satellite operators as does the merged TPS & CanalSat.

The DTH market has twelve competitors but is fragmented anyway. Each of the competitors is monopolist in its own area. The only exception to this situation is Scandinavia which knows two competitors. This could change in the future since Germany knows a new competitor in Easy.tv since 2005. The fact that the Western European market is fragmented and has multiple monopolies is due to the fact that the area knows many different languages and equally many different cultures. This narrows the area in which a DTH operator is active more or less down to the country boundaries.

22

NSS8 (2007) and Astra 1K (2005) both failed to become commercially active because of launch failures

(36)

3 Current Developments in the Satellite Video Market

3.1 Introduction

In this chapter the second part of the first sub question will be investigated: What are the current relevant developments in the Western European satellite video market resulting from improved data compression techniques? To answer this question, an environmental analysis will be performed using a PEST-analysis and impact analysis. What is meant by this can be read in the next paragraph. After that the actual results follow. The chapter ends with a concluding summary.

3.2 Methodology and literature

3.2.1 Methodology

A PEST-analysis could have handled more than the four developments described further on in the chapter. There are three reasons for this. First, the developments that are treated in the current analysis have been discussed with future users of the video demand model (id est: SMD employees). During the development of the new video demand model, it proved too difficult to quantify four known current and future drivers of the market:

1. High Definition Television; 2. Internet Protocol Television; 3. Digital Terrestrial Television;

4. The closing of the global release gap.

It was decided that further information on these subjects was necessary. Second, the reason not to include more developments is that it would complicate the process of making different scenarios that describe a possible future market situation. More drivers for the market lead to more possibilities but also make it hard to comprehend the outcome of the scenarios.23 Third, this research explicitly looks at the developments directly related to improved data compression.

The Five Forces Model consists of different forces of which one is internal competition. To give a complete overview of all competitors in the video market, would create a complicated and oversized list of cable and DTT operators, for supply of cable is

Exploring the effects of developments in data compression on the satellite video market in Western Europe