France Telecom Goes to the Movies

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All that was before the widespread availability of high-speed broadband. Now the telcos are no longer talking about merging with giant cable companies or producing their own content, but rather, making real profits from distributing popular fare to offset their declining revenues from conventional voice calls. TV shows sent using Internet protocols, known as IPTV, are now being offered by phone companies around the world—and are becoming a booming business.

Better to Sell Than Be Robbed

ABI Research figures global revenue from IPTV will grow from $2.5 billion in 2007 to $14.6 billion in 2011. Those kinds of numbers are drawing renewed interest from Hollywood studios facing rampant piracy on the Net. They'd rather sell their programming through legitimate providers than have it siphoned away by downloaders.

Both sides win, says Lombard. In his Apr. 9 keynote speech—the first ever given by a telecom CEO to the assembled TV and media executives in Cannes—he asserted that without their content, his network risked becoming a "dumb pipe" that merely carries traffic for other people who skim off the profits. At the same time, he said, "I am certain that my network can give far greater value to your content." The telecom infrastructure, he said, is better suited than alternatives such as cable or satellite to respond to the increasingly personalized and interactive expectations of customers.

In a videotaped statement aired in Cannes, Warner Brothers CEO Barry Meyer applauded France Telecom's new service, noting that allowing users to swap content among platforms would lead to a wider dissemination of legally downloaded programming.

A Server on Every Street

Perhaps the biggest question weighing on any service such as France Telecom's is whether the network can handle the load from so much video programming. Lombard says the company is planning carefully for the demand, installing servers and other network intelligence "practically at the end of each street." And to serve rural customers too distant from phone offices for conventional DSL, France Telecom has signed deals with satellite providers GlobeCast (an Orange subsidiary) and Eutelsat (ETL.PA) to downlink content to subscriber homes.

"It is this proximity that permits very quick reaction times, both for channel-hopping and for handling requests such as video-on-demand." Still, analysts say France Telecom and other carriers piling into the video business will have to buy lots more gear to keep up with demand—which could be a windfall for sellers of such equipment.

France Telecom is embracing so-called quad-play services that bundle voice, video, Internet, and mobile in part thanks to aggressive domestic competition. In 2000, France's national telecom regulator forced the former state-owned monopoly to open up its network to rival operators (BusinessWeek.com, 7/18/07). That encouraged telecom upstarts and carriers from other countries to rent access to France Telecom's wires and start offering competing broadband services.

Startup telecom Iliad (ILD.PA), which offers broadband services under the name Free, has been one of the greatest successes. It first launched DSL service in October, 2002, and now counts over 2.5 million subscribers, all of whom use Internet phone calls and get 90 channels of IPTV through the company's Freebox service. From the very beginning, Free has stuck to the same monthly price of €29.99 ($47), but has continually added more services.

Unconventional Services May Offset Decline

That helped set a benchmark that rivals, especially France Telecom, had to meet. Analysts say France Telecom's moves to offer exclusive content—it recently won the right to broadcast live soccer games—as well as movies across three screens will help it better compete against Free, which does not have a mobile offering.

Orange's new three-screen service falls under the responsibility of Raoul Roverato, who was given the title earlier this month of executive vice-president in charge of new high-growth businesses. In addition to content, Roverato's responsibilities include online advertising and health-related telecom services such as long-distance monitoring of blood pressure. Although small today, these offerings could play a key role in offsetting the decline in conventional voice revenues.

All of the telcos in Europe and elsewhere are under pressure to find new sources of growth, says Peter Nuthall, an analyst at technology consultancy Forrester Research (FORR). Mobile TV hasn't worked out particularly well yet as a standalone offering, he notes, but new schemes like Orange's that let consumers shift content will make mobile TV more attractive. "The race is on for the three screens," says Nuthall. Stay tuned as more telcos get with the program.

Schenker is a BusinessWeek correspondent in Paris.