BT Group Plc (BT/A) and TalkTalk Telecom Group (TALK) are betting an exclusive fast lane on the Internet and partnerships with television companies will help squeeze more profits from their increasingly crowded phone networks.
The U.K. broadband companies have teamed up with British Broadcasting Corp., ITV Plc (ITV), Channel 4 and Channel 5 to form the YouView venture, enabling consumers to install set-top boxes to watch movies and shows anytime. BT, the country’s biggest phone company, will start selling YouView with speed guarantees next month, while TalkTalk says secured streaming quality is essential for winning users as it introduces the service today.
“There’s going to be some video traffic which will have quality assured delivery and another that’s going to be in the mix of Internet traffic,” Sean Williams, managing director of strategy and regulatory services at BT, said in an interview. “The business model around charging for this quality of delivery is you pay per bit that you have transported.”
YouView will offer customers more than 70 digital channels and a week-long catch-up service for BBC, ITV, Channel 5 and Channel 4 shows in the U.K. Customers can buy the set-top box through a retailer for 249.95 pounds ($404) to 344.90 pounds. Those who sign up through TalkTalk can get the box for free. The devices go on sale at BT on Oct. 26.
The quality guarantee, which helps the channels’ streaming services appear more like broadcast, is the latest tool for phone operators to counter Internet companies that are clogging up their networks with services without contributing enough to their upkeep, while maintaining so-called “net neutrality” promises not to degrade traffic from particular sites.
“It’s really the best way of carrying TV,” TalkTalk Communications Director Mark Schmid said of YouView. The company has similar arrangements with Google Inc. (GOOG) and Amazon.com Inc. (AMZN) which plug their servers into its network to improve the performance of their websites on computers.
Representatives of the companies involved in YouView declined to discuss the venture’s financial agreements.
BT is not only delivering content of other companies. To sell more broadband connections, the London-based operator this month agreed to pay as much as 152 million pounds to show top English Rugby matches on its own channel, taking away the broadcasting rights from pay-TV operator British Sky Broadcasting Group (BSY) and Walt Disney Co. (DIS)’s ESPN. BT earlier this year also acquired some rights for English Premier League soccer matches.
BT, which has accelerated its 2.5 billion-pound rollout of fiber broadband by one year to fend off faster Web offers from competitors such as Virgin Media Inc. (VMED) and BSkyB (BSY), said separating out some traffic into a fast lane isn’t counter to the company’s commitment to net neutrality. The company pledged not to block or degrade content when it signed the Open Internet Code of Practice along other companies including BSkyB and TalkTalk.
BT rose 0.1 percent to 231.20 pence as of 9:54 a.m. in London trading while TalkTalk gained 0.2 percent. BT has risen 21 percent this year, beating the 3.9 percent gain of the FTSE 100 benchmark index.
France Telecom SA (FTE), the largest French phone company, has also signed agreements with content companies to give them faster access to the Web, Elie Girard, the company’s head of strategy, said in March. While France Telecom gets some revenues from the deals, it also tries to push websites and Internet services to be more efficient with the way they send traffic. He declined to name the companies involved.
France’s competition watchdog last week recognized carriers’ right to charge users of their networks for so-called network imbalances that occur when service providers such as video-streaming websites send much more traffic to users than they receive from them.
Services based on quality-of-service guarantees are typically done two ways, said Alissa Cooper, Chief Computer Scientist at the Washington-based Center for Democracy and Technology. In one method, carriers can set aside part of their network.
In the other, all companies share the same pipeline and the content providers who have paid get priority. The danger is that too wide a gulf between the performance of the premium and free networks could force websites that want to stay relevant to pay and also hurt cash-strapped start ups, Cooper said.
“You don’t want to end up with the dirt road where application providers have no choice but to go into the specialized lane,” Cooper said.
About 11 percent of fixed and wireless carriers in Europe give preferential treatment to some of their traffic, according to a survey of 266 fixed and 115 mobile carriers, the Body of European Regulators and Electronic Communications said in May.
Other Internet service providers have said that they may start selling the guarantees once their networks become more crowded. Hans Tschuden, chief financial officer of Telekom Austria AG (TKA), said last month that he wouldn’t rule out such a service in the future.
The new business models are becoming more important as carriers are grappling with increasing usage and falling revenues.
The average time U.K. users spend online per month has more than doubled since 2004 and 85 percent of British households have at least one Web-enabled device, according to a July report from the Ofcom regulator. More than half of all households have three or more Internet-connected electronic devices.
At the same time, revenue for fixed-Internet providers has fallen a compounded 2.2 percent a year for the past five years, according to the Ofcom report.
Legislators in Europe have used a light touch on laws that would prevent carriers from blocking access to some websites or deliberately slowing service for some users. Still, operators need to be transparent about how they control traffic, said Neelie Kroes, digital agenda commissioner for the European Commission.
Kroes this year began preparing recommendations for policy that would ensure customers are able to switch between more and less restrictive carriers and would require greater transparency around broadband speeds and an Internet provider’s policies for data caps.
“Consumers need to know if they are getting Champagne or lesser sparkling wine,” Kroes said in a May blog entry. “If it is not the full Internet, it should not be marketed as such; perhaps it shouldn’t be marketed as ‘Internet’ at all.”
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