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European operators' original content ambitions face hurdles


According to Market Intelligence, December 2022


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European operators' original content ambitions face hurdles

Original content is fast emerging as the key battleground for Europe's mobile operators. But hurdles underpinned by strong competition from over-the-top services and national broadcasters do mean that efforts toward telecoms-owned content will not be plain sailing, industry observers said.

Driven by a need to balance declining margins with investments in adjacent industries, operators across Europe are increasingly looking to go beyond the traditional model of building infrastructure by leveraging shifting consumption patterns toward premium OTT content.

Last month, Germany's Deutsche Telekom AG ordered its first original series, called "Germanized," for its streaming platform EntertainTV, while Movistar Plus, the pay TV arm of Spanish telco giant Telefónica SA, plans to spend €100 million on as many as 10 series each year. Meanwhile, French carrier Orange SA will spend about €100 million on developing its own series during the next five years.

However, for the most part, operators' smaller budgets, relative to the likes of Netflix Inc. and Inc., as well as global studios and broadcasters, mean they do not have the "luxury to fail in a production or two," according to Per Stenström, director at telecom consultancy Northstream.

Stenström is not convinced operators' original content efforts will have a major impact.

"This is something that national broadcasters have been doing ever since TV was invented. I do not think operators will tip the scale significantly," he said in an interview, stressing that "if [operators] want to compete in producing high-quality original content, they need to scale that investment. The competition they are up against are doing exactly that."

Netflix recently said it could spend as much as $8 billion on content in 2018 while Amazon is reported to have budgeted around $4.5 billion for 2017. But unlike their OTT rivals, larger content budgets may not be high on operators' list of priorities.

For a start, operators continue to face spiraling costs for rights to sports content.

Banco de Sabadell analyst Andrés Bolumburu therefore argued that rising cost of acquiring sports content would dampen appetite for higher spending in the more "volatile" market of original programs.

"It is a dramatic change for telcos. They are not investing too much when you take into account the fact that they are investing billions into football," he said, noting that Telefonica splashed out €2.4 billion-worth on the soccer rights to Spanish and Champions League matches in 2016.

In addition, competing outside of the telecom industry's core communications space, at a time of low to single digit overall revenue growth in Europe over the next two years by S&P Global Ratings' estimates, is a challenge in itself. S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global.

"OTT companies do not have the same obligations as mobile operators," explained Eduardo García Argüelles, an equity analyst at GVC Gaesco Beka.

Apart from the aggressive shift toward original content production, telcos are also investing heavily in capital intensive areas such as fiber to the home deployment and mobile broadband spectrum, he added.

Moreover, for telcos, gaining visibility and exporting content to consumers outside of their core network and national markets will be another key challenge due to the many language and cultural barriers across Europe's fragmented markets.

For instance, Florence Le Borgne, an analyst at think tank IDATE DigiWorld, noted that French, German, Italian and Eastern European content had typically performed poorly in other countries. In the case of Telefonica, however, she said that access to Latin America would provide the carrier with a much-needed boost.

"Since most operators are only national, it is quite difficult to make the investment profitable with a limited audience and it's difficult to sell original production [on an international basis] at a good price," she explained.

That said, the observers agreed that sitting still and keeping their content offering within one geographic market would ultimately lead to a poor return on investment for operators.

And as things stand, telcos will not be able to compete until they are in a position to significantly increase the amount of content they produce, acquire and bundle, Stenström argued.

"I do not believe we are close to that scenario," he concluded.