A New Alternative in the Video Service Market: An Analysis of Chunghwa Telecom's Multimedia on Demand Service in Taiwan

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A New Alternative in the Video Service Market: An Analysis of

Chunghwa Telecom’s Multimedia on Demand Service in Taiwan

Yu-li Liu

Professor, Department of Radio and TV

National Chengchi University, Mucha, Taipei 116, Taiwan

yuliliu@nccu.edu.tw

key words: multimedia on demand, competition, ADSL, telecommunications

Abstract

Chunghwa Telecom (CHT) dominated the telecommunications services market until 2000 when the R.O.C. government opened up three new fixed networks in Taiwan. Chunghwa in October 2003 sought the approval of the Government Information Office (GIO) to offer “multimedia-on-demand” (MOD) services to its ADSL subscribers. When CHT launched its MOD service in Taipei county in March 2004, it had only thirteen basic channels, including five terrestrial channels, some religious channels and two locally originated channels. (CHT paid NT$90 million to CTS, a terrestrial TV station, to run the two channels on behalf of CHT.) CHT also announced that its set-top box would be provided free of charge. If the customers subscribed to their MOD service before the end of the promotion period, there would be no installation fee and the basic channel fee (NT$150, about US$4.5) could be waived for the first six months.

Foley (1992) found four main reasons why telecommunications carriers wish to enter video markets: (1) the local phone revenue does not increase; (2) they wish to fully utilize the extra broadband; (3) the home video market may have the potential for more revenue; and (4) they can more fully exploit the economies of scale. The above four reasons can also explain why CHT is eager to provide MOD. Dr. C.K. Mao, the former chairman of CHT, said that CHT was not interested in acquiring cable systems or cable channels, because whatever the cable industry could do, CHT could also do.

The first part of this paper sets out to analyze the government policies, driving forces and barriers behind CHT’s MOD. The second part of the paper then synthesizes the discussion regarding the competition, cooperation and complementarities in relation to the video platforms by applying the co-opetition value net model and the five forces competition model.

Government policy

In more than half of the designated cable TV areas in Taiwan, there is only one cable provider. Therefore, the GIO and the various local governments believe that CHT’s MOD service can provide the general public with another entertainment

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alternative. In addition, this new service will bring competition to the existing cable services. However, the government needs to make sure that there is no discrimination exercised against CHT’s MOD in terms of providing programs, because the cable operators might boycott the cable channels that provide programs to CHT’s MOD. Furthermore, since CHT’s MOD provides a free set-top box to its subscribers, there should be no cross subsidization for the box.

Barriers

1. State-owned enterprises are inefficient

CHT is in the process of being privatized. Until it is completely privatized, its budgets and rate structure have to be approved by the Legislative Yuan. Therefore, CHT is not very efficient in terms of its management.

2. Cable TV boycott

Cable operators used to warn the cable channels that provide content to Direct Broadcast systems. Now, they have adopted a similar attitude towards MOD service. That is why CHT’s MOD only obtained 200 film titles in March 2004.

3. Not specialized in managing content

CHT is a huge telephone company that has many experts in the field of telecommunications. However, it does not have experts that are specialized in planning, producing and managing the content. MOD is a new adventure for CHT, and it will take time for CHT to learn how to manage a video platform and interactive services.

Success factors

1. Lowering the barriers to entry

CHT’s ADSL circuit fee for a speed of 512K is NT$499. If people wish to subscribe to CHT’s MOD, they have to be CHT’s ADSL subscribers in the first place. This is an entry barrier to CHT’s MOD subscribers. If CHT lowers the ADSL circuit fee, more people may wish to try this new service. Otherwise, it will be considered more expensive than cable TV service, even though CHT’s MOD provides interactive services.

2. Content is the key

CHT’s MOD lacks programs. Because it does not have a large enough customer base, some channels are too expensive to become part of the MOD service. CHT has announced to the public that it is going to offer many program choices. However, the reality is that when CHT launched its MOD service in March 2004, there were only 13 basic channels. CHT needs to expand its program sources otherwise its

subscribers will no longer subscribe to the service. 3. VOD and interactive services are strengths

When CHT launched its MOD service, it announced that it would provide

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interactive services, such as music, educational programs, travel information, stock prices and shopping services. As for video-on-demand, it emphasized that the

customers would be able to fast forward and rewind the movie. However, it admitted that it was experiencing difficulties providing the service before it had a sufficiently large customer base. Even though CHT has wanted to differentiate MOD from cable TV by strengthening its VOD and interactive characteristics, CHT had not provided any attractive interactive service by March 2004. It only has 200 titles for its VOD. After the 6-month promotion period, it will be a big test for CHT to keep its MOD customers when they have to pay an extra NT$150 for the basic channel fees.

To sum up, CHT’s MOD is seeking to fully utilize the extra broadband it has and to look for potential revenue in the home video market. Competition, cooperation and complementarity exist among the video platforms. CHT’s MOD should lower the entry barriers to subscribers by lowering the ADSL circuit fee and the basic channel fee. It should not have to develop its own channels, but rather its positioning strategy should be a VOD platform or interactive services. If CHT’s MOD does not establish its own channels and only plays the role of video aggregator, it can be the

complementor of digital terrestrial TV. If CHT’s MOD is still worried about being boycotted by cable TV companies or being discriminated against in relation to

satellite channels, it can lobby the government to revise relevant laws and ask for non-discrimination protection in relation to its buying programs, otherwise the digital terrestrial TV stations might not decide to allow CHT’s MOD to carry their channels as a “must carry” obligation of cable TV.

Reference

Brandenburger, A.M. & Nalebuff, B.J.(1996). Co-opetition. New York: Currency Doubleday.

Foley, J.M. (1992). “Economic factors underlying telephone company efforts to enter home video distribution.” Journal of Media Economics, Fall, 57-68. Gerbarg, D. (1999). The economics, technology and content of digital TV. Ed.

Boston: Kluwer Academic Publishers.

Government Information Office (2003). The white paper of radio and TV. Taipei: Government Information Office.

Liu, Y. L. (2004). Telecommunications. Ed. Taipei: Yeh yeh book publisher. Porter, M. E. (1980). Competitive strategy: techniques for analyzing industries and

competitors. New York: The Free Press.

Tsai, N. C. (2003). The studies of digital and broadband communication industry. Taipei: Yang Chih.

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