Tuesday, January 15, 2008

IPTV penetration rates

At the end of 2006, Merrill Lynch took a stab at UTs iptv market potential in China alone.

"Assuming 10% penetration of the approximately 80+mn urban households in China in the next 5 years, with UTSI capturing a maximum market share of 50% only gives 4mn subs on UTSI equipment. At an estimated revenue of $200 persub (including backend CPE and subscriber STB), the revenue opportunity translates into up to $160mn in annual sales for UTSI. We estimate gross margins would range from 40% for CPE to <20%>90% TV householdpenetration in China and more significantly, projections for almost 50mn broadband internet subscribers in China at the end of 2006 and about 60mn at the end of 2007. However, these numbers do not take into account that some of the connections may not have the necessary infrastructure to carry higher bandwidth IPTV signals, or likely competition from digital TV rollout by cable operators.In the mid to longer term, we believe that the potential Chinese IPTV market is could be between 30-60mn households. Even if UTSI’s market share was only 30% and blended gross margins were only ~25%, the potential margin contribution to UTSI could still be up to 2 – 4x higher than our conservative baseline scenario above."

An article from lightreading highlighted the top 10 iptv operators and their current number of subscribers.


It is worth noting that "In addition, we have only included service providers that have provided us directly with IPTV subscriber data. So while we believe that China Netcom Corp. Ltd. (NYSE: CN - message board; Hong Kong: 0906) and Japan's Softbank BB Corp. likely merit a place in our Top 10, we won't be adding them until we have sourced data directly from those operators, which haven't yet responded to our requests. "

Here is a table of the top 10 operators, the number of subscribers, broadband lines, and iptv penetration rates.


For those that have been following the last couple of years from UTs initial 5k deployment in Shanghai to now, you have read about iptv's potential. However, this has not translated into overall profits for UT. For longs like myself, I have put my faith in UTs system and the markets in developing countries. From the table, China Telecom has 310k subscribers. China Telecom and China Netcom basically split the country in providing fixed line (and PAS deployments). From the last update, UT already had 380k subscribers in China alone and over 600k worldwide. From the table, CT has a 35 million broadband subscriber base. CN probably has comparable numbers. The key take away from the table however is the 0.9% penetration rates for CT. All other operators have a 9 to 78% penetration rate. As mentioned earlier, this does not include CN and Softbank and guess who provides the iptv equipment to them. So, overall, the iptv market in China right now has 70m broadband lines with an 0.9% penetration rate.

The Merrill analyst did a credible job in estimating the potential but conceded it is probably conservative. Broadband numbers will also keep growing in the next 5 years. The analyst also did not include models for India, Brazil, and Taiwan where UT has gotten major contracts, and the other 40 locations (such as in South America, Middle East, Eastern Europe) where UT has trials. In India, wins at MTNL and Bharti Airtel are for an initial 120k subscribers each with up to a million users. Taiwan and Brazil are for 10s of thousands with higher caps (Taiwan up to a million or two).

The wins in other countries are great but the near term growth/explosion (next year or two) will definitely come from China. In one sense, it is disappointing that the company is not yet profitable and the stock is under $3. However, if you look at the growth that lies ahead and the probability that they will be profitable in a few more quarters, this is an incredible situation.

BTW, there was also an article about BSNL's potential $10b ipo. UT has provided and deployed broadband lines to BSNL, the largest operator in India.


The push in broadband and relatively large iptv contracts that UT has won in India show that this is not a bad "secondary" market to ship iptv gear to.

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