2006

Generating money in a mobile TV world

An awkward history, but mobile video services are coming of age

Despite the considerable hype surrounding 3G services, the mobile video market has been slow to develop. Part of this is due to the low penetration of 3G handsets and part due to content owners being focused on opportunities elsewhere, most notably the internet. The internet has definitely been the most rewarding market for next-generation revenues over the past three to four years, and although these opportunities are still growing strongly, the mobile phone represents a significant, complementary opportunity. Mobile phone TV technology has developed rapidly and the picture quality is almost acceptable. Network operators are now able to offer their subscribers the richest of rich-media services: video. If our four key building blocks are successfully achieved, this market may finally match its hype.

1. Two different mobile video technologies

Mobile video technologies are nascent today, but their failure to deploy as currently anticipated would limit the expected opportunity.

There are essentially two different platforms available to broadcast video content to mobile phones: 3G, which has been on offer, but sparingly used by consumers for the past two to three years, and secondly, BTTM services. There will be some limited, small-scale BTTM services launching this summer, but most still require special broadcast networks to be built and spectrum licenses secured.

We believe that 3G networks will be used to download the more niche video content, whilst BTTM networks will be used to watch mainstream channels or content. Operators plans' today indicate that users are likely to be asked to pay a monthly fee for access to all the BTTM channels available, whilst 3G content will be a mix between subscription services and some pay-per-download.

The following table discusses the strengths and weaknesses of each technology.

In February 2006 News Corp quietly launched Mobizzo7: ‘…a truly unique proposition for consumers…’ Mobizzo is a virtual mobile entertainment store which sells ringtones, wallpaper and other graphics, games, music and, in the near future, video for mobile phones.

Case study: 2000 versus today

Vivendi and Vodafone Airtouch launched the mobile entertainment portal VIZZAVI in May 20002 in a blaze of publicity. Then Vivendi CEO, Jean-Marie Messier, hailed it as ‘…the first portal of the second internet age…’3 and ‘…the internet in the palm of your hand…’4 Despite £960m of investment5, the service struggled, and Vivendi sold its 50% stake (excluding the French operation) to Vodafone in August 2002 for just £90m6. Vodafone subsequently dropped the VIZZAVI name.

Some may think that News Corp has not learned the VIZZAVI lesson, but the timings are critical. VIZZAVI launched at the tail-end of the dot.com boom, a time when clunky technology restricted the mobile content market. Mobizzo is launching at a time when media and entertainment companies are re-assessing their mobile digital media strategies.

GE N E R AT I N G M O N E Y I N A M O B I L E T V W O R L D

1

Summary

Initial commercial broadcast TV-to-mobile (BTTM) services are expected to launch in the UK this summer while streaming and download 3G video services have been available since 2003. Media companies should now be evaluating their opportunities in the mobile video market because 3G penetration is growing and broadcast TV handsets will be arriving soon. The following four factors will be crucial building blocks for the successful development of this market:

1. Technology: only 20% of the UK population has a 3G handset today1, no-one has a BTTM handset and the BTTM infrastructure is still being built. Deployment delays with this costly new infrastructure will inhibit this opportunity.

2. Partnerships: content owners and mobile network operators will need to structure their business models as partnerships, such that there is the right balance of risk and reward for both parties.

3. Content: original, ‘bite-sized’ content must be specifically created for mobile phone services; re-purposed content (except news, sport and music videos) will not drive demand.

4. Mobility: the current trend for consumers to lead hectic lifestyles, with a willingness to place convenience over quality, must continue.

2

Three broadcast TV-to-mobile standards

There are 3 BTTM standards (as discussed in the table below): DAB-IP (DMB), DVB-H and MediaFLO. DAB-IP is seen by many as an interim solution due to its limited TV channel capacity. However, because DAB technology is used today for digital radio services in the UK the spectrum licenses have already been awarded and the infrastructure deployed and it could be launched without delay. BT Movio and Virgin Mobile will launch a five-video-channel service this summer based on DAB-IP10. Other mobile operators look set to wait until DVB-H infrastructure is deployed and licenses secured before offering a BTTM service, believing that a five-channel service is not compelling. DVB-H services are likely to launch with 16 video channels.

Pros Cons

Approx. 80% of UK population covered by 3G network today8

One-to-one (unicast) distribution is inefficient use of network capacity when distributing to many users

21% of UK handsets will be 3G-enabled by the end of 2006 9

Bandwidth constraints mean low video quality

One-to-many (multicast) distribution system is highly efficient

Requires investment in new broadcast technology and the roll-out of the new infrastructure (likely to be shared by operators)

It does not use the (limited) 3G capacity Critical, unresolved issues about spectrum capacity could delay many launch plans until 2008+

Broadcast-quality video Handsets are not yet in mass production

Strengths and weaknesses for video transmissions: 3G versus BTTM

DVB-H MediaFLO DAB-IP (DMB)

Definition Digital Video Broadcasting-Handheld

Media Forward Link Only

Digital Audio Broadcasting-Internet Protocol (Digital

Multimedia Broadcasting is a variant of DAB used in S Korea)

Live services today in UK No No Launches this summer

Infrastructure in place in UK No No Yes

Spectrum issues in UK Yes Yes No

Video channel capacity 9-30 20 5 to maybe 11

Average time to change channel

1.5-6 seconds 2 2-6

Key supporter Nokia Qualcomm BT Movio in the UK/S Korean hardware manufacturers

~

Also rans: ISDB-T (Integrated Services Digital Broadcasting-Terrestrial) is a unique standard, specifically tailored to the Japanese market. MMBS (Mobile Multimedia Broadcast Service) mostly a software upgrade of the current 3G technology, and a hybrid between 3G and BTTM. It won't be available until 2007 and it only supports 1-3 video channels.

~~~

BTTM

3G

Source: Ernst & Young

Source: 'Broadcast TV to Mobile', Datamonitor (Dec 2005); Company data; Ernst & Young

GE N E R AT I N G M O N E Y I N A M O B I L E T V W O R L D

3

The UK Government has so far moved slowly in providing spectrum capacity for BTTM services. DVB-H and MediaFLO services could be restricted until digital switchover in 2012. However, the UK communications regulator, Ofcom, will auction L-band spectrum capacity by March 200711 which could be used for these two services. Despite the fact that the MediaFLO technology offers approximately 30% greater efficiencies12 in network infrastructure costs, it is proprietary technology, and DVB-H, heavily backed by mobile handset giant Nokia, is likely to be the dominant BTTM technology in the UK. The chart below gives an indication of the timetable for mobile video services.

Where is the 3G and BTTM technology today?

Mobile operator 3 was the first to offer 3G services when it launched in 200313, but with limited initial geographic coverage and bulky handsets, the service struggled at first. Further investments over the past few years by 3 in a nationwide network, and 3G network upgrades by the incumbent mobile network operators (O2, Orange, Vodafone and T-Mobile) have seen 3G coverage reach 80% of the UK today14. Conversely, by the end of 2005 only 4.4% of Vodafone's (the UK's largest mobile phone operator) subscriptions had a 3G device15.

BTTM services have been available, using DMB technology, in South Korea since early 200516 — and in Japan since early 2006 using ISDB-T technology17. Meanwhile rival technologies, DVB-H and MediaFLO, have been trialled throughout the world over the past 12-18 months. In the UK there have already been limited-user trials of DVB-H in Oxford (by O2, Arqiva and Nokia)18, of DAB-IP in London (by BT Movio and Virgin Mobile),19 and MediaFLO and BSkyB will trial a service in the summer of 2006 in Cambridge20. German operator debitel launched a four-video-channel service at the start of June 2006 for £7 per month in conjunction with service provider Mobiles Fernsehen Deutschland (MFD) using DMB21.

2. Multiple business models, but partnerships are crucial

This new market must be addressed by content owners and network operators as a partnership, regardless of the business model adopted.

The provision of mobile video services is based around two powerful groups: mobile network operators and content owners. Mobile network operators control the customer relationship; they will build the infrastructure and subsidise the handsets to boost penetration. But without strong content (including some user-generated content), consumers will not pay for mobile video services, and the operators will have built themselves white elephants. There are already multiple competing handheld portable video devices today, from gaming devices to portable video jukeboxes, and the mobile phone video market will need to offer a more compelling product than the competition to succeed. Mutually beneficial partnerships between the two groups are essential.

SK Telecom case study

10 months after its May 2005 launch, South Korean mobile operator TU Media (owned by incumbent SK Telecom) had overcome a slow start and signed up 450,000 subscribers to its BTTM service, paying £7.70 a month (in addition to a £11.80 one-off fee) for 11 video and 26 audio channels. The slow start has been partly due to government regulations which prohibit handset subsidies. The new phones cost £353-£471, but it is now adding customers at a rate of approximately 1,500 a day, and expects to have 1.5 million by the end of 2006. Despite the small screen and the fast-moving ball, baseball coverage has proven to be a huge driver for demand recently24.

2003 2009 2012 Year2006

DVB-H and/or MediaFLO TV services

DAB-IP TV services

3G video services

Source: Ernst & Young

Estimated timetable for video mobile phone services in the UK

Note: 3G is likely to replaced by 4G at sometime

4

Partnerships structured around sensible revenue-sharing divisions will be critical. Neither party is coming into this market from a position of great strength. Mobile operators are seeing their core voice revenues weakening but their stock market valuations are heavily based upon the growth of non-voice revenues. Similarly broadcasters are finding that consumers (particularly the younger age groups) are turning to the internet in their spare time, not the TV, and they now have their first significant opportunity to capture eyeballs on the move. Recent speeches, regarding changing consumer behaviour, by Rupert Murdoch, chairman of News Corporation22, and Mark Thompson, Director-General of the BBC23, indicate how serious media companies are to embrace these technological innovations to pursue the consumer.

Given the need to provide differentiated, and superior, content to capture subscribers in a competitive mobile phone market, content owners should be able to gain the upper hand in revenue-sharing negotiations. In South Korea, mobile operator SK Telecom takes only a 25% share of the revenues from the TV service, whilst content owners take 35% (content aggregators and others share the remainder)25.

One business model not enough

Ernst & Young believes that there will be different business models for different products. In order to pay for the construction of the BTTM network, operators will look to charge a monthly subscription fee for the service. Trials and surveys to date suggest that consumers will happily pay approximately £8 per month to watch 10-20 broadcast TV channels on an unlimited basis26. But, with no live services today in the UK, the true demand for pay-TV on a mobile phone is still highly questionable. Given the high setup costs (the true size of which is still unclear to many) and handset subsidies required, operators will not provide BTTM services for free (except for initial trial periods).

However, in the 3G market we expect both pay and free services. In the pay services, consumers will pay via subscriptions or per download. But only the truly premium content (football highlights, for example) will be able to charge for their videos. Other content will be available for ‘free’, funded by advertising or sponsorship. However, over time that content which is not truly premium, but tries to charge for access, will migrate to free in the scramble for viewers.

Advertising: a critical element of media, wherever it is consumed

The role of advertising will not be diminished in the mobile world, and in fact advertising will be needed if the market is to become a long-term success. But, as with the other elements of the creative chain, originality will be needed. 30-second adverts will not be appropriate. However, two-to five-second adverts might and there will be the opportunity to sponsor (free) video clips with brief branding screens before and after the clip. Small screen sizes will restrict the opportunities for logos during videos or product placement.

Despite the challenges, the mobile video market should offer advertisers a wide user-base among the key 18- to 34 year-old target market and measurable feedback: who saw what, where, when and for how long. The sponsorship of a whole series of compelling video shorts by an advertiser offers positive brand association opportunities, with viewers actively seeking out more video content associated with that specific advertiser.

Vodafone 3G case study

Since November 2005 Vodafone has offered two 'Sky Mobile TV' packages in addition to its 'Vodafone live!' variety pack of TV content on its 3G services. All these packages can be subscribed to today for £10 per month (with 30 days offered for free) providing 23 channels of content27.

m-commerce: a limited opportunity case study

Will consumers see the t-shirt or suit or skirt in the video clip and then impulsively purchase the item? We believe not. Interactive purchasing had little success in digital TV, where the screens are much larger and thus the details of the item are substantially greater, and it will not work in a mobile market. However, seeing the music video and buying the digital version of the single or video or seeing one clip and buying the rest of the series, is more feasible.

GE N E R AT I N G M O N E Y I N A M O B I L E T V W O R L D

5

A market destined for viral marketing

Indications from the internet, where the wealth of information available overloads the individual user (as will soon happen to the 3G user), suggest that viral marketing should play a significant role in advertising content in the mobile market. Consumers are showing an ever-increasing propensity to go to their (physical or online) friends first in the search for recommendations for music, video or other such content. Creative deployments of viral marketing will be critical to content owners to drive users to their particular content. As in the diagram below, consumers will create 'super-distribution' networks between themselves as they share content. To encourage the usage and sharing of content, operators and content owners should discount the price of content that has been forwarded-on, and also, reward the sender.

Intellectual property rights will be problematic

Content usage rights, except in the rarest of occasions today, do not specifically include a section about re-transmission on a mobile phone service. Whilst these issues will be resolvable in many cases, the complexity involved should not be lightly dismissed. For some, old footage re-transmission agreements may simply not be possible. Broadcasters will need to review carefully all content before it is broadcast, including the accompanying music. Content owners will want to audit the processes to verify that their intellectual property is not being misappropriated.

Did you get your fair share?

To deal with broadcast rights, the BTTM ecosystem will to some extent mimic the established principles of the traditional broadcast system. New entrants to this market should ensure that they understand the situation. But, in the download, on-demand 3G environment, the network operator must be able to manage accurately the rights available to it. With numerous complex inter-party billing systems likely to be involved, this will not be simple. However, accurate revenue collection and redistribution to the content owners will be critical. Failure to do so will be detrimental to both sides. Similar issues have created widespread problems on the internet and content owners should approach this new medium with caution.

The need for contracts with agreements that include the right to audit the processes and revenue collection or re-distribution systems will be paramount for content owners.

What sort of market opportunity are we talking about?

3G handsets are already in use in the UK, but BTTM devices are not (the Nokia N92 and HTC Trilogy will arrive soon). Mobile operator 3 has more 3G customers than the rest of the UK operators combined — in excess of 3.2m28. In contrast, industry heavyweight Vodafone had 725,000 by the end of 200529. However, as can be seen in the graph below, 3G handsets are expected to continue to grow strongly. Italy leads Europe with 2 recently launched services.3 Italia's DVB-H based 'Walk TV' and a service from Telecom Italia Mobile and Mediaset, also based on DVB-H. debitel/MFD is the only other live European BTTM service today.

100%

80%

60%

40%

20%

0%

3G

2/2.5G

2005 2006 2007 2008 2009 2010

UK penetration of mobile phone technologies, 2005 to 2010

Source: 'UK mobile forecast: 2005 to 2010', Forrester (Jan 2006)

50

60

70

40

30

20

10

0

20

25

30

15

10

5

02006

Number of paying broadcast TV-to-mobile subscribers (right axis)

2007 2008 2009

No. ofhandsets

(m)

No. ofsubscriptions

(m)

Number of broadcast TV-to-mobile TV handsets shipped (left axis)

Broadcast TV-to-Mobile EMEA forecast

Source: 'Broadcast TV-to-mobile', Datamonitor (Dec 2005)

Tom ElaineTom pays for a video clip (1) and receives it (2); he likes it and sends it to a friend Elaine (3). Copy protection technologylocks the file and prevents Elaine from accessing the content for free. But because it has been forwarded by a friend,Elaine does not pay the full price (4) for the keys to access the file (5). Tom is given a 10% discount off his next videoclip purchase (6).

3

1

12

5 4

4

Network operator’s back office6

Source: Ernst & Young

Example of viral marketing possibilities

6

3. Original, bite-sized content

Ernst & Young believes that core to the success of mobile video services will be original, bite-sized content.

The content for mobile TV services is, and will continue to be, very different from that content which is watched in the living room today. The dynamics of mobile TV services are different: consumers are on the move, focused on multiple tasks, with limited time and they will be watching alone on small screens.

Content should be specifically generated

There is a natural tendency in business to invest cautiously when entering a new market, and content creators or owners who operate on slim margins are no different. At least initially, they would prefer to repurpose material created for the TV. However, looking at examples from analogous situations (such as websites not offering mobile internet-specific sites at the start of mobile internet services) it is apparent that to achieve success, content creators need to create platform and device-specific content.

It must be in bite-sized form

We believe that people will predominantly watch content on their mobiles to pass time while commuting or waiting. Few will be watching for more than 30 minutes, and most will watch for 1-20 minutes. Content owners must not lose sight of this explicit market requirement. A 30-minute TV programme will not prove popular — unless it is truly must-see content, such as Eastenders or Big Brother or a major sporting event. Content producers will need to approach the mobile video market from a new, fresh perspective.

User-generated content will be as significant as ‘professional’ content

We believe that there will be two primary forms of content: that generated by consumers and that produced by the more traditional production companies and broadcasters. Much of the recent activity on the internet has been driven by user-generated content: blogs, video blogs, social networking (such as MySpace) and the posting of self-shot videos (for example, YouTube). Consumers are displaying an increasing interest in viewing user-generated content. The pioneering 3G video service, SeeMeTV, has already benefited from this trend.

Ernst & Young believes that this market will continue to develop and that it will match ‘professional’ content in its popularity on mobile services. The challenge will be for media and entertainment players to try to generate income from user-generated content — it is likely to be captured solely by the mobile operator, including the increasingly popular, mobile virtual network operator (MVNO). The leveraging of existing internet sites (offering videos suitable for both computers and mobile phones) will be an important marketing challenge.

Viewers will be driven to brands they know and trust

This new opportunity is likely to herald new stars and brands, particularly via user-generated content, as well as new formats, in manners which cannot be predicted today. Ernst & Young believes that in this large and unknown world, many consumers will start with the brands that they trust — such as the BBC, BSkyB, Disney and Yahoo! It will be up to these content owners and broadcasters to develop pre-existing relationships and leverage their multiple assets and brands on mobile video services. Thus, it will not only be well-known channels and brands that leverage their mainstream TV audiences, but also new, niche, mobile-specific channels created by media conglomerates. This is important because youth audiences prefer new, cool brands and they will not seek out recognised brands.

24 case study

A prime example of original content, in bite-sized form, is the ‘24: Conspiracy’ series made available on Vodafone’s 3G ‘live!’ service in 200530. Customers could download 24 episodes, each one minute long but accounting for one hour of ‘real’ time, that were based around the popular TV series, 24. Rather than simply repurpose the original content, Vodafone and 20th Century Fox re-created the successful series specifically for mobile phones.

SeeMeTV case study

Subscribers to 3 can upload self-shot video clips to the SeeMeTV portal. Other subscribers then pay to download a clip, with the creator receiving 1 pence per download. Over 30,000 clips have been uploaded and more than 4 million31 downloaded in the first four months of operation. 3 charges 50p to upload a video clip to the portal32 and 10-75p per download33. It is believed that more than 80% of all uploads are rejected by 3 due to the illegal, adult or violent nature of the clips.

GE N E R AT I N G M O N E Y I N A M O B I L E T V W O R L D

7

Significant role for the content aggregator

In the current early stages of mobile TV, content aggregators are playing a significant role and this will continue. Smaller content owners do not have the time or resources to deal with multiple network operators, and the network operators have neither the time nor the interest in dealing with the myriad of content producers. The market structure is perfect for content aggregators to play a key role in packaging content. They should also take the lead in resolving the content licensing issues.

The structure of a mobile video service

An electronic programme guide (EPG) is a list of the channels or portals available on a service controlled by the mobile operator. Branding and advertising opportunities on the EPG will be constrained due to the small screen size on a phone.

But, given the likely structure of the service, the role of the EPG in guiding consumers to content and the almost unlimited number of portals in a 3G environment, we believe that a two-tiered market will develop. The big brands will pay to be well positioned at the top of categories on the EPG and word-of-mouth or viral marketing will drive consumers to niche content. But there is likely to develop a significant gulf between these two groups and a substantial mid-tier where content has either been repurposed for the mobile environment, or is original, but lacks demand.

4. Wanted: hectic lifestyles

Content owners and broadcasters will financially benefit from consumers today having high disposable incomes, short bursts of unwanted downtime and scarce free time.

Industry observers have warned that the potential for success of the video mobile market is restricted by a number of factors, but most significantly that few people will watch content on such a small screen, let alone pay for it. However, we would argue that consumers today lead increasingly hectic lifestyles and are no longer willing to accept ‘downtime’. In moments when people are travelling or waiting, they want to be entertained. The arrival of digital technology has taught consumers to expect immediate satisfaction.

Intelligent electronic programme guide (EPG)

Incorporating a personalisation engine for à la carte choices

Mainstream channels:Traditional programmes

at traditional times to be watched outside the home, or when the main

TV is tuned to another channel

Traditional content:News, soaps, business, sports and

entertainment content willbe key markets forproducers/owners

Music videos:Perfect for mobile TV.

Strong youth audience, 3-5minutes long and mobile

owners are used to listeningto music on their phones

User-generated content:Video clips created by

users in the form of videoblogs and amateur contentto be uploaded/downloaded

from various portals

Source: Ernst & Young

05

101520253035404550

%

News Soaps Music Docs Other sports

Movies Comedy Football Childrens Dramas

Most popular TV genres in O2's Oxford trial

Source: 'Mobile TV' presentation, Mike Short, VP of R&D - Group Technology, O2 (available via www.ippr.org.uk)

8

Quality does succumb to practicality

We believe that today’s younger generation are much more accepting of product deficiencies if the service or product fits a defined gap in the market. Even with the best intentions and technical innovations, the mobile phone screen will always remain small (until rollable screens are deployed) because consumers want compact phones to make phone calls, rather than large phones to watch videos on the move. For evidence of portability and practicality over quality we would highlight: the iPod video market (2.5" diagonal screen and 3 million videos downloaded in the first 55 days of launch)34, 3's SeeMeTV service, and films watched on the back of seats on airplanes and in cars.

Initial screen sizes will be small

As can be seen in the table below, the screen sizes of the phones today are indeed small. Their form factor is practical for people on the move, or for those wanting short bursts of television, but impractical for longer viewing times. This limitation may initially restrict demand to early adaptors, but screen sizes will improve.

Who, where and when is the audience?

By its very definition, mobile TV services should target consumers who are on the move, outside their homes, offices and schools. The morning and evening commuter times will be key moments of usage, although the evening demand will begin to grow in the early afternoon when children leave school. At the O2 Oxford trial, peak usage was between6pm-8pm, followed in popularity by 6am-9am and then 12pm-2pm36.

But technological developments always hold surprises

Despite our view of the main key points for mobile video services, it should be remembered that technological developments often have unpredicted outcomes: for example, the unexpected and sustained demand for text messaging on mobile phones. And certainly, the evidence from the 375-user O2 trial in Oxford is somewhat contradictory. The average viewing session was not just a few minutes, but rather 23 minutes — with 1.5 sessions per day on average37. It was 18 minutes in the BT Movio/Virgin Mobile DAB trial38. Also, although 'while commuting' was the most common usage location at the O2 Oxford trial39 and the Finnish trials40, 'at home' was second most popular in both trials. In interviews trialists said they used the service at home because someone else was controlling the main TV in the house. In reality, commercial deployments may produce different results, but it is apparent that the media industry will need to think carefully about its marketing approach.

Live events a significant market

As is being seen by artists in the music business, consumers are willing to spend substantial sums of money to personalise and remember their experiences at concerts. The 3G video download market should significantly expand this opportunity. Concert

Average time spent watching mobile TV in Oxford trial, per session

0

%

5

10

15

20

25

30

1-5 mins 6-10 mins 11-20 mins 21-30 mins 31-40 mins 41-60 mins 61-90 mins 90+ mins

Source: 'Mobile TV' presentation, Mike Short, VP of R&D - Group Technology, O2 (available via www.ippr.org.uk)

Nokia 7710

(enhanced version)

HTC Trilogy Nokia N92

Trial or launch O2 trial in Oxford 1st handset for BT Movio/Virgin Mobile live service

No live TV services,but phone will launch

soon in the UK

Screen dimensions 2.5" (for the TV) 2.2" 2.8"

BTTM technology DVB-H DAB-IP DVB-H

Source: Company data, EBU Technical Review35

GE N E R AT I N G M O N E Y I N A M O B I L E T V W O R L D

9

goers could instantly buy live video clips of songs performed (at a vastly superior quality than they can record with their camera phones), while sports fans could watch video clips of the controversial decisions with their friends straight after the match on their way home, or buy clips of goals. Rights owners for other live events should take note of the significant opportunity offered by consumers’ desires to personalise live events and make them a part of their digital history.

Not a service just for the youth market

Ernst & Young does not believe that this market will be completely dominated by the younger generation — despite their predilection to consume TV more heavily. Even with their parents’ financial support, the younger generations simply do not have the financial resources to spend heavily on mobile video content. Significantly it is no longer just the younger age groups who have short attention spans, but it is the wider 18-35 age group: the very group which has a high level of disposable income and scarce free time.

Hectic lifestyles create profitability

Some would argue that consumers will not pay for video downloads on their mobile phones because it is cheaper to download content via a PC and transfer it to the memory device inside the phone. This is an option, but we believe that most people act more spontaneously and do not plan in such a structured manner. People can download software to create ringtones for their own music collection, rather than paying £2-£5 to download it directly to their mobile, but few have done so.

Video downloads, and BTTM content in particular, is likely to be a spontaneous market, driven by people seeking to ‘kill’ brief moments of spare time. The majority are unlikely to plan ahead and spend time transferring content between their digital devices to save a few pennies. While at the same time, much of the demand for wallpapers, ringtones and screensavers has been driven by the ‘image’ aspect — the youth community wanting to be seen by friends to have the latest and coolest device. The ability to watch (and to be seen to be watching) video content, whenever, wherever (and to share the content with friends), is likely to be another cool, must-have function among the youth market; as well as profitable for content owners.

Many challenges, but a rewarding opportunity

Ernst & Young expects mobile video distribution platforms to represent a substantial revenue opportunity. Market research company, Datamonitor, indicates that in EMEA, BTTM services alone will generate revenues of £514m in 200841. It will enable traditional players to re-assert their brand dominance and add further credence to their multi-channel strategies. While the expansion of 3G video services will see the emergence of new, poorly-financed independent media brands, who are in-touch with the desires of the younger consumer.

But despite this positive outlook, there are risks to be considered. This market will succeed or fail based on successful partnerships between mobile network operators and content owners. Risks need to be taken, and some occasional setbacks accepted, for this market is a key revenue opportunity in a new media sector that has substantial potential. It needs to be thoroughly embraced. The music industry’s failure to capture the ringtone market is a lesson to be learnt: if content owners ignore the mobile TV market in its early days, user-generated content will dominate.

10

Sources:

1. ‘UK mobile forecast: 2005 to 2010’; Forrester, January 2006

2. Vodafone AirTouch/ VivendiNet, MAP joint venture press conference, 17 May 2000

3. ‘Telecoms giants unveil VIZZAVI — Europe’s rival to Yahoo!’; Agence France-Presse, 17 May 2000

4. ‘VIZZAVI challenge to US rivals’; The Guardian, 18 May 2000

5. ‘Vizzavi sales forecast cut’; Financial Times, 26 February 2001

6. Vivendi 20F filing; June 2003

7. ‘Fox Mobile Entertainment Launches Mobizzo New Consumer Destination For Mobile Content’; News Corporation press release, 27 February 2006

8. ‘3G operators: We’ll hit coverage targets’; ZDNet UK, 13 December 2004

9. 'UK mobile forecast: 2005 to 2010'; Forrester, January 2006

10. ‘Virgin Mobile first to offer live digital mobile TV with BT MOVIO’; Virgin mobile press release, 14 February 2006

11. ‘Spectrum licences for broadband, wireless communications and mobile multimedia services’; Ofcom press release, 31 March 2006

12. ‘Broadcast TV-to-mobile’; Datamonitor, December 2005

13. 3 company website, http://www.three.co.uk/aboutus/story.omp

14. ‘3G operators: We’ll hit coverage targets’; ZDNet UK, 13 December 2004

15. ‘Key performance indicators December 2005’; Vodafone Group, December 2005

16. ‘SK Telecom in DMB Dilemma’; The Korea Times, 9 March 2006

17. ‘Japan to launch DTT for mobile phones’; Screen Digest, April 2006

18. ‘Mobile TV trial goes live’; O2 press release, 22 September 2005

19. ‘BT Movio trial a success, says BT’; www.theregister.co.uk, 12 January 2006

20. ‘QUALCOMM and British Sky Broadcasting Announce Intent to Conduct MediaFLO Technology Trial in United Kingdom’; Qualcomm press release, 9 May 2006

21. ‘T-DMB-powered mobile TV launches in Germany’; Jan Michael Hess, //blog.mobiliser.org , 26 May 2006

22. ‘The Dawn of A New Age of Discovery: Media 2006’; Rupert Murdoch (Chairman and CEO of News Corporation), 13 March 2006

23. ‘Creative Future — The BBC programmes and content in an on-demand world’; Mark Thompson (Director-General of the BBC), 25 April 2006

24. ‘Satellite DMB Soars on Baseball Frenzy’, 17 March 2006. ‘Mobile Broadcasters Struggle to Take Off’, 28 August 2005. Both articles from The Korea Times

25. Capgemini, ‘Growing Mobile Data Revenues: Opportunities in Infotainment’, November 2005. Visit www.capgemini.com/tme for more information or to download the report

26. ‘Finnish mobile TV pilot’ presentation; Research International, August 2005: ‘half of the pilot participants did not find a monthly fee of €10 too expensive’. ‘Mobile TV – results from the BT Movio DAB-IP pilot in London’, E Lloyd, R Maclean, A Stirling; EBU Technical Review, April 2006: ‘around two-thirds of users were willing to pay up to £8 per month’

27. ‘Mobile TV is here. Don’t miss it.’ Vodafone Group, www.vodafone-i.co.uk

28. ‘Introducing 3. A mobile media company’; 3 company website, www.three.co.uk

29. ‘Key performance indicators December 2005’; Vodafone Group, December 2005

30. Vodafone company website, www.vodafone.co.uk

31. ‘Budding directors on 3 earn over £100,000’; 3 press release, 8 March 2006

32. ‘Picture all the news that’s fit to upload’; The Guardian, 23 March 2006

33. Terms and conditions on 3 website regarding SeeMeTV, www.three.co.uk/customer/terms/index.omp?cid=1128010467006

34. ‘NBC Universal & Apple Offer New Primetime, Cable, Late-Night & Classic TV Shows on the iTunes Music Store’; Apple press release, 6 December 2005

35. ‘Mobile TV — results from the DVB-H trial in Oxford’, S Mason; EBU Technical Review, April 2006

36. ‘Mobile TV’ presentation, Mike Short VP of R&D; O2 (available via www.ippr.org.uk)

37. ‘Mobile TV’ presentation, Mike Short VP of R&D; O2 (available via www.ippr.org.uk)

38. ‘Mobile TV — results from the BT Movio DAB-IP pilot in London’, E Lloyd, R Maclean, A Stirling; EBU Technical Review, April 2006

39. ‘O2 trial finds mobile TV catches on with commuters’; The Guardian, 29 May 2006

40. ‘Finnish mobile TV pilot’ presentation; Research International, August 2005

41. ‘Broadcast TV-to-mobile’; Datamonitor, December 2005

© 2006 Ernst & Young. All Rights Reserved. Published in the UK.

The UK firm Ernst & Young LLP is a member practice of Ernst & Young Global

Ernst & Young, 1 More London Place, London SE1 2AF

The information contained in this brochure is intended to provide general guidance. It is not intended to replace the specific advice which should be sought from an appropriate professional adviser before taking any particular course of action.The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC300001 and is a member practice of Ernst & Young Global.

(UK). Produced by Transaction Advisory Services — D1748.

ER N S T & YO U N G LLP

Contacts:

Alan Flitcroft aflitcroft@uk.ey.com +44 (0)20 7951 3494

Guy Di Piazza gdipiazza@uk.ey.com +44 (0)20 7951 4124

Carolyn Kerr ckerr2@uk.ey.com +44 (0)20 7951 0668

James Healey jhealey@uk.ey.com +44 (0)20 7951 1304

In line with Ernst & Young’s commitment to minimise its impact on the environment, this document has been printed on recycled paper.

W W W.E Y.C O M/U K