“5 Questions” with Espial’s (TSX:ESP) Jaison Dolvane

Founded in 1997, Ottawa based Espial Group (TSX:ESP) has not been around a very long time. But in the world of IPTV (internet protocol television), which is barely a decade old, Espial is practically a senior citizen. The Company has moved quickly of late, securing major service provider customers in cable and in telecom. We sat down with President and CEO Jaison Dolvane for “5 Questions” from Cantech readers…

1. (From Peter is Mississauga) In your opinion, how do the telecomm giants view IPTV. Do they see it as an important new source of revenue?

JD: IPTV services are viewed as table-stakes by Telecom providers so they can maintain current business and fend off competitive threats. Telcos are looking at IPTV to be additive to their revenues and earnings, however the former reason of survival is a larger mobilizing factor for Telcos to act on IPTV. Cable operators have done a good job in threatening the voice business of Telcos, taking away subscribers and leading to declining Telco voice revenues. In addition, telcos are wary of Google and Microsoft as potential voice competitors as they build this service directly into their web and desktop software.

Bundling services has also become an important part of a service provider strategy. In most places worldwide, the ability to provide a triple play bundle which includes phone, TV and broadband is critical. In Canada, service providers like Bell and Rogers are bundling together quad play, which includes wireless services. Bundling of services means higher net ARPU per subscriber for the service provider, while benefits for the subscriber include lower cost of service, single bill and one-stop shop for services. IPTV is an important enabler for Telcos to complete their bundle with a TV service, increase revenues, and successfully compete in today’s marketplace.

2. (From Fabian in Gibsons, BC) Where do you stand on the net neutrality issue? Should Canadians be subject to “bandwidth throttling”?

JD: This topic is not very relevant to our business, since we focus on managed IPTV, which is a service offered by service providers. In this case, they will guarantee a certain quality of service and bandwidth. In regards to the general question of “bandwidth throttling”, I have two thoughts on this. First one is that usually less than 20% of the users end up using 80% of the bandwidth on the network and there needs to be some way for service providers to monetize this or protect the quality of service for other users. Second thought is that as models of delivering video over the open Internet (un-managed IPTV) evolve, this does threatens the value of the service bundles, yet the service provider continues to bear entire capital cost of implementing the physical network that enables such services. My view is that as the industry evolves, there will need to be a model for service providers to get a return on their capital investment in networks, or we risk not having these networks evolve.

3. (From Tom in Toronto) I am new to this space as an investor and it can be kind of confusing putting together all the pieces and seeing where your company fits and how you will continue to win business. To that end, I would like to ask you what do you see as Espial’s “moat”. By that I mean what is your major competitive advantage that will allow you to expand your business and command high margins?

JD: Espial has been in business for the past 10 years, arguably quite early for this market. The IPTV market has shown signs of growth over the past three years and directionally is pointed towards continued growth for years to come. We have already secured some major service provider customers in cable and Telecom that continue to add new subscribers and we expect to see continued revenues from our current customer base. Further we have secured various distribution channels for our IPTV products, namely major network vendors like like NSN, Motorola, Ericsson and Huawei, and several other smaller regional system integrators and channels. These channels continue to enable new customer acquisition which helps layer on additional sources of revenue as new customers launch their services. From a product perspective, our middleware and VOD products are very strategic to service providers and provides them a platform for growth. Our products integrate into numerous parts of the service provider head-end and network, and directly impact the service providers’ ability to launch new services, continue to innovate, and ensure a quality service. Our products are a well entrenched part of the network and most important, enables service providers to continuously create new revenue generating services on the platform. In a nutshell, our moat is a combination of our industry knowledge gained in many real-world deployents, scalable and open products, well-established channels and strong customer base.

4. (From Amit in Vancouver) Do you see IPTV and satellite TV working together? Satellites seem to be a natural way around terrestrial bandwidth limitations..

JD: Yes, many service providers worldwide are considering hybrid strategies where they use the satellite, terrestrial or cable bandwidth to enable broadcast TV services, while using IPTV to offer more on-demand and interactive services like video on demand and information services like news, weather and sports. The choice of using satellite or terrestrial is really one of market conditions and service provider type.

In some regions, there is a terrestrial service which is free and it makes most sense for Telcos to offer a combined terrestrial and IPTV service to make the most of their network capacity and constraints.

Satellite services are usually owned and operated by more commercial service providers like DirecTV or UK’s BSkyB. These service providers look at IPTV as a way to offer on-demand and interactive services, not possible with satellite. It Satellite companies will need to offer IPTV and Satellite as a service in order to stay competitive with Cable and Telco offerings.

5. (From Bill in Halifax) As far as I can tell, television through an internet signal is about 10 years old-a very young industry! Where do you see the business in ten years? Will all countries have the broadband capability of say, Denmark or South Korea?

JD: As a trend, networks will continue to improve and yes over the next decade, maybe two, a fairly large portion of the globe will be equipped with access to a significant amount of broadband capability. Increase of broadband speeds is one trend which increases the quality and quantity of videos that can be transferred over the net. The other trend is the convergence of fixed line and wireless networks and as such integrated wireless, voice, video and data services with seamless access from a variety of devices, be it your PC, car, mobile or TV. These are technology trends that will make possible innovation around a host of new subscriber services that we have yet to imagine.
Over the next decade, I also anticipate that business models of Internet Video Service Providers (ISPs), like Google and Netflix, and Managed Service Providers, like Rogers and Bell in Canada and globally, will collide. The ISPs are far quicker and more innovative, while the managed service providers control the networks. Both parties have advantages the other cannot ignore and this will force a win-win business model, possibly different from what we may see today.
Lastly, we now live in a world where it is far easier and cheaper to create video content than ever before. This leads to an exponential increase of user generated and commercial content that is available for consumption by users through various mediums and devices. Over the next few years, methods and technologies of how we will access this content, navigate and search for it will change, improve and morph. How we get to what we want to watch quickly, ensure it is meaningful and how we control access to restricted or dangerous content for our children will be important technology and social questions that will need to be answered in the coming years.