Never listen to anyone in the entertainment market unless they back up what they are saying with both physics and economics. You have to always answer the questions of ‘Can it be done,’ and ‘If it IS done, what will it cost’ and you have to answer them properly.
In 2003 Faultline analysts were told in no uncertain terms that video would never travel across the open internet. IPTV is something clever and wonderful and it can only be carried out by the owner of the network because it needs access network upgrades, backhaul upgrades, substantial investment in infrastructure and Quality of Service tools to ensure real time video delivery. About three years ago we had the same discussion about HD video. This position was clearly a marketing ploy to get operators to spend more and more on infrastructure.
But over all that time the meager broadband line went from an average of around 500 kbps to something closer to 10 Mbps and is on its way comfortably to 20 Mbps, and it will only be a matter of time before the economics are in place to move the entire shebang to fiber or fiber VDSL2 combinations and broach the 50 Mbps and 100 Mbps barriers.
So when someone says it can’t be done, you have to think about just what is happening at the physics level of copper wire, and then at the organizational level of ISAMs and cross connect boxes, before finally working out how much it would cost per home to deliver it, and what percentage of homes would have to sign up for it at a sensible economic rate, before it would all be worth doing. So even back in 2003 it was fairly easy to see that HD video WOULD travel across that open internet. What was tough to see was just when it would become economically viable, although that became increasingly clear as the years rolled by.
What we now have in Europe (and parts of the Far East), and what is rapidly arriving in the US, are broadband networks which are perhaps one generation away from HD Over The Top video services, and by one generation we mean that some lines can manage it, but that’s not yet a majority of the lines installed. For that it may take the continued competitive pressure on broadband pricing and performance levels for maybe two more years and it will take that long until most homes have a HD screen.
Core networks obey a kind of Moores Law of network performance, doubling the amount of data they can carry at least once a year (Moores Law was to do with processing power and circuit integration and has slowly shifted from doubling every year to doubling every 18 months). So the Core is not going to be the issue. Cisco with its CRS3 router range announced a week or so back, has helped ensure that.
So suddenly, as we have noted in the last few weeks, as major industry brands prepare Over The Top video services, we are faced with a very real prospect of fixed line operators, who now rely totally on broadband for all their growth, and who have spent $billions upgrading their access networks to cope with classic traditional IPTV, going into freefall over triple play.
First off inherent in pricing of IPTV so far has been a small charge for the gradually growing complexity of the underlying network, but if you produce a service which goes over the top of the network, it only has to pay its dues to content suppliers, its internet peering charges and the rest is profit ‘ it has no inherent network costs built in.
In a sane and rational world, OTT services would be welcomed, and broadband pricing would slowly rise, to pay for network costs, but that defies the mixed economics of the Faultline Economies.
In this realm we call the Faultline, all telcos want to be broadcasters, simply because it looks like they can do it for the basic costs of being a telco. The same applies to cablecos wanting to be phone companies, and broadband suppliers, and ISPs wanting to become VoIP phone suppliers.
But as soon as you enter Faultline Economics you are in trouble. Rival ISPs drive down broadband connection prices, rival pay TV operators drive down pay TV pricing and Skype drives down VoIP phone pricing, both fixed and mobile.
In the world of triple play it was supposed to be that the telco or cableco would win simply because they had ONE network to build, with one set of costs, but three revenue streams. As a result they could compete with anyone in any of the single plays, extremely effectively, because they could choose to take their profits on any of the three services and compete aggressively on the others.
There are two fallacies here. The first is that a single network can supply all three services. Each service may end up going over a single piece of coaxial cable or twisted pair copper wire, but the rest of the network, particularly the CPE in any given application (set top/DVR, handsets, broadband routers) adds more costs which are application dependent. The other clear fallacy is that as long as there are Network Neutrality principles guiding competitive behavior, with telcos unable to stop rival services traveling over their networks, then operators must invariably hit a brick wall.
On the one hand OTT suppliers have no requirement to invest in infrastructure, but in a competitive environment telcos also cannot continue to charge high prices for basic services like broadband.
ABI Research tells us this week that IPTV and online gaming were the key ingredients in driving broadband uptake globally and that this has led to fixed broadband service revenue leaping from $145 billion to $164 billion from 2008 to 2009.
The ABI calculations show that fixed broadband service revenue will exceed $210 billion by 2014. But at the same time DSL broadband will move from $100 billion in 2009 to just over $103 billion in 2014 with a CAGR of a meager 0.6%.
So despite further DSL build out and uptake, income will barely hold its own against inflation over the coming 5 years, despite the fact that we are halfway through an upgrade cycle to VDSL2. In order to grow, fixed broadband will need to have more infrastructure built out, much of it in fiber. Suddenly after years of it being the salvation of previously shrinking, voice revenue dependent telcos, broadband is beginning to look like just another dead end.
So on our gaze goes to the salvation that is triple play, predicated on QoS, walled garden IPTV. The latest numbers for Europe from a variety of researchers suggests that IPTV will become an 85 million home business by 2013 or so, from perhaps 30 million now, with Europe perhaps taking just over a third of that growth. Others cite European growth at around 20% CAGR until 2013/4 or so.
Well right now we are fine with that kind of prediction. The Telcos have their marketing engines going, they have had 4 or 5 years in some cases, to pick up speed and learn what the public want, and OTT services are mostly coming from small, start up rivals. But this trend will change. Operators trying to sell outside their own footprint will turn to OTT techniques and leverage their existing content relationships and then it is one big brand against another. On top of this, brands like Apple will create OTT TV opportunities which may even be offered in partnership with a local telco. Let’s say that Apple offers iTunes TV in the US in partnership with AT&T ‘ will that have the power to damage or slow down Verizon FiOS TV? If it affects the desire for it by even a percentage point, it will mean Verizon missing on its share of those IPTV predictions.
In fact if your business relies at all on the prediction of IPTV services in any of the major regions, we’d suggest you do a worst case analysis based around the arrival of OTT services and there emergence into a credible force over the next two years.
If you are an investor in Telcos, then you have another calculation to do. Take away perhaps the top 10% of IPTV growth this year, make it 20% next year, from your telco stocks, and then increase churn numbers as OTT begins to take hold. See if the stock can still maintain its capex at that rate, and next thing you know some of these telcos are back where they were in 2002, looking for the next big thing, although seeing last time that it was broadband, was fairly easy. This time however we are not so sure what it would be, and some telcos will either go ex-growth or have to become hyper competitive to survive, accelerating the price spiral.
The key to survival is to understand that content markets will and must remain separate from network markets. To make more sales as a networking company it is NOT vital to own content. It’s vital to have a really efficient, self repairing, remotely managed network built around robust technologies which can continue to scale into the foreseeable future. The trouble is that if your rival invests in content and you don’t you risk having the best network, and for the immediate future, less customers.
To do well in content markets is to invest in a service brand which can be delivered across multiple networks, with a consistent and intuitive UI, and an attractive market proposition (price) and model.
By 2011/12 we will have reached another tipping point in Europe, which operators will have to adapt to. In the US it is likely to be very different. Network Neutrality is likely to take years to establish there, and go through several legal battles. As a result there will be less competition in content services, and the price of broadband and content will stay high.
In Europe in five years we will have a consolidating mass of marginal operators, with a layer of totally different content brands. In the US the networks and the content brands may come to be the same, and the average American will be calling for a renewed broadband plan as the last one (announced this week) will be seen by then to be failing due to lack of competition.
And almost as if it was purely to underline this trend we hear this week from Akamai that it has experienced a three fold increase in HD video traffic on its network.
Akamai has spent the past three or four years mutating its network in order to reduce the journey of HD video to any given broadband home around the planet, to a manageable distance.
It just said this week that it experienced that three fold increase just since November, in under 6 months, in the US with HD video. It attributes a lot of this to movie services from Netflix, CinemaNow and Epix.
Effectively these are all over the top services. Epix was revealed back in June and launched in October as a HD movie service owned by Viacom’s Paramount, MGM and Lionsgate studios, in a joint venture called Studio 3 Partners. Akamai also delivers iTunes content, though at present this is not streamed and has a global footprint of more than 61,000 distributed servers.
ComScore also said in February that online video views grew from 14.8 billion in January 2009 to 33.2 billion in December 2009.
All of which says that OTT is happening everywhere, not just in Europe, but in the US as well, and its effects could devastate fixed line operators.