Why OTT Video Could Help Some ISPs, Harm Others

Ask most telecom industry professionals whether competition from over the top services is a problem, and you are likely to get an affirmative answer. Ask most cable TV industry professionals whether over the top video is a potential problem, and you might also expect to get an affirmative answer.

Perhaps ironically, a new survey by Incognito Software of executives largely from cable TV providers of broadband Internet access suggests a rather strong belief that over the top video services will help more than hurt their existing TV businesses.

Some 86 percent of service providers surveyed (82 percent of the respondents were cable executives) did not report cord cutting as a major threat, for example.

There are several ways to look at the findings. The respondents might not presently view OTT video as a threat, but might, in the future. That response would be rational today: there is not much evidence that over the top alternatives have harmed take rates for entertainment video by any appreciable amount.

But the answers might be different if the respondents had been asked what might happen in the future.

Also, the job responsibilities of respondents is a key issue. Network professionals tend to have different priorities than CEOs or CFOs, who might have answered differently.

The survey might indicate a rather sharp division of thinking within the cable and telephone industries about the threats from OTT, driven perhaps by different legacy services and platform upgrade issues.

Telco narrowband revenue streams (voice and messaging) are rather easily disrupted even at modest bandwidths. And there are differences between industry perspectives on the timing of disruption.

Telcos already have seen erosion of voice for more than a decade. Cable operators have only recently started to see video customer erosion.

Also, some of the telco voice erosion has been to mobile services many telcos also own, so revenue is shifted from a fixed network platform to a mobile platform. But there are bandwidth dimensions to the shifting market share.

Assuming there is upside for ISPs from greater consumption of OTT video entertainment services, ISPs ought to be able to generate incremental revenue from their customers, as customers will need bigger pipes and bigger usage plans.

But cable executives might rationally believe it will be more affordable to upgrade gracefully, since cable networks are, by definition, broadband networks.

Telcos face a rather disruptive upgrade path, as they must shift from all-copper to hybrid fiber-copper or all-fiber networks, since telco access networks historically have been narrowband networks.

That could explain the apparent optimism about the impact of over the top video. OTT video might harm the existing video subscription business, but also should offer compensating broadband access revenue.

Also, there is the potential upside from branded and owned OTT services, or partner revenue generated by services sold to third party providers.

In a real sense, then, you might argue the difference in industry perspectives is less about over the top services and more about the impact on capital investment, business risk and operating margins from network upgrades.

Cable executives might rightly believe their upgrade path is more incremental and affordable, even if they are highly exposed to disruption of existing video revenue streams.

Telcos face some of the same disruption of their own video revenues, while even platform upgrades could not stop erosion of the narrowband services.

In a broad sense, you might argue that telcos strategically have less to gain from growing broadband access demand than cable operators might gain, simply because the telco capital investment requirements would be much greater.

Simply, OTT voice, messaging and video are disruptive for all incumbents. But OTT video also requires much more end user purchasing of bandwidth services, so there is an offsetting revenue source for the lost video entertainment revenues.

But there are stark differences in capex impact, on the cable and telco fixed network ledgers.

Of the respondents who reported growth in bandwidth consumption, 75 percent point to streaming video sites as the reason.

Latin America was most concerned with bandwidth consumption, as 47 percent indicated this was a top concern.

Service providers in Europe, Middle East and Africa were most concerned about losing content rights to OTT service providers. Some 43 percent of respondents from those regions suggested this was a top concern.

North American respondents were concerned about high bandwidth consumption but at much

lower levels (24 percent) than Latin America.

North American service providers were most optimistic about OTT content as an opportunity. About 56 percent of North American respondents suggested they saw OTT as a chance to create new services and revenue streams.

The study shows that at least some thinking on the part of cable operators that over the top video has more upside than downside, not an unreasonable belief if online video leads to greater demand for higher-priced and faster access services.

But we might also be somewhat cautious about other reasons video cord cutting was not viewed as a threat. If the respondents were largely in charge of capacity and network functions, the responses might indicate great confidence that the respondents know they can increase bandwidth on their existing networks rather incrementally, while there will be offsetting new revenue.

Consider also how an ISP that is a pure play Internet access provider might respond. In that case, there is no existing video entertainment revenue to cannibalize, and only the upside of faster tiers of services and bigger consumption buckets.

The issue there is again on the capital investment side of the business case. Some ISPs will find it easier and cheaper to upgrade, compared to others. OTT video is a greater problem for any ISP that faces challenges conducting the upgrades.

Fair usage is the most common approach to managing OTT consumption. On a global level, the most popular strategies employed to manage OTT are fair usage policies (40 percent), followed by bandwidth caps (34 percent), and proprietary OTT services (22 percent).

Proprietary OTT services and service add-ons, such as unlimited video streaming or speed boosts, are expected to see the most growth in adoption rates over the next 12 months.

International operators are more likely to view OTT as a threat. While the majority of respondents agree that OTT allows for the creation of new services and revenue streams, some operators — particularly those outside North America — believe that OTT presents considerable risks.