Thursday, April 25, 2013

Internet Video Eventually Will Create Network Winners and Losers


The switch to Internet delivery of video is going to have profound impact on the strategic fortunes of current and future providers of Internet access and video content.

If you want to know why Charlie Ergen, Dish Network CEO, is so intent on getting into the mobile business, that is the reason. At some point, as bandwidth requirements rise, and more of the traffic load becomes video entertainment content, network topology matters.

Point-to-multipoint networks are very good at delivering linear TV, where essentially one copy of a stream can be beamed to scores of millions to hundreds of millions of people.

But such networks fall apart when the traffic is point-to-point, as traditional telephone networks are, or must support unicast video, as the Internet must. The faster Internet access becomes, and the more people use the Internet to watch lots of video, the more difficult it becomes for a satellite provider, or any other unicast medium, to match.

Likewise, as bandwidth demands grow, spectrum-based networks will be at a disadvantage, compared to wired networks. As much as people enjoy the freedom of watching video content anywhere, anytime, volume sooner or later will naturally be pushed onto fixed networks.

We already can see glimmers of that trend in smart phone consumption patterns, where in many instances a majority of volume is shifted to the fixed network. That will only be more important in the future, as unicast, personalized consumption begins to rival linear consumption.

“Eventually, as linear TV is viewed less, the spectrum it now uses on cable and fiber will be
reallocated to expanding data transmission,” says Reed Hastings, Netflix CEO. “Satellite TV subscribers will be fewer, and mostly be in places where high-speed Internet (cable or fiber) is not available.”

Clearly, Netflix and other streaming video services now are driving bandwidth consumption in the U.S. ISP business. Since at least 2011, real time entertainment content has represented at least 49 percent of peak hour traffic  in North America.

By 2012, video had grown to represent as much as 75 percent of peak hour traffic. For some ISPs, that is an opportunity to sell bigger access packages. For others, video entertainment represents a danger, threatening to overwhelm either access bandwidth or capacity caps, or both.

During peak periods of internet use in the US, Netflix constitutes 33 percent of all downstream traffic, according to Sandvine. That’s more than Google’s YouTube (14.8 percent), BitTorrent (5.9 percent), Apple’s iTunes (3.9 percent), Amazon Video (1.8 percent), and Facebook (1.5 percent).

That has clear implications for all ISPs. The issue is just how big an impact all that consumption is having.

Netflix says its users consumed “more than four billion” hours of content  in the first quarter of 2013, so assume that means 4.150 billion hours, globally.

The vast majority of Netflix streaming subs are in the United States, so assume about 88 percent of the streaming happens in the U.S., market.

That implies monthly U.S. consumption of about 1.2 billion hours. So how many subscribers are streaming? Netflix has projected 28.1 million streaming users. That further implies consumption of 73 billion minutes a month.

That implies 2,599 minutes of Netflix viewing per subscriber per month, or roughly 87 minutes per subscriber per day, or 43 hours per subscriber per month.

But there’s a new wrinkle: Netflix is launching new plans that allow for up to four simultaneous streams on an account instead of two for $11.99 a month, $4 more than the current $7.99 single user plan.

Netflix estimates one percent of customers will opt for the new “family plans.” But for ISPs already grappling with Netflix bandwidth demand, the new plan will potentially double Netflix bandwidth consumption from some percentage of Netflix households.

ISPs with the ability to provision lots more bandwidth and price services to reflect higher consumption will have an advantage. ISPs that cannot so easily do so will face a challenge competing.

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