Wednesday, May 14, 2014

High Speed Access Strategy Key for Telcos as Video Shifts to Over the Top Mechanisms

Many observers believe that, in the future, the lead revenue generator for U.S. cable TV companies will in fact be high speed access, not video entertainment.

Whether that is the case for telcos is harder to predict, though most would argue high speed access likewise will be foundational for fixed network telcos.

But the latest data from the Sandvine first half 2014 Global Internet Phenomena Report show the implications of a future shift to significant over the top, Internet-delivered video content of the sort people typically have purchased as part of their linear video entertainment services.

For starters, U.S. subscribers with “cord cutter” behavior consume 11 times--more than an order of magnitude-- streaming content and over seven times as much total data as a “typical” subscriber, Sandvine says.

Real-time entertainment is responsible for over 63 percent of downstream fixed network bytes during peak usage periods.

During peak period, real-time entertainment traffic also accounts for over 40 percent of the downstream bytes on North American mobile networks as well.

And all of that is happening even before most of the content provided by linear video subscriptions has been made widely available for over the top Internet-based viewing.

If U.S. cable TV operators continue to lose market share, in part because of competition from satellite and telco TV providers, but more significantly long term because demand for traditional linear video subscriptions erodes, and if consumption of new products shifts to Internet delivery, then high speed access revenue potential grows.

But that shift also suggest the exposure telcos face on the fixed network front as fixed Internet access networks become primary means of watching video content, including real-time events and content, not just pre-recorded or archive material.

The big issue is how much capability is required for telcos to remain competitive in the high speed access market, under conditions when some would argue cable TV operators and some ISPs, are better placed to upgrade efficiently.

Cable operators and Google Fiber already are taking most of the net new additions in the high speed access market, with the possible exception of Verizon, where it provides FiOS Internet services.

But Verizon already has halted further FiOS deployments, in large part because the business model is questionable. AT&T recently has decided to invest more heavily in its high speed access networks, with spot deployments featuring speeds as high as 1 Gbps.

Cable operators and some independent ISPs might well have an edge over the telcos in terms of business model, and might be able to justify significant investments where telco planners might struggle to justify capital investment.

And, to be sure, “raw speed” might not be the key business model issue to be faced. Instead, it is other matters such as the fundamental value-price relationship, charging by usage, and consumer ability and willingness to pay, that are more crucial than actual potential top speeds, even if marketing platforms are affected directly.

Indeed, one might argue telcos would be better off to craft retail offers that are good enough to support streaming video access and mobile Internet traffic offload, at reasonable prices, rather than compete head to head with the cable companies, Google Fiber and others, for headline speed.

But that will require a sober assessment of perceived value. If others provider gigabit access for $70 to $80 a month, and if telcos match those prices, as AT&T is doing, then prices for slower-speed packages will have to adjust lower as well.

Where a 20-Mbps or 40-Mbps package might cost $40 to $50 a month, in markets where gigabit access is available for $80, 50 Mbps service might have to be priced at just about $4 (assuming the cost of a megabyte of speed “costs” about eight cents) to $8 a month.

That would represent an order of magnitude less revenue per subscriber, per month, unless pricing were somehow shifted in such a way that consumers were comfortable with a “usage” billing model, and stopped evaluating offers based on headline speed.

But there are ways to do so. Mobile Internet access already generally has moved to a consumption-driven model, not a “peak speed” model, with little subscriber resistance.

And that is a likely key component of future retail packaging by telcos: de-emphasis on headline speed and a concurrent shift to volume of consumption. That largely is the shift already made in the mobile business.

In other words,  “raw speed” improvements might not be as crucial for telcos as the cost and packaging of Internet access plans. In other words, telcos might not generally be able to compete with cable headline speeds.

Instead, telcos will likely have to emphasize “good enough” speeds supporting all key end user apps, at prices that reflect usage, which compare favorably with alternative offers.

In that regard, the most destabilizing offer is the unlimited usage, $70 a month, symmetrical gigabit offer fielded by Google Fiber and some others.

The other alternative is simply to avoid selling lower-speed offers, shifting to a simple 50-Mbps, 100-Mbps, 300-Mbps or 1 Gbps offer, as local market competition requires, with no slower speed options, as is the case in the mobile Internet access market.

de-emphasize their competition in consumer high speed access, instead operating access networks suitable for offloading mobile traffic, and instead shifting capital to mobile and other revenue segments with higher revenue and growth potential.

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