Video Streaming Business Model Issues Will be Fixed Primarily on Revenue Side

Content companies have found the direct-to-consumer business challenging on both the cost and revenue sides of the business model. Compared to the linear video business, content spending has been higher. In 2023, for example, leading content firms will all spend more money on streaming content than linear content. 

Company	Linear content	Streaming content
Disney	$20 billion	$30 billion
Warner Bros. Discovery	$15 billion	$25 billion
Comcast	$10 billion	$15 billion
Fox	$5 billion	$10 billion

The reasons for the higher streaming need for content exclusiveness is not always obvious. Every linear channel also desires some degree of content exclusiveness. 

But linear channel availability is a wholesale, business-to-business transaction, done only once a year or less, with high barriers to churn.

Direct-to-consumer services are fragmented retail transactions with low barriers to churn, and where consumer buying hinges largely on the amount of new and compelling content. In the linear business, though new and compelling content also is important, the danger of immediate churn is far less, as carriage agreements are longer term. 

Even when a consumer might relatively less unique and fresh content (compared to the amount of catalog, or pre-existing content) on any single channel, the value of linear is predicated on the availability of all the content on all the channels. 

Linear video consumers supposedly derive value from the accumulated total amount of new and fresh content from the whole package, not the unique content available on any single channel or streaming service. 

Also, compared to the linear business, revenue sources are far more limited, at least to this point. 

Where the linear model includes affiliate fees, advertising and subscription revenues, the direct-to-consumer business has been reliant on subscription revenues only, though this is starting to change, with the addition of advertising versions of the service.  

Revenue source	Video streaming services	Linear video subscriptions
Subscriptions	Yes	Yes
Affiliate fees	No	Yes
Advertising	No	Yes

We undoubtedly will see efforts to create additional revenue sources over time. Among the logical extensions are indirect volume growth by paying commissions to distributors who drive streaming subscription volume. 

Though that revenue is directly earned by the distributors, and represents a cost of doing business for the streaming service owner, the content owners benefit from higher subscription counts. 

So even if commissions for selling particular streaming services actually represents a commission payment by the content owner to the distributor, it might be considered a sort of  indirect form of affiliate fee, which in the linear business is revenue earned by allowing a distributor access to content. 

For the distributor, aside from the commission, streaming video becomes a feature of service that is intended to increase value, and therefore revenue upside, aiding with retention and customer acquisition. 

The point is that the streaming business imposes higher costs and limits revenue, compared to the linear business. It is a challenge that eventually will be solved more on the revenue side than the cost side, one might argue.

Content costs already are being reduced, but cannot be entirely done away with. It is on the revenue side of the business model where the ultimate answers must be found. Addition of ad-supported subscriptions is one such innovation. 

But there will be others.

Will Linear Video be Profitable in 2040?

Nobody doubts the decline of the linear video subscription business. The only issue seems to be the point at which it ceases to be profitable at all, for content owners or distributors such as Comcast and Charter Communications.

According to analysts, Charter and Comcast combined profit from linear video services after deducting all expenses was approximately $3 billion in 2022. This is down from approximately $4 billion in 2021 and $5 billion in 2020.

In 2023, profit for those firms from linear video might be about $2.5 billion. 

Total profit for the firms in 2023 will likely be in the range of $16.3 billion. So linear video might represent about 15 percent of total profit. Significant, but less significant with each passing year. 

So Charter Communications and other U.S. cable operators--all other things being equal--would certainly prefer to remain in the linear TV subscription business under the right circumstances. 

But linear TV also arguably represents half of total operating costs, a quarter of cash flow. 

So what could change were Charter, or any other cable TV company, to abandon the linear TV business entirely? Surprisingly, there is at least a chance that financial performance would improve, despite the lost revenue. 

Linear Video	Actual 2023	Hypothetical
Revenues	$20 billion	$0
Operating Costs	$15 billion	$12 billion
Cash Flow	$5 billion	$7 billion
Earnings	$2 billion	$3 billion

One study by MoffettNathanson estimated that Charter would lose $1.5 billion in revenue and $1 billion in earnings if it were to exit the linear TV business. Another study by LightShed Partners estimated that Charter would lose $2 billion in revenue and $1.5 billion in earnings if it were to exit the linear TV business. The study assumed that Charter's average profit per video customer is $18.

LightShed Partners seems to believe that Charter's linear video business is more profitable than that. LightShed Partners has estimated that Charter would lose $2.5 billion in revenue and $1.5 billion in earnings if it were to exit the linear TV business.

Company	Revenue	Profits	Cash Flow	Operating Costs
Charter Communications	33%	46%	25%	50%
Comcast	35%	38%	28%	42%

By some estimates, linear video, though declining, still represents 25 percent to 33 percent of total revenues for many cable TV operators. 

For many cable operators, linear video might represent perhaps 20 percent to 25 percent of firm profits, though some cable operators might earn as little as five percent profits from linear video services.  

Category	Revenues	Profits	Cash Flow	Operating Costs
Home Broadband	45%	30%	40%	25%
Mobile Services	15%	5%	10%	10%
Voice Services	10%	5%	10%	10%
Linear Video Entertainment Subscriptions	30%	20%	20%	45%

Linear video might often represent 20 percent to 25 percent of cash flow as well, though smaller operators might well generate only about five percent of cash flow from linear video. 

On the other hand, linear video might represent as much as half of all operating costs. Assuming unwinding of contracts is not burdensome, one therefore has to ask what the impact would be were Charter Communications or other cable operators to abandon the linear TV business altogether.

Obviously, revenue would fall. But so would operating costs. And the impact on profits or cash flow might well be positive. 

The point is that, at some point, linear TV revenues will diminish to the point that it is questionable whether it makes sense to remain in the business. That is the challenge now faced by Disney and other content providers as well as by all linear video distributors. 

Will linear video still be profitable for firms such as Comcast and Charter in 2040? That appears unclear, but at present rates of decline linear video profits--if they exist--will be marginal by 2040. 

How Feasible is a Software-Only 6G Upgrade to 5G?

If telco executives get their way, 6G will be a software upgrade that does not require replacement of 5G network elements such as radios. In some ways, that will be challenging. 

"We believe that a software-only upgrade to 6G is the best way to meet the increasing demands of mobile users and businesses,” said Niklas Heuveldop, Vodafone CTO. 

"A software-only upgrade to 6G is essential for us,” said Hannes Ametsreiter, Deutsche Telekom CTO.

Perhaps surprisingly, even Rajeev Suri, Nokia CEO, has said "a software-only upgrade to 6G is the only way to meet the ambitious goals of the 6G roadmap.” It will be challenging. 

It is not clear whether the in-place radios are frequency-agile enough to handle huge new blocks of millimeter wave or teraHertz frequencies. So it is not clear whether virtualized or software-defined radios can be used with the existing 5G infrastructure to allow the 6G upgrades without major upgrades or replacement of existing radio infrastructure. 

Then there is the issue of whether the existing 5G network radio sites are compatible with the signal propagation characteristics of new millimeter or teraHertz spectrum that might be added, or how much new radios or new small cell sites will be required. 

Easier to implement are new modulation techniques, for which there are a number of possible alternatives to the 5G orthogonal frequency-division multiplexing standard. 

What might make adaptive modulation possible--the ability to use different modulation methods depending on local conditions, is the 5G ability to support 5G networks can also use adaptive modulation, which allows the modulation scheme to be changed dynamically, depending on the channel conditions. 

That feature should support dynamic modulation that is more robust in areas where signal propagation is more challenging (though supporting less bandwidth); but supporting maximum throughput in other areas with favorable signal propagation characteristics.

6G is expected to use higher-order modulation schemes than 5G, such as 256QAM and 1024QAM. This will allow for more bits to be transmitted per symbol, increasing the spectral efficiency of the network. 

But there also are a number of potential modulation approaches. 

Index modulation: Index modulation is a technique that uses the indices of active transmit antennas, subcarriers, or time slots to transmit additional information. This can be used to further increase the spectral efficiency of the network.

Non-orthogonal multiple access (NOMA): NOMA is a technique that allows multiple users to share the same spectrum resources at the same time, without causing interference. This can be used to improve the network capacity and support more connected devices.

Machine learning (ML)-based modulation: ML can be used to develop new modulation schemes that are more efficient and robust to interference.

Hybrid modulation schemes: Hybrid modulation schemes combine elements of different modulation schemes to achieve the best possible performance in different operating conditions.

Polar modulation: Polar modulation is a new type of modulation that is more efficient and robust than conventional modulation schemes. Polar modulation is expected to be used in 6G to achieve higher data rates and improve reliability.

MIMO modulation: MIMO modulation uses multiple antennas to transmit and receive data simultaneously. This can significantly increase data rates and improve reliability. 6G is expected to use MIMO modulation with a larger number of antennas than previous generations of cellular technology.

MIMO-OFDM: MIMO-OFDM is a multiplexing technique that uses multiple antennas at the transmitter and receiver to transmit and receive multiple data streams simultaneously. MIMO-OFDM is already used in 5G networks. 

In addition to OFDM, 5G networks can also use other modulation techniques, such as filter bank multicarrier (FBMC) and universal filtered multicarrier (UFMC). However, OFDM is the most widely used modulation technique in 5G networks today.

It is the existing 5G network’s ability to use adaptive modulation, supporting modulation schemes that can be changed dynamically depending on the channel conditions, which will support 6G. 

It remains to be seen how much such approaches can support a software-only upgrade of 5G to support 6G. Many will guess that hardware upgrades will still be necessary, though on a perhaps-reduced level compared to earlier mobile network upgrades. 

That there is growing buyer resistance to the traditional hardware-based platform updates is obvious. Just as obviously, there are possible new opportunities for non-traditional suppliers, such as the hyperscale cloud computing providers.

AI Impact on Data Centers

The use of internet mechanisms for content apps created a need for content delivery networks, so it is likely that artificial intelligence, perhaps a form of high-performance computing, will shape requirements for data centers. 

 

Area	Expected impact
Electricity consumption	AI applications are typically more energy-intensive than traditional IT applications. This is because AI applications often require the use of high-performance computing (HPC) resources, such as GPUs and FPGAs.
Computing cycles	AI applications typically require more computing cycles than traditional IT applications. This is because AI applications often involve complex mathematical operations, such as matrix multiplication and convolution.
Storage	AI applications typically require more storage space than traditional IT applications since databases must be accessed to make inferences.
Data center design	Data centers--in large part--are increasingly designed to support high-performance computing and ability to support AI training and inference operations. Additionally, data centers are being designed to be more energy-efficient and to provide better cooling for HPC resources.
Edge computing	Generative AI and AI applications are increasingly being deployed at the “edge” of the network, closer to where the data is generated, as well as “on the device,” in large part because inference operations often require lower latency than many other types of apps.
Cloud computing	Generative AI and AI applications are also driving the growth of cloud computing. Cloud providers offer a variety of AI-specific services, such as pre-trained AI models and AI development tools. This makes it easier for organizations to develop and deploy AI applications without having to invest in their own computing infrastructure.
Chips	FPGAs and neuromorphic chips are being developed specifically for AI applications. These technologies can provide significant performance and energy efficiency improvements for AI applications.
Content delivery networks	CDNs can be used to distribute AI workloads (load balancing) or storage.

What Would an AI Smartphone Do?

I’m not sure there will ultimately be anything we might all call an “AI smartphone.” Presumably the use of AI to provide rudimentary personalized recommendations or handle natural language processing will be augmented even further. 

Additional contextual awareness and enhanced personalization based on device learning of a user’s preferences and habits seem likely avenues of advance. 

Maybe the device learns which apps you use most often and places them on the home screen more conveniently. Perhaps the device learns your favorite settings and automatically applies them to new apps.

Maybe AI smartphones use information about your location, time of day, and activity level, and then use that information to provide you with relevant information and services in context.

Predictive capabilities might also be explored.  AI smartphones could use machine learning to predict your future needs and wants. ff you're regularly late for meetings, your phone might suggest setting off earlier. If you're planning a trip, your phone might suggest packing certain items or booking flights and accommodation.

More robust forms of natural language processing also seem likely, beyond today’s voice-to-text features and prompts. 

Improved camera capabilities such as automatically adjusting the exposure, white balance, and focus to produce the best possible results also seem likely.

5G Fixed Wireless Probably Appeals to about 25% of the U.S. Home Broadband Market

Verizon reports that its fixed wireless customers are using about 300 Gbytes of data per month. T-Mobile, meanwhile, has reported that in 2022 its fixed wireless customers were using an average of 478 GB of data each month.  

According to OpenVault, the average usage by home broadband users is about 567 GB per month. 

source: OpenVault 

One might point out that such levels of fixed wireless usage are characteristic of more than 60 percent of the whole U.S. market. If one assumes that a fixed wireless connection will tend to run no higher than about 200 Mbps, then fixed wireless arguably appeals to about a quarter of the U.S. home broadband market. 

source: OpenVault