Real-Time Video Entertainment Drives 63% of Fixed Network, 40% of Mobile Internet Access Bandwidth Consumption

It is a truism in the high speed access business that today’s “heavy users” are tomorrow’s “typical users.” And nothing will provide more confirmation of that theory than future consumer behavior, if and when the same content now available from linear video services shifts to Internet delivery.

Already, 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.

In a future market where significant amounts of former linear video viewing are shifting to over the top Internet delivery, the amount of bandwidth consumed by even “typical” consumers will increase by orders of magnitude.

Consumers who do not buy linear video services consume roughly an order of magnitude more data than consumers who rely on linear video services for most of their video consumption, the data suggests.

“Cord cutters” are U.S. ISP customers in the top 15th percentile of streaming audio and video usage. And while it is impossible to ascertain directly, Sandvine assumes those consumers are using streaming as a primary form of entertainment.

That suggests a high likelihood those consumers either do not buy traditional linear video entertainment services, or have access to such services but do not find them as compelling as over the top alternatives such as Netflix, Amazon Prime or Hulu.

“Typical subscribers” in the 15th to 85th percentile of data consumption likely are streaming on a regular basis, Sandvine says, and arguably represent “most” U.S. consumers in terms of behavior.

In other words, these days most consumers stream some amount of video or audio.

“Non-Streamers” represent the bottom 15th percentile of users who stream less than 100 MB of audio or video each month.

Those statistics have direct bearing on future market trends, when it will be possible for consumers to stream much of the content they otherwise would watch as part of a traditional linear video subscription.

The implication is that demand for Internet access bandwidth will skyrocket, even as buying of linear video services declines.

Assuming 1.5GB of data for each hour viewed, and assuming relatively equal high definition and standard definition content viewing, subscribers with “cord cutting behavior” could be consuming on average roughly 100 hours of video each month, or 25 hours a week or roughly 3.6 hours a day.

The top 15th percentile of video users actually consume the majority of monthly network traffic, while the bottom 15th percentile of users consume only 0.5 percent of data.

Again, that suggests the scale of future demand for Internet access data demand. If and when today’s linear video content is widely available over the top, the typical consumer will have behavior very similar to current behaviors of the heaviest users, at a minimum.

For the first half of  2014, mean fixed network (“average”) usage was 51.4 GB, a slight sequential increase from the 44.5 GB seen in in the second half 2013 report.

Over the same period, median fixed network (half of respondents use more, half use less) monthly usage also saw a small sequential increase moving from 17.6 GB to 19.4 GB.

But many ISPs predict 30 percent to 40 percent annual growth rates for aggregate demand, in 2014.

	“Cord Cutter”	Typical Subscriber	“Non-Streamer”
Mean Monthly Usage	213 GB	29 GB	4.5 GB
Mean Real-Time Entertainment Usage	153 GB	13 GB	40 MB
Streaming Share	72%	45%	1%
Average Hours of Streaming	100	9	>1
Share of Total Traffic	53.9%	45.7%	0.5%

source: Sandvine

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.

Will U.S. Mobile Market Structure be More Like France or U.K.?

Will the French mobile market or the U.K. market provide a precursor of developments in the U.S. mobile business?

The U.S. and French mobile markets are unstable, both presently have four leading national contestants, while a major transaction with change of control has occurred in France, while a possible bid to do the same in the U.S. market could be launched within months to two years.

The U.K. market, on the other hand, features more than four national providers, with BT a new entrant. In addition to three firms with more than 15 percent share, there are three additional providers with at least seven percent market share.

Some might argue France resembles the current U.S. mobile market structure, though the U.K. could be more germane if both Dish Network and a cable TV operator operation launch as independent entities, and the legacy mobile carriers do not consolidate.

That could mean as many as six national providers in the market, though most think five or four is a more-likely outcome, even after the entry of Dish Network and a cable operator operation as well.

Illiad’s Free Mobile has disrupted the French mobile market by attacking prices, basing that assault on use of a “Wi-Fi-first” access model that U.S. cable operators also plan to use to anchor a future untethered or mobile access business.

The chief difference at the moment is that the French government now has concluded that ruinous levels of competition exist, and that stable competition, long term, will be served if the mobile market consolidates to three dominant national providers.

In the U.S. market, at least so far, regulators and antitrust authorities have signaled a belief that maintaining four national competitors is necessary. In the French market, government officials now believe competition has reached ruinous levels.

To end a destructive price war, Economy Minister Arnaud Montebourg has argued that the number of mobile operators needed to be reduced. That consolidation further would allow the surviving operators to invest more aggressively in next generation networks.

Matters are more fluid in the U.S. market, though. No matter what view U.S. regulators hold, two additional contestants will enter the market: Dish Network, which must build a network and begin offering service or lose its mobile spectrum licenses, and the asset value the spectrum represents.

Also, the cable industry will enter the market, using a strategy pioneered by Free Mobile.

So while the French government now pushes for consolidation in the country's mobile market--from four providers to three--the U.S. market could potentially see as many as five to six national providers in the near future.

Note that in France, it was Numericable--France’s largest cable TV operator--that has acquired SFR, creating France’s second-biggest communications provider, behind Orange.

"There are two smaller operators that remain, and we can wonder what their future will be unless they merge, which doesn't seem to be on the agenda right now," Montebourg has said.

Consolidation "will happen," Montebourg says. "We will make three operators capable of investing, which will stop destroying jobs and killing each other.”

Many observers would argue that the logical combination would be a combination of Illiad’s Free Mobile and Bouygues. Illiad owns fixed network assets as well as mobile assets.

At the same time, Free Mobile, which is building its mobile network, then would have access to the Bouygues access network, while Bouygues mobile customers would have access to Illiad’s fixed network for mobile data offload.

Since April 2014, the French government has said it will actively encourage mobile market consolidation, a bit of a switch from some earlier thinking that four service providers in the market was preferable to just three in the market.

But there is a difference between the French and U.S. markets. France had just three dominant providers prior to Free Mobile’s market entry in 2012. So a return to three providers would merely restore former market structure.

In the U.S. market, the recent pattern has featured four national providers, even if two more entrants are expected.

Systemic risk to Orange, however, clearly is an issue for some French government authorities,  who believe the danger to jobs is greater than the risk of reduced consumer benefits from competition.

So in one sense, the French market seems headed for fewer providers, while the U.S. market seems headed for more providers, even if Sprint were allowed to merge with T-Mobile US, or if some subsequent deal allowed Dish Network to buy T-Mobile US.

After the expected entry of a cable operation, there still would be at least four national providers, and potentially five. tru

FCC Has to Thread a Needle on Net Neutrality

Predictably, as potential regulation of Internet access as a common carrier service is at least raised by the Federal Communications Commission, opponents and proponents are making clear their respective views on whether such a move would harm, or would not harm, investment in gigabit and other faster networks.

Proponents of Title II Title II regulation include Netflix and Mozilla, though that is not the dominant position. Most app providers are not calling for such big changes, but only for a clear “best effort only” rule for Internet access, as they generally have been doing for years.

ISPs predictably warn of investment slowdowns.

The FCC says it wants public input on reclassifying broadband access a common carrier service as well.

As always, the public positions stake out negotiating positions, in addition to reflecting the perceived business interests of Internet participants and also have political value for the FCC, as a very drastic stick (Title II regulation) will make new "best effort access" rules more palatable for ISPs--and provide political cover for the FCC--after all have had their say.

As always in such highly-political proceedings, the FCC will face strong opposition from some, and strong strong support from other quarters. By essentially moving the goalposts further apart (common carrier regulation on one hand and no effective best effort access rules on the other), the FCC will ultimately have more room to craft a compromise that leaves both sides with something they can live with.

To do so, the FCC will have to thread a needle, in the end choosing not to impose Title II common carrier rules, but also being able to claim it is protecting best effort access, while leaving some room for content delivery networks that stretch all the way to end user locations.

For the moment, we will see the "extremes" of proposed solutions. 

In the end, we will see something that is not a complete victory for proponents of best-effort-only Internet access nor a complete victory for advocates of content delivery features as one possible form of access.

Still, the debate will be fierce, especially initially, until a workable consensus can be crafted and a political consensus reached.

To reach that point, the strongest positions offered by ISPs and some app providers will have to be aired, pressure brought to bear by both sides, and then a workable solution with broad support crafted.

The argument by Internet service providers will be that such regulation will have clear and negative impact on future investment. 

Supporters of common carrier regulation of access services will argue the ISPs are bluffing, and that common carrier regulation will not reduce investment.

But that is why the Title II reclassification is unlikely to happen. There are risks to investment if common carrier rules are applied.

The dispute about future investment is not limited to the U.S. market, though. In Europe, ommon carrier regulation arguably has restricted telco investment in faster networks, while cable TV networks, not covered by common carrier regulations have invested significantly.

The European Commission’s Connected Continent proposals, for example, are a direct response to regulator concern that not enough investment is happening.

The relatively low cost of upgrading cable TV networks, and the widespread availability of cable TV networks in the United States has meant high availability of “superfast” broadband access in the U.S. market, a report by Ofcom, the U.K. communications regulator, suggests.

The high amount of facilities-based competition also has spurred matching investments by U.S. telcos, Ofcom says.

In Europe, where similar  fixed-infrastructure competition is less common, regulators have opted instead for robust wholesale access requirements on telco fixed networks. That has lead to lots of retail competition in the high speed access market, but at the cost of lower investment  in faster facilities.

High speed access provided by cable TV companies, in fact, accounts for much of the higher-speed market share in European Union countries.

McKinsey analysts have estimated it will cost about 200 billion euros to 250 billion euros to upgrade half of EU homes to fiber to the home networks capable of delivering 100 Mbps service.

Though government subsidies will help, the bulk of that investment will have to be made by private firms making rational decisions about the financial return from making such investments.

One might argue that common carrier regulation of Internet access within the EU has contributed mightily to the problem of lagging investment in next generation access faciliities.

An Ofcom report on U.K. broadband infrastructure illustrates the inherent tension between promoting investment in next generation networks and fostering robust competition between suppliers of such services.

Put simply, there often, if not always, is a tension between policies that promote competition and policies that create incentives for investment.

In addition, different nations have historical differences on the supply side that create different outcomes on the demand side.

For reasons having to do with widespread facilities-based cable TV networks being deployed, competition in the United States, for example, is inter-platform (between cable and telco networks), where in Europe, because of less-prevalent cable TV deployment, competition has been intra-platform, based on competitor wholesale access to the telephone network.

Ofcom notes that infrastructure-based competition between local incumbent telcos and local cable companies lead to early investment in faster access networks.

By way of contrast, in Europe fixed-infrastructure competition is less common, so regulators have required that incumbent telcos provide wholesale access to their networks, fostering competition but also creating negative incentives for investment in faster networks.

Ofcom also argues that retail pricing policies have differing impact on demand, though some might attribute much of the difference to supply constraints, in particular the longer average loop length in the United States, compared to Europe.

80% of Surveyed Small Businesses Believe "Wi-Fi as Amenity" is Important

Some 80 percent of small businesses surveyed on behalf of Time Warner Cable Business Class believe their customers expect free WiFi, and also rank it as a top way to attract new customers, but only 43 percent of businesses offer it.

The survey also found that 41 percent of respondents do not use a website in their day-to-day business, and 54 percent are not using social media to promote their business.

Of course, it comes as no surprise that a survey conducted on behalf of a specific service provider finds that potential customers need to buy more of that service provider’s services to compete.

But it might be significant that offering Wi-Fi as an amenity is viewed to have such positive business value.

“The survey reveals that the top ‘must have’ services for small business are fast, reliable internet access; clear, reliable phone service; and reliable WiFi service at their business location,” says Time Warner Cable.

While a majority of businesses are evaluating their technology bi-annually or annually, 33 percent claim they have been negatively affected by outdated technology, and 35 percent are fixing tech problems themselves, Time Warner Cable says.

AT&T Deal For DirecTV Soon?

AT&T reportedly is within weeks of making a firm bid for DirecTV, a move in keeping with AT&T's (SBC) growth strategy over the last couple of decades, which is to get bigger fast using acquisitions. 

Verizon, in contrast, has emphasized organic growth. 

As always, there is disagreement about the value of such a deal. Some think AT&T will not gain as many synergies from the deal as some expect, since the network platforms are distinct. That line of thinking suggests a better approach would allow AT&T to bundle multiple services using a single platform.

But "better" in principle does not take into account the realities of what AT&T can accomplish, in its actual markets, with expected close regulatory scrutiny, at reasonable cost, without damaging its credit rating and debt load.

Any significant-sized deal to acquire additional fixed network assets or mobile assets would almost certainly be rejected by the Federal Communications Commission and Department of Justice, as any big deals in those areas would boost AT&T above 30 percent market share, a trigger for regulatory objection.

In that regard, the Comcast bid for Time Warner Cable would give the new Comcast about 40 percent share of U.S. fixed network high speed access share, even if video entertainment share or voice share would raise fewer issues. 

That level of Internet access market share (40 percent) typically would be a huge warning sign that regulatory opposition is certain. 

In that sense, an AT&T bid for DirecTV would face fewer obstacles than Comcast's bid for Time Warner Cable.
Comcast says it would divest about three million accounts, as part of the acquisition, to keep video share under a 30-percent market share level.

But some will argue it is high speed access share that is critical, going forward, not video share. 

And that is one complication for regulators and antitrust authorities looking at fixed network acquisitions and mergers. What is the relevant market: all triple-play services taken together, or market share in each discrete market (voice, video entertainment and high speed access)?

Even more complicated are evolving quadruple-play markets, where U.S. cable operators, not just telcos, soon will be competing against each other, and against other contestants with a single lead app (mobile-only, or satellite-only).

In fact, many observers already believe that, in the future, cable operators will make most of their money from high speed access, not video entertainment and other services. If so, then the strategic change in market structure is high speed access, not video.

Any Sprint effort to buy T-Mobile US would not so much face opposition because it vaults Sprint above the 30 percent market share test, but because it reduces the number of national U.S. mobile service providers from four to three.

That is a major concern of regulators in many mobile markets. 

Comcast Acquisition of Time Warner Cable Would Vastly Boost Comcast's High Speed Access Share

Cable operators have generally been winning market share in the fixed network high speed access business in the United States. Where Cox Communications, CenturyLink and Verizon are generally expected to see flat revenue growth, AT&T is projected to lose market share, while Comcast and Time Warner Cable are expected to gain share. 

Combined, Comcast and Time Warner Cable would grow vastly more than all the other competitors, in the event of a successful Comcast purchase of Time Warner Cable.

source: Consumerist