Will Access or Content Drive Consumer Internet/Media Revenues in 5 Years?

One way of illustrating why the strategies AT&T and Verizon now are following make sense is to look at consumer internet and media revenues over the next five or so years. In 2016, about 29 percent of total consumer internet/media revenues will be generated by the internet access function. Some 32 percent of revenues will be generated by third party spending (advertisers).

Paid-for content subscriptions (or on-demand purchases) will contribute about 39 percent of total consumer internet and media revenues in 2016.

In 2021, access might contribute 33 percent of total consumer internet and media revenues; advertising about 32 percent; paid content about 35 percent of total revenues. Relatively speaking, paid content contribution will drop, as a percentage of total, while internet access, as a percentage of total, will grow.

The point is that it makes sense for an access provider with scale to look at the paid content or advertising segments of the business. In 2016, paid content is the single largest segment.

By 2021, each of those revenue segments will represent about a third of total revenues.

source: Activate

Mobile Ad Revenues Grow 89%, Mobile Digital Video Revenues 178%

Verizon’s big move into mobile advertising and AT&T’s big move into content (especially mobile plans) remain controversial strategies, at least from the perspective of many investment concerns.

Right or wrong, there is a clear logic at work. Mobile revenues increased 89 percent from the first half of 2015 to the first half of 2016, the Interactive Advertising Bureau reports. Likewise, digital video, including mobile and desktop, grew 51 percent between 2015 and 2016.

Digital video revenues generated by smartphones and tablets grew 178 percent, year over year, IAB reports.

As audiences shift to mobile devices, digital video was the only ad format on desktop devices that had meaningful growth, increasing 13 percent, year over year.

The extent to which Verizon can succeed as a mobile advertising platform, or AT&T win as a mobile and over-the-top content distributor, remains unclear to many. What is clear is the strategy.

Both firms operate in content and advertising markets that are large and potentially sustainable. That is not the case in most countries, whose markets are too small to offer scale benefits.

AT&T already is the largest linear video distributor in the U.S. market. And though many have criticized AT&T for moving into linear video distribution in a big way, the company’s leadership is not dumb. They know linear is going to give way to over the top distribution, which is why OTT plans are being developed.

If one accepts the notion that large tier-one telcos will have to replace something like half their present revenue within a decade, and that gross revenue and profit margin protection requires moving “up the stack” and “across the value chain” towards applications and platforms, then both video content and mobile advertising are rational bets for Verizon and AT&T.

That is not the case for most smaller entities globally.

Mobile/Tablet Internet Access Surpasses Desktop for 1st Time

On a global basis, a majority of consumers access the Internet from a mobile device or tablet, though that is not the case in the United Kingdom, Australia, or United States, new data from StatCounter shows.

Separating mobile from tablet data, desktop instances still outnumber mobile sessions, though. Desktop sessions represented about 49 percent of Internet usage in October 2016, while mobile instances represented 47 percent. Tablet sessions added another five percent of access activity.

source: StatCounter

Facebook Developing Open Source Optical Transport

It is hard to argue, in any way, with the statement that “meeting the demands of increasing global internet usage requires a combination of wireless connectivity and scalable, cost-effective backhaul infrastructure,” Facebook engineers say.

You might argue that is correct, but not especially meaningful. You might be wrong, as Facebook engineers are working on a number of those fundamental technologies, looking to create open source gear and platforms for service providers.

Facebook is working on new open-source approaches to switching, routing and optical transport called Open Packet DWDM.

Open Packet DWDM uses combined packet and dense wavelength division multiplexing (DWDM) technology for metro and long-haul fiber optic transport networks. That is not surprising. What is different is Facebook’s determination to create open source--and therefore lower cost--platforms long haul networks can use.

Open Packet DWDM enables a clean separation of software and hardware--all open source--so anyone can contribute packet or DWDM systems, components, or software.

Facebook will contribute Open Packet DWDM to theTelecom Infra Project (TIP).

Already, Facebook has used Open Packet DWDM to develop a new transponder platform called Voyager. Voyager is described as the industry’s first “white box” transponder and routing solution.

“By unbundling the hardware and software in existing ‘black box’ systems, which include transponders, filters, line systems, and control and management software, we can advance each component independently and deliver even more bandwidth with greater cost efficiency,” Facebook engineers believe.

Facebook partners “have helped us successfully test Voyager and begin to build an ecosystem around it.”

The design will be contributed to TIP as part of the Backhaul: Open Optical Packet Transport (OOPT) project group, with the aim of encouraging more open and programmable network architectures.

Figure 2: Voyager transponder with 12 QSFP28 ports and 4 x200G DWDM line ports.

The first version of Voyager leverages data center technologies that Facebook implemented in Wedge 100, Facebook's top-of-rack switch.

Laboratory measurement results using Voyager early units configured for 200 Gbps per wavelength capacity using 16QAM modulation have reached up to 180 km distances.

“We believe that Voyager is powerful enough to support metro and long-haul data center interconnect applications,” Facebook engineers say.

“We successfully tested the packet-optical transponders in field trials with Equinix in the U.S. and MTN in South Africa, and we plan to open-source the Voyager software, similar to the FBOSS software for Wedge 100,” they say. “The open approach to development of optical packet systems will allow for faster time to market and a lower barrier of entry for new technologies.”

Carriers Want to Stop Selling Products Customers Do Not Want

In many markets and industries, suppliers can make their own decisions about what products to sell, based on what customers want to buy. Much of the telecommunications business is not that way. Often, service providers must ask for permission to discontinue selling legacy services that customers no longer wish to buy.

Former data protocols such as frame relay simply are not used anymore. AT&T, for example, has pointed out that it no longer has any customers for fractional T-1 services in many states.

So it is that CenturyLink wants to stop selling asynchronous transfer mode and frame relay services. Some of you will remember ATM. it was the expected next generation network until “legacy” IP displaced it in the market.

In the rather significantly regulated telecom business, providers cannot even stop selling products customers do not want, without asking permission.

Zero Rating of Video is Inevitable, Necessary

It long has been obvious that mobile video consumption--especially managed streaming services--would “break” the mobile data business model, without fundamental changes to the charging mechanisms.

In other words, mobile data consumption when customers used for-fee video services would have to be zero rated, the same way linear video services, broadcast TV, broadcast radio and other content services have been zero rated.

As the Internet increasingly has become a venue for content consumption, such changes in rating mechanisms have been increasingly inevitable, since pricing video data consumption at comparable rates (cents per megabyte) would quickly break the video streaming business model.

That is happening, as all the leading mobile carriers in the U.S. market have moved to some form of zero rating for consumption of at least some streaming video content.

The reasons for the change are simple enough. Video is the most bandwidth-intensive application typically used by consumers, by an order of magnitude or more. In other words, consumption of one minute of video consumes more bandwidth than one minute of web browsing, and up to a few orders of magnitude more data than one minute of texting, voice or messaging.

Revenue per bit metrics likewise are skewed. By some estimates, where voice might earn 35 cents per megabyte , revenue per Internet app might generate a few cents per megabyte. It gets worse. Mobile operators earn nothing when customers watch over the top services such as Netflix, beyond the typical bigger data buckets such behavior will drive.

As in other markets around the world, data growth is being driven largely by video streaming, a GSMA report says.

source: GSMA

Multiple Roles, Revenue Streams a Problem?

Some observers appear to believe it is somehow unethical or unsavory for an internet access provider to have multiple revenue streams, including simple access as well as content or application revenues.

It is an odd perspective, given that nearly all large contestants in the internet ecosystem now operate in multiple roles, and therefore have multiple revenue streams. Google operates in search, many other app roles, devices, connectivity and operating systems, for example.

Indeed, one might well note that some contestants have no option but to expand from their current roles, into new roles.

In 2015, connectivity represented perhaps 17 percent of internet ecosystem value. By 2020, connectivity might represent only about 14 percent of internet ecosystem value. In 2015, apps represented about 47 percent of internet ecosystem value. By 2020, apps might represent 52 percent of value.

That explains, simply, why connectivity providers constantly look for ways to move up the value chain, or “up the stack.” Value is shifting to apps, and away from simple connectivity. At the same time, profit margins generally are higher in apps and content.