OTT Versus Linear Video is Becoming a Global Battlefield

By now, nobody is surprised to hear that linear video subscriptions continue to drop or that over the top subscriptions are growing. Perhaps the bigger story is the globalization of the business. Netflix now is a global content supplier, while most other providers operate mostly in a single country, or a small number of countries.

So while it still makes sense to track how U.S. service providers are doing, compared to U.S. competitors, the battle has become global, and Netflix arguably is the leader, in that regard.

source: Statista

In aggregate, there are more U.S. paid streaming accounts than linear accounts in service.

Netflix has some 55 million U.S. accounts, while Amazon Prime has some 90 million subscribers. All the largest linear video providers together have about 92.2 million accounts.

Total revenue is another story, as monthly subscription revenue earned by a linear account can be an order of magnitude greater than the revenue from any single OTT streaming account.

source: Ovum (Informa)

In 2017, for example, the major U.S. providers lost about 1.5 million accounts, up from some 760,000 in 2016, according to Leichtman Research Group.

The big swing was that streaming services owned by the linear providers gained 1.5 million accounts, nearly the amount lost by the two satellite services.

The biggest six cable companies now have about 48.1 million video accounts. Satellite TV services claim 31.5 million subscribers (including DirecTV, owned by AT&T).

The largest three fixed network telephone providers have 9.2 million subscribers (nearly all provided by AT&T and Verizon).

The top OTT services have about 3.4 million subscribers.

Pay-TV Providers	Subscribers at End of 4Q 2017	Net Adds in 2017
Cable Companies
Comcast	22,357,000	(151,000)
Charter	16,997,000	(239,000)
Altice	3,405,500	(129,000)
Mediacom	821,000	(14,000)
Cable ONE*	283,001	(37,245)
Other major private companies**	4,200,000	(90,000)
Total Top Cable	48,063,501	(660,245)
Satellite Services (DBS)
DIRECTV	20,458,000	(554,000)
DISH TV^	11,030,000	(995,000)
Total DBS	31,488,000	(1,549,000)
Phone Companies
Verizon FiOS	4,619,000	(75,000)
AT&T U-verse	3,657,000	(624,000)
Frontier	961,000	(184,000)
Total Top Phone	9,237,000	(883,000)
Internet-Delivered
Sling TV^^	2,212,000	711,000
DIRECTV NOW	1,155,000	888,000
Total Top Internet-Delivered	3,367,000	1,599,000
Total Top Providers	92,155,501	(1,493,245)

Netflix Wants Massive Disruption of Every Internet Access Market in the World

The thing about value chains is that, lower in the stack or earlier in the chain, each participant’s revenue is a “cost” to other participants. That explains, as much as anything, industry segment views on network neutrality, inter-segment competition, regulation and antitrust action, irrespective of the public policy goals any particular policy represents.

Be clear, that does not mean there are only naked commercial interests involved. There are legitimate issues of public policy. But for every element of public policy, there are corresponding financial interests.

Example: Netflix views on disruption of access markets. Universal internet access availability and massive internet access cost declines are preconditions for Netflix and its business model.

“Reliance Jio has been a transformational network in India and has brought down data cost massively,” says Netflix CEO Reed Hastings. “There are other people around the world having that kind of impact and can get people to use internet more.”

“We hope someone would do a Reliance Jio in every other country,” says Hastings.

It would be exceptionally hard to find any reasonable objection to the policy notion that every citizen and consumer should have access to the internet, at prices they can afford.

At the same time, it is incontestable that the widespread availability of cheap internet access is a precondition for the business models of every application provider and device manufacturer, while high-quality (fast, reliable, low latency) is a precondition for some business models.

Since application providers sit “at the top of the stack,” every other segment’s revenue streams are “costs” for the application layer providers.

That is true even when the app provider has vertically integrated all or most of the value chain (silicon, processors, optical fiber, communication networks and elements, network management and operating system software, data centers, end user devices, personnel, marketing platforms and fulfillment mechanisms.

That explains why retail telecom service providers care about the cost of servers, switches, construction, optical cable, management and billing software, end user devices and software used to create and deliver the actual end user applications, union contracts and so forth.

All those are cost inputs to the retail price. So for Netflix, universally available cheap internet access is a fundamental requirement for people deriving value from Netflix services. Without internet access, the product has no value.

So it is in Netflix business interests for the rest of the value chain to create and support universal and low-cost internet access. The same is true for Google, Facebook and all other app providers.

If you want to know why industry segments fight over network neutrality, it is because their business interests are at stake. The net neutrality debate is not only about business interests of particular firms and value chain segments. But it explains the positions those interests take.

Ultra-Low Latency is the Defining Characteristic of Next Era of Networks and Business Models

Eras now change so fast in the computing space that it is hard to come up with nomenclature that makes sense. It used to be easy.

In terms of platforms, we moved from mainframe to minicomputers to personal computers (and client-server) to mobile or ambient computing. Some might say the next evolution is “pervasive computing” based on widespread internet of things adoption.

In the area of core technology we moved from vacuum tubes to transistors to integrated circuits to microprocessors, graphics processors and now seem headed for an era where artificial intelligence becomes the driver.

In terms of apps, we have moved from enterprise back office to desktop productivity to internet apps on smartphones. It is the recent era that seems most diverse. Some people might say we are now in the age of mobile computing. Others might say it is more about “internet computing” or “cloud computing” or “social computing.”

Recent “ages” or “eras” change so fast we probably are not talking about ages or eras at all. Within a span of seven years, for example, we might be said to have moved through the ages of web, to search, to social, to cloud, to mobile.

Obviously we are too granular. An “age” or “era” should not be so short as to last only a year or two. That is a buzzword or a theme, certainly, but not an “age or era.”

At the risk of contributing to the confusion, we might be on the cusp of an era of ultra-low-latency networks designed to support new applications requiring such ultra-low latency, one of the defining performance characteristics of 5G.

But there are other big changes. A new edge computing infrastructure is believed necessary to support the ultra-low-latency apps for which 5G will provide the access. Inside the core network, new methods of creating virtual private networks (including network slicing) might also sometimes play a role in creating low-latency networks.

Most likely, the coming era will not be called anything like “ultra-low latency.” It simply is not catchy enough. “Era of IoT” or “ambient computing,” while not especially easy  to grasp, might make more sense.

Still, the key change is latency performance, though most casual observers will point to the huge increases in bandwidth as the defining characteristic. But when Nokia Bell Labs consultants talk about “creating time,” they are speaking broadly about latency performance, not bandwidth.

And to the extent that 5G revenue upside comes from internet of things apps (sensor connections), much of the clear upside comes in the ultra-low-latency areas, as much of the IoT sensor access requirement might be met by existing 4G or fixed connections (Wi-Fi, for example).

Many sensors will have essentially zero latency dependence, as they might report data only once a day or at specified other intervals, but with no particular dependence on latency performance.

Other applications, including autonomous vehicles, virtual or augmented reality, remote surgery or instant startup of 8K video content, might well require latency below 10 milliseconds.

source: Heavy Reading

The implications are fairly clear: if in fact the next big wave of revenue opportunity for service providers are various internet of things (sensor) applications--not humans using smartphones--the key area where 5G is unique is ultra-low latency, since 5G is specifically built to deliver ultra-low latency.

So it is not bandwidth, as such, that is the clear differentiation between pre-5G and 5G and future networks. Latency performance is where the difference exists, not bandwidth, though the increases will be significant.

Even advanced 4G networks, Wi-Fi and other networks will routinely operate in the hundreds of megabits per second to gigabit ranges, and most apps will not routinely require that much bandwidth.

It will be some time until we are able to come up with a universally-accepted nomenclature for the coming era that includes 5G and edge computing. As has been the case in the past, we will be able to characterize the eras at the component level, the computing model, the devices used or by lead applications.

And, cumbersome though it might be, latency will figure in nearly every characterization, and possibly in all descriptors. Low latency really is the key, where it comes to the business model, the key changes in architecture or revenue model changes.

U.S. Internet Access Prices Actually Have Not Increased Over 2 Decades

As the old adage implies, people are “entitled to their own opinions, but not their own facts.”

So it is that historical evidence for consumer internet access “price gouging” is virtually impossible to find in the U.S. market, over the past two decades, when internet service providers have--for all but three years--been able to charge whatever the markets would bear.

In fact, improvements in product quality (bandwidth, for example) have been made almost at Moore’s Law rates. And prices broadly have dropped, in absolute terms as well as relative terms, without considering inflation adjusted prices or product changes.

Impressionistically, recall only that some of us who were buying “broadband” internet access before the turn of the century were paying hundreds of dollars a month for 756 kbps service. Today we are able to buy 100-Mbps service for $50 to $70 a month, on a standalone basis.

In fact, because the internet access actually is part of a bundle, the imputed cost of 100-Mbps fixed network internet access might be less than $50 a month.

And since many of us buy mobile bundles as well, the cost of 15 Gbytes of monthly usage, per device, might be about $30 a month, per device. That is less money than we used to spend, for smaller usage buckets.

People with shorter experience of internet access prices might not understand the price declines.

Consumers who do not consider the changes in volume or the actual discounts on the products they actually buy might not be so aware of the price changes.

But assume one argues typical posted retail prices have climbed over the last decade or so. Ignore for the moment the fact that the “product” itself has changed, climbing from less than 1 Mbps to 100 Mbps to 300 Mbps for standard products.

Even there, one can argue that the increase in retail prices has been less than the overall level of consumer prices. In other words, internet access posted retail prices have increased less than the general level of prices.

The argument that ISPs are oligopolists whose behavior “harms” consumers because prices are higher than they ought to be, and service quality lower than it ought to be, is not borne out by the historical record.

According to the U.S. Bureau of Labor Statistics, for example, between 2009 and 2017, the producer price index (PPI) for “telecommunication, cable, and internet access services” shows that prices actually dropped, and dropped fastest in 2017.

What makes this data even more noteworthy is that it includes “cable TV” subscription services, which everyone agrees climb every year, at rates above the background rate of inflation generally.

So if cable TV prices rise every year, the only explanation for declining prices for the whole basket (telecom, internet access and video) is that telecom and internet access prices dropped even more than cable TV prices rose.

Producer Price Index

Telecom, Cable TV, Internet Access

source: BLS

Likewise, as consumer prices have increased (from 2007 to 2012, for example), the cost of internet access increased less than the overall CPI, even as product quality (measured in terms of speed) increased.

source: GABOR MOLNAR, SCOTT J. SAVAGE, AND DOUGLAS C. SICKER

In earlier periods, such as 2000 to 2009, we see the same trend: U.S. internet access prices dropped about 80 percent, according to the Economist.

source: The Economist

Looking at cost per bit, since 1999, cost has dropped by two orders of magnitude (100 fold).

Deloitte University Press

Historically speaking, U.S. retail internet access prices have dropped, not risen, over the past two decades, on a cost-per-bit basis; compared to the consumer price index or other inflation-adjusted terms.

Some of the price declines are hidden, as consumers have shifted to bundled products, not standalone products, where prices are effectively discounted, even if standalone retail prices grow.

Finally, the product itself has changed. We now routinely buy services that are two orders of magnitude better, at prices four to six times cheaper.

Wide Divergence on 5G, IoT, Edge Computing Near Term Impact

It is not too hard to find skeptics about revenue upside for mobile operators in 5G, internet of things or edge computing, because it is hard to demonstrate the business case in a near term sense, in most markets. That seems to have been true at the recent Mobile World Congress trade show as well.

Despite clear evidence that mobile operators in the United States, Japan, South Korea and China are charging fast into 5G, with firms in each of those countries believing 5G leadership will lead to broader benefits, many operators in other nations are less optimistic about the near term business case.

In some cases, that skepticism or agnosticism also has other roots: recent and major investments in 4G, uncertain spectrum allocations or the general state of the mobile business (very low growth) in general, which raises the risk of big new investments in 5G.

Add to that divergence the sense in early-adopter countries that 5G is about industrial policy, while perhaps not a plausible possibility in most countries, and the split of opinion is easy to explain.

Optimists might point out that business model fuzziness also was a characteristic of both 3G and 4G, so some amount of uncertainty is perhaps typical of next-generation mobile platforms in recent eras that have seen revenue growth drivers migrate from voice to messaging to internet access for revenue growth, and which now will have to depend on additional new growth drivers in the 5G era beyond internet access for people on smartphones.

It also is fair to say that early adopters in 5G vary by continent, with mobile operators in the United States, Japan, China, South Korea moving early and aggressively into 5G, while European, African, South American and broader Asian operators are more circumspect.

In some instances, the hesitation is related to the recency of 4G investments. In other cases the difficulty of the mobile business model in general makes a major upgrade cycle unpalatable.

There are divides, by continent, on the matter of internet of things upside as well, possibly because many observers see the biggest early revenue cases developing in North America and parts of Asia.

source: Research Nester

So it might not be surprising that mobile operators in the United States and East Asia are more optimistic about the near term 5G and IoT business cases (as IoT upside will be dependent on 5G, in important cases).

In Europe, the IoT opportunity often is included in discussions of the “fourth industrial revolution.”

One hears the term of art used less in the North American markets, perhaps suggesting different perceptions of where opportunity lies. In a broad sense, users of the term fourth industrial revolution seem to use it in a sense similar to “digitalization” and a bit more reliant on applying artificial intelligence to business processes.

Other touted revenue platforms such as edge computing are simply early in development, as edge computing requires new lead apps such as autonomous vehicles to drive such requirements.

Some observers also note the nebulous discussions and status of artificial intelligence within the service provider community at the moment, though, perhaps surprisingly, AI is seen by some as having more relevance for mobile operators than 5G, IoT or edge computing.

The point is that near-term optimism about 5G, internet of things and edge computing--if not complete conviction at the same level--is higher in a few markets than across most of the globe.

In part, that is because 5G business cases are part of the broader IoT and edge computing trends. Without significant IoT growth, it is hard to make the case either for 5G or edge computing.

At the moment, 5G and IoT are a Rorschach test. Different people see different things.

Facts Do Not Support Charge that Internet Access Prices Climb "Without Net Neutrality"

One often hears, in discussions of network neutrality, assertions that without such rules, internet access costs will skyrocket. Oddly enough, internet access has--for nearly all its history--been an unregulated service where internet service providers have been able to charge whatever the market will bear.

Since, for all of the time U.S. consumers have purchased internet access, the same fundamental rules (internet access is a data service, and therefore unregulated as are other data applications) have been in place, with the exception of the the few years when internet access was deemed to be a regulated “telecom” service, we can look at the whole history of prices to evaluate whether prices actually have shown evidence of “price gouging.”

History suggests prices have done nothing but drop--and drop by orders of magnitude--over the whole history of consumer internet access services.

Some might argue that this might be true on a “cost per bit” basis. Others will argue it is true on an absolute price basis. Those of you who were buying internet access early in the broadband era (around the turn of the century) can remember spending $200 to $300 a month for 756 kbps service. We routinely now pay $50 to $70 a month for service of 100 Mbps.

Value is higher and price is lower, on an absolute basis, without adjusting for inflation. And prices continue to fall, even faster, on a “value compared to price” basis. Schools buying internet access between 2013 and 2017, for example, saw prices decline 78 percent, on a cost per Mbps basis.

source: Infrastructure USA

That same price trend can be seen globally, in developing countries. The same trend was seen in mobile voice, internet transit (where prices often decline 33 percent per year).

Consumer internet access also can be characterized as having Moore’s Law rates of change. In other words, connection speed increases 50 percent per year, every year, while prices drop, remain stable or increase only modestly.

source: Statista

It is obvious that consumer internet access prices, despite improvements, do not increase 50 percent per year. In fact, without adjusting for inflation or changes in end user demand for products, it is hard to argue that U.S. consumer internet access prices actually have increased much at all.

Real prices are often hidden because most consumers do not buy the “stand alone” prices for access, but instead buy bundles of services where the actual discounts are not visible.

Some might argue internet access prices rise two percent or perhaps three percent a year. That is not surprising, as this represents the underlying rate of inflation.  

source: Jacob Nielsen    

The point is that actual access prices are not--as many claim--increasing in the U.S. market because there is no competition or because there is no “network neutrality.”

Some studies suggest prices are higher than they actually are, because the quotes are for “standalone” prices, at retail, even when most consumers do not buy those products, but rather bundles or other promotional plans.

Of course, one also has to adjust nominal (actual) retail prices across countries, as overall price levels vary across countries. Adjusting using the purchasing power parity approach, to normalize retail prices for actual price levels in each country, global internet access prices average between $50 to $80 a month, according to Point Topic studies.

source: Point Topic

Will SD-WAN Become the Universal Enterprise WAN Connection?

Some 93 percent of surveyed executives believe enterprises will have adopted software-defined wide area networks by the end of 2019.

That is a typical, and possibly too-optimistic forecast, in terms of revenue expectations. Since SD-WAN primarily is viewed as a branch office solution, and since current revenue might be less than $1 billion annually, on a global level. That is a very-small market, by tier-one service provider standards.

But there is another way to look at what we now call “software defined wide area networks.” And that is to envision the future enterprise wide area network being built nearly exclusively on virtual private networks that tunnel through the public network.

Source: Nokia Bell Labs

source: Nokia Bell Labs

In that scenario, virtual private networks become the basic way all enterprise WAN connections are built--to headquarters or branch locations. That becomes even more central if, as many believe, future networks will be highly virtualized and therefore federated.