OTT Now Attacks a Wider Range of Telco Revenue Streams

Internet Protocol and over the top software attacks current telecom service provider revenues and profit margins on an ever-wider basis.

Content encryption has eliminated nearly 60 percent of the video and audio optimization market in 2015, according to ABI Research. That eliminates a major opportunity for Internet service providers to provide “quality of service” or quality-related management of  those streams.

“Moving forward, telecom operators and vendors need to make significant and strategic operational moves to protect network performance and create a competitive advantage with streaming media entertainment,” says Joe Hoffman, ABI Research VP.

It is going to get worse. “We expect 85 percent of traffic to be encrypted,” said Hoffman.

“With encryption here to stay, operators need new tools to manage mobile broadband traffic,” says Joe Hoffman, Managing Director and Vice President at ABI Research.

Those new methods will be designed to work even with encrypted media streams.

Also, consider the revenue impact of software-defined wide area network services.

SD-WAN allows the creation of an over the top intelligent network infrastructure that aggregates transport from any number of providers or physical connections.

Enterprises can run their own software-defined wide area networks, using that control to

Apply least-cost-routing more easily, or highest-quality-routing.

That enables high-margin MPLS connections to be replaced with commodity Internet connectivity , to some significant extent.

Software-defined WAN capabilities also reduces enterprise customer loyalty or provider lock-in by establishing an “abstraction” layer above the network, controlled by in-house IT teams or competing managed service providers.

So the potential threat is a reduction in MPLS & other WAN services revenues, as well as lower potential united communications “as a service” or managed security services as well.

Verizon Strategy Right in Terms of Function, Wrong in Terms of "Core Competence"

Sooner or later, the notion of traditional service provider “core competence” where it comes to  running networks--already challenged--is going to be severely tested within the Internet ecosystem.

“Core competence” implies not only that an entity is good at doing some things, but that an entity has a unique ability to so those things, in ways that others cannot emulate.

Viewed that way, no single mobile operator has a “core competence” where it comes to building or operating mobile networks, by definition. Others can, and do, routinely do so as well.

That has become increasingly true in the fixed network business as well, as cable TV operators, Google Fiber and third-party Internet service providers provide identical services, and operate their own networks.

In other words, perhaps “running networks” is not really a core competence. If so, Verizon and other traditional access providers are going to face huge headwinds.

Managing access networks arguably is a “key role or function” provided by an ISP, whether that is a core competence or not.

There is a reason the seven-layer Open Systems Interconnect model has access at one layer and apps at the other end of the stack.

The functions are distinct, even if any single provider might not have an actual “core competence” that is unique, within its role.

In other words, “things we do” within the ecosystem is a valid concept, even if “core competence” is less clear.

“The one thing that I try to think about is core competency,” said Verizon CEO Lowell McAdam. “And I'd put our team up against anybody in the world on the network side.” Few would disagree with that statement, as far as it goes.

“The connectivity layer is where we feel we need to be dominant,” said McAdam.

But here’s a key follow-up statement: “ As you go up into platforms and things like content, it's not exactly our strong suit.”

In other words, Verizon’s strategy is to be “dominant” as an access provider, and then be “a player” in at least some of the applications that require access.

In principle, that is a very-sound strategy. It is the strategy embraced by cable TV providers, who likewise might argue they need to be dominant access providers, but also own at least some of the apps they deliver.

Still, over time, a number of trends suggest that the access function might be less a matter of scarcity than has been true in the past.

There are going to be more providers (cable TV already has the largest market share in the U.S. Internet access business).

There are going to be more ways to source access (Wi-Fi, new high-throughput satellite constellations, fixed wireless, balloons, unmanned aerial vehicles).  

There is going to to be much more capacity (more providers of gigabit fixed access and much more wireless spectrum).

And the cost of being an access provider is going to drop. As that hurdle gets lower, a wider range of potential business models becomes possible.

All of that erodes whatever advantages an access specialist might believe it possesses. So, in one sense, Verizon’s strategy is strategically flawed. It does not actually have a “unique and hard to replicate core competence” in access.

Others have done so, and more will do so in the future.

Still, Verizon is correct, in another sense. Like cable TV operators, the revenue portfolio will be a mix of selling access, and owning at least part of the content delivered over that network.

“Core competence” is not necessarily the issue. Key function is the issue. Verizon will build on its access function, adding app roles. Like many other big participants in the ecosystem, Verizon will participate at multiple layers or segments within the ecosystem.

But Verizon might not have a unique capability in any of those roles.

Set-Top Market is Small and Declining, Why Bother Regulating It?

The set-top box market is on the decline, expected to drop by about nine percent in 2016 to less than $16 billion in revenue globally, according to researchers at ABI Research.

Under the best of circumstances, the North American market for set-top boxes is rather small, representing less than $7 billion in annual turnover for all video service suppliers, annually, and perhaps $6 billion in the U.S. market, as the Federal Communications Commission explores methods of opening up the market to competition.

“The market is experiencing significant downward pressure on set-top box pricing,” says Sam Rosen, ABI Research VP. “Hardware revenues will fall.”

All that at a time when virtually everyone believes the linear video market will continue to be in decline, as over the top streaming services, which require little in the way of “dedicated decoder” support, will simply use standard IP-capable screens.

source: Grandview Research

The point is that regulating markets in decline tends to be a poor use of regulatory effort. In fact, if anything, a light touch is required, as declining markets tend to feature “underinvestment” as a rule.

The other issue is that spending time on small and declining markets likewise is an inefficient use of regulator time and effort, as such markets are, by definition, relatively inconsequential and, in any case, are destined to shrink over time, in any case.

Whatever one thinks about the degree of competition in the set-top decoder market, it is a small industrial product segment that is declining in value. Regulators undoubtedly have many bigger issues to confront than that.

Consumers probably are not interested in "owning" clunky boxes whose only function is to provide channel tuning and conditional access for linear video service. Set-tops are industrial products of little, if any, intrinsic value to consumers. They are not phones. Not even music players or cameras. Who cares, really, about "owning" such industrial products?

Content Encryption Limits ISP Ability to Manage Network Performance

Content encryption has eliminated nearly 60 percent of the video and audio optimization market in 2015, according to ABI Research. That eliminates a major opportunity for Internet service providers to provide “quality of service” or quality-related management of  those streams.

“Moving forward, telecom operators and vendors need to make significant and strategic operational moves to protect network performance and create a competitive advantage with streaming media entertainment,” says Joe Hoffman, ABI Research VP.

It is going to get worse. “We expect 85 percent of traffic to be encrypted,” said Hoffman.

“With encryption here to stay, operators need new tools to manage mobile broadband traffic,” says Joe Hoffman, Managing Director and Vice President at ABI Research.

Those new methods will be designed to work even with encrypted media streams.

Will 5G Enable New Birth of Fixed Wireless Business?

Fifth-generation mobile networks might be more strategic than you might think, boosting both the value of wireless access and the fixed network. It is easy to focus on the "gigabit per second to every mobile device" 5G is designed to support, with higher speeds up to 5 Gbps or 10 Gbps conceivable in some scenarios.

In addition to making mobile access speeds competitive with--or higher than--fixed networks in many instances, 5G might also allow some Internet service providers to rethink access architectures, in region and out of region.

Verizon, for example, now is studying ways to use fiber backbone networks, especially out of region, to anchor fixed wireless access, in much the same way that competitive local exchange carriers long have operated. 

The same approach could work in region, where Verizon does not intend to build dense optical access networks, but might have greatest value out of region, allowing Verizon to leverage fixed network facilities in new ways.

Looking only at "out of region" opportunities, Verizon might be able to leverage new core optical networks acquired from XO Communications, with fixed wireless, to reach many business customers, at lower costs, than ever before.

The access services business model, in other words, could change with the advent of 5G, especially for business customers out of region, or for some consumers, in region, where Verizon does not intend to build FiOS fiber to the home networks.

5G fixed access might also allow Verizon to serve some customers, even where it does build FiOS, who cannot be reached by fiber to home facilities, for cost reasons.

When you have firms including Facebook, Google, Verizon and AT&T all looking at fixed wireless, and AT&T publicly committed to adding as many as 13 million new connections using fixed wireless, you know something has changed.

Fixed wireless is not new, as a concept. It has been seen as the solution for any number of business models, ranging from multi-channel video delivery to Internet access to consumer and business voice. It never has gotten much traction, as a percentage of industry connections.

That could change, dramatically, over the next decade, for several reasons. First, most Internet service providers now acknowledge that fiber to the home is not always the best “use everywhere” platform for high-bandwidth (gigabit) services. In areas where demand is spotty or light, fixed wireless will be a better option, in terms of a sustainable business case.

Second, suppliers--notably the potential ISPs themselves--are working on ways to make fixed wireless work better, at higher frequencies, at lower cost, and have gotten significant support from traditional equipment and platform suppliers, in some cases.

Third, the strategic role of fixed networks now is evolving in a way that makes them backhaul networks, allowing more-affordable “fiber to where you can make money” deployments that, in turn, can use fixed wireless instead of cabled drops.

That strategy is not new, either. Many metro fiber businesses long have built fiber rings to underpin access operations, gradually extending spurs off the rings to reach actual customers.

In a clear sense, fiber networks (metro ring or transport and access) now are going to play the same function in the consumer business. Fiber backbones will have subtending fiber distribution rings or spurs, which will in turn terminate close enough to customer locations that fixed wireless can be the drop (access).

That, fundamentally, is a variant of the hybrid fiber coax network design, fiber to the curb or fiber to the neighborhood architectures, perhaps beginning with services aimed at business customers, especially small or mid-sized businesses.

Now Verizon has begun to talk about using 5G networks in a fixed mode, supported by optical fiber backhaul.

“I think the problem that the telcos have had is a DSL service is really not going to keep up with DOCSIS and so we’ve had to do fiber, and fiber is expensive for all of us,” McAdam notes. “So if you think about it if I can get we than say a 1,000 meters of a business and I give them a router, a basic router that has a 5G service inside it, and I’m up and operating immediately.”

“If you look at 5G in a fixed wireless environment we've demonstrated for some of our shareholders in our Basking Ridge facility putting 1.8 gigs into the house without a wire,” said McAdam. “Think about the difference for the carrier and the cost structure.”

In principle, assuming the acquisition of XO Communications is approved, Verizon will be positioned as a competitive local exchange carrier “out of region,” as XO Communications has fiber rings in 45 of the top 50 U.S. markets.

“That gives you the ability to be out into those markets and then you just run your extensions off of them,” said McAdam.

Though we are early in the process, it appears fixed wireless might be poised for its biggest-ever role in U.S. access operations.

Nobody Knows What the Cost Structure of a Modern Network Will be in 10 Years

You cannot assume the cost of building a high-performance Internet access network is going to be the same, in 10 years, as it is today. How much different is the only issue. Some trends are easy to identify.

The cost of supplying a gigabit connection on a 5G network likely will be lower than on a fixed fiber to the home network, and possibly lower than a cable TV hybrid fiber coax connection.

But that is not all that will change. Google Project Loon is testing entirely new platforms for Internet access, using fleets of balloons. Both Google and Facebook are testing use of unmanned aerial vehicles. New fleets of low earth orbit satellites will change the cost of delivering Internet data by satellite.

Fixed wireless technology being developed by Facebook, Google and others such as Starry  likely will change that cost curve as well.

And that is not all. An effort to develop standards-based and open telecom platforms is underway by the Facebook-initiated Telecom Infra Project that has gained important support from mobile and fixed telcos and many equipment suppliers.

Followng on the heels of Facebook’s Open Compute Project (OCP) to create open standards for data centers, the Telecom Infra Project now seeks similar results for access platforms.

“A few years ago, Facebook was faced with a data center problem familiar to many scale companies: We depended on proprietary systems and hardware that were inflexible and expensive,” said Jay Parikh, Facebook Global Head of Engineering and Infrastructure. “We realized quickly that this approach would not be sustainable; we needed to find a new way.”

Note the language: traditional rack and stack approaches were “unsustainable.”

The end result, for Facebook, was that “we were able to...save billions of dollars in infrastructure costs over the last few years,” Parikh said. The obvious winner was Facebook and its users. The obvious losers were suppliers of traditional data center gear.

“We recognized that telecom infrastructure could benefit from the same innovations taking place in the data center,” Parikh said. So make note: the winners will be Internet access providers. The losers will include many suppliers of network platforms, or whole lines of equipment and software platforms.

“It was clear that the raw building blocks of what we were developing for our own infrastructure could be applied to telecom networks with great benefit,” he said.

The Telecom Infra Project “ is bringing together operators, infrastructure providers, system integrators, and other industry players to work together to develop new technologies and rethink approaches to deploying network architecture.”

Early founding members include Intel and Nokia, Deutsche Telekom and SK Telecom.

At first, “TIP will focus on disaggregating the components of network infrastructure that are traditionally bundled together and vendor-specific,” said Parikh.

TIP members will work across three areas: access, backhaul, and core network management.

As one early example, Facebook has been working in partnership with Globe, deploying a low-cost, solar-powered network-in-a-box solution, bringing mobile coverage to a village. “In the first week alone, we connected more than 60 percent of the community,” said Parikh.

New members include Axiata Digital, Indosat, MTN Group, Telefonica, Vodafone, Acacia, ADVA, BlueStream, Broadcom, Coriant, Deloitte, Juniper Networks, and Lumentum.

The TIP Board of Directors includes Dr. Alex Choi of SK Telecom (TIP Chairman), Axel Clauberg of Deutsche Telekom AG, Ashish Kelkar of Facebook (TIP Secretary and Treasurer), Lynn Comp of Intel, and Henri Tervonen of Nokia.

Project groups also have been created to address “the most pressing industry needs including connecting the unconnected or underserved populations, and augmenting the development of powerful new technologies like 5G.”

The access system integration and site optimization group is chaired by SK Telecom

The unbundled solutions group is co-chaired by SK Telecom and Nokia, and will seek cost-effective, low-power and low-maintenance solutions.

Media-friendly solutions, chaired by Intel, will focus on mobile experience, especially for close-to-edge solutions.

In the backhaul area, Facebook heads the effort to develop “thin and extensible software stack to autonomously coordinate routing, addressing and security related functions in packet-switched IPv6 networks.”

The open optical packet transport project is co-chaired by Facebook and Equinix, and is working on Dense Wavelength Division Multiplexing (DWDM) open packet transport architectures that avoid supplier lock-in.

The core network optimization project is chaired by Intel, and seeks to disaggregate

core network components.

The greenfield telecom networks group is co-chaired by Nokia, Facebook and Deutsche Telekom, and will work on IT-based network architecture.

If and when those solutions emerge as commercial realities, we must assume the cost structure of networks will be lower. So all current assumptions about business models will have to be revised as well.

Huge Shift in Local Government Thinking and Policy Leads to Gigabit Internet Access Investment

A really-major shift in thinking by municipal officials has occurred, where it comes to permitting, licensing or franchising high speed Internet access businesses.

In the past, it would have been impossible for any telco or cable TV company to get permission to build a network unless that network reached all homes in a city or town.

The new thinking--spurred by Google Fiber--is that Internet service providers should be allowed and encouraged to build gigabit networks wherever there is demand within a city, without requiring ubiquitous network builds.

That is the reason Verizon Communications now is building out gigabit connections in Boston, for example, when the original business case--assuming a ubiquitous build--was not deemed attractive.

"The past administration here wanted the sort of buildout we have done in other areas where you build everywhere and you go in and get penetration," Verizon CEO Lowell McAdam said. The new administration, on the other hand, is "more willing to help us get rights of way, help us push fiber into the neighborhoods, and do more pre-subscription a la the Google model."

In other words, by allowing ISPs to build only where there is a reasonable expectation of demand, high-performance networks are being deployed where they would not have been built before.

In part, that change followed the example of the competitive local exchange carrier business, which allows service providers to build facilities only in areas where there is business customer demand for high-bandwidth services.

That, in turn, was not lawful until passage of the Telecommunications Act of 1996. The new attitude by local government officials is leading to more intense deployment of gigabit facilities than would be the case if all builds had to be ubiquitous across a city.

That is a really big deal.