The move to usage pricing isn’t being heralded as a victory; network operators would prefer to get their profits from other sources. The problem is that they’re becoming convinced they can’t roll out a monetization strategy in time to sustain infrastructure investment without a bandwidth-cost kicker.
Mobile data use is growing by 50% per year worldwide, and that’s creating not only a backhaul cost but also a multiplication of towers as cells become congested with more users and more traffic per user. The whole metro infrastructure is stressed by the mobile traffic load, and wireline streaming video traffic is also contributing.
The rumors that Google will be offering a YouTube-branded streaming multi-channel “cable replacement” service aren’t making operators happy either. In fact, it’s streaming competition for TV that’s generating the conviction that they need usage pricing even more than concerns about the pace of their monetization progress. Only usage pricing can stem the exploitation of incrementally free bits by OTT players, as operators see the situation.
The Google offering, if it’s real, will be a test of the complex relationship between content cost, content cost recovery and content quality. Any streaming service that purports to replace channelized TV will have to offer viewers something that’s equivalent in quality.
For Google, whose service is rumored to be involving only 10 to 20 channels, the issue is even more significant because the traditional solution to things like summer reruns has been to let customers flee to cable channels. What happens when there aren’t any? What happens if the prime networks are never there? You can’t just stream old episodes, because they’re already available online through a variety of sources, from Amazon to Netflix and from many networks themselves, and in on-demand form to boot.
The pricing model relates to content quality. If you have first-run movies and original series like HBO or some other pay-for channel, you can charge the consumer directly and forego advertising. If you want to draw on network TV or older content, you’ll likely need to get revenue from advertising, at least as a supplement. The challenge there is that the per-impression rate for ads in streaming video is about one-thirtieth that of a TV commercial, and you have to pay for content out of the total of what customers and advertisers pay you, either to produce it or license it.
Video in TV and movie form doesn’t always work, and these models of content consumption have been with us for decades. We’ll have to see how a streaming model can work, which Google may demonstrate, either in a positive or negative way. We’ll also see how this will relate to usage pricing.]]>
I’m a strategy analyst—someone who surveys and models markets. My goal isn’t to find out what people want, but rather to find out what’s going to happen and what’s not. People want gigabits for nothing, but that’s not going to happen. We could give people faster broadband today in a technical sense, but the decision would fail for financial reasons. You could argue that anything that reduces the cost of the much-for-nothing goal is an advance, but it’s doubtful that any single development could create a cost revolution.
That is the dilemma Alcatel-Lucent’s announcement poses. The company has made an impressive technical stride that I’m not confident is a significant market stride.
Alcatel-Lucent’s FP3 chip is a quite revolutionary achievement in special-purpose network semiconductor design and fabrication. This chip, says Alcatel-Lucent, is faster (by 4x), smarter and greener (50% less power per bit) than ever before, and the company says that it will accelerate the adoption of 100 Gigabit Ethernet from edge to core. Certainly, the chip can support multiple 100G interfaces or a future 400G interface, but the question of capacity in my view is less one of technical performance than of financial performance.
Operators we survey are watching 100G Ethernet to be sure, for a time when it would be economically justified. They don’t think they’re at that point. The problem they have is that revenue per bit is already plummeting. A four-times-faster chip would presumably need a network with four-times-higher capacity. Our model says that consumers will pay 17% more for 4x speed; operators are estimating 20% more on the average. The uptake for premium speed tiers is low, and FCC data shows that broadband users in the U.S. cluster at the low-cost end of the service range. So how does making the network capable of higher performance change things fundamentally?
Something for nothing (or next-to-nothing) may be appealing, but it can’t be delivered. The thing is, people are willing to pay for stuff; it’s just that they’re not willing to pay for Internet bandwidth. Apple’s success with apps demonstrates that people will shell out millions for just the convenience of using an app for what they could get from a website. If there’s a revolution in the market, it has to come from allowing the people who build the networks to participate in this higher-level part of the food chain. They want to do that; they’ve told me that explicitly in surveys for four years now. They want to add services to their networks, to add a service layer to their network layer.
Which brings us to “smarter,” the third claim for the FP3. What exactly does that mean?
Alcatel-Lucent says that “smarter” means fully programmable delivery of personalized services and content, and massive IPv4/IPv6 scale for the future. But unless we believe in 100G to the user, the access network will have to be able to do all of that or the user will never see the service, and the FP3 won’t be out there.
We all know that supporting most of the “smart” things is likely an edge role. The power of the Internet was to avoid being aware of individual users or flows deeper inside the network; it doesn’t scale. And what exactly is the FP3 programmable to do? Yes, the number of VPLS and virtual private routing network (VPRN) instances is doubled, along with the number of queues and (almost) the number of routing table entries. The question is how exactly this creates monetization—the increased revenue-per-bit that operators need if they’re to punch capacity up by 400%.
Alcatel-Lucent did offer a couple of ideas on services—one on the general evolution of the service experience and one on the video distribution process. I agree with the points in both; what I still have a problem with is what role the FP3 plays beyond moving the bits around.
I doubt that Alcatel-Lucent proposes to add customer or service-flow awareness to deeper aggregation products that have the traffic scale to justify 100G. It doesn’t scale. Is Alcatel-Lucent proposing some intermediate “not-aware-but-sentient” role for the network? I’d love to hear about that, but I didn’t hear it in this announcement.
It’s possible that the FP3 could play a role in binding the services of the future to the network of the future, but Alcatel-Lucent doesn’t say that. It’s possible that Alcatel-Lucent intends to meld its Application Enablement and Open API themes downward into the network and create a multi-layer profit partnership, but it doesn’t say that either.
The FP3 is specifically faster, specifically greener and un-specific about how it’s smarter. And it’s smarts that will revolutionize the Internet; it’s smarts, not just bits, that generate bucks. For a company that has gained router market share because of its success in the mobile and content service layers, it’s disappointing that Alcatel-Lucent would forget a strong technical service-layer tie here. It would be more disappointing if there isn’t one.
Without monetization in a service sense, traffic can’t be profitable even at current prices, and the FP3 presumes a 400% traffic gain. Long before we reached that, the current market model would collapse into usage-based pricing, which would limit traffic growth and also the growth of the Internet. We have to create a healthy ecosystem here, and the FP3 picked up three credible points about that ecosystem: speed, smarts and power efficiency. It validated two of the three.
So that’s my dilemma. I think the engineering is impressive—in fact, very impressive. I think it could reduce the cost of high-capacity devices, and just the fact that Alcatel-Lucent announced it may suggest that the company is planning to go higher on the router capacity tree. I just don’t think Alcatel-Lucent has proved that it revolutionizes the Internet, because nothing is going to do that except something that revolutionizes the Internet business model. The capacity play it has made for the FP3 is dangerously close to following Cisco down into the “bandwidth at any cost” abyss that I warned about when Cisco announced its ASR 900 enhancements.
The FP3 shouldn’t have been about speeds and feeds, but about dollars and cents. The “smarts” point of the FP3 launch is the one that had to be the strongest; instead, it was the weakest. Might Alcatel-Lucent plan to correct that down the line? Perhaps, in which case, I’ll take another look when they announce it. For now, this is a strong evolution, but it’s not a revolution.]]>
The economic downturn is blamed by many for the fact that nobody seems to be able to make the ad model work, but we believe that the initial bad experiences of advertisers with things like click fraud created a skepticism that manifest itself in demands for better metrics. That, in turn, has made advertisers wonder if they get what they pay for even where there’s no fraud involved, and that’s not an easy issue to resolve. More people are now stepping up and suggesting that people are going to have to start paying for stuff, something people actually resist less than the VCs do. Pay-for-service models look an awful lot like a service provider business model, after all.]]>
Price commoditization of legacy services and lack of credible monetization strategies overall force telecoms to reduce their costs, which moves them to lower-priced suppliers. We believe Cisco’s emphasis on service/outsource models, consumer electronics, blade servers and new market sectors are all reflections of the fact that even Cisco no longer believes telcos will continue to spend on premium vendors.
Certainly the time available to create alternative monetization models for telcos is coming to a close; a big negative step will be taken in May if no credible strategies are available by the spring planning reprise, and the nail in the coffin could come in October with the fall planning cycles.]]>
While the proximate cause was the deferral in spending by carriers worldwide, which Nortel’s reserves simply could not handle, the true cause was a persistent refusal to deal with market conditions as they were. Nortel stayed with its core competences despite the fact that those areas were becoming core irrelevancies.
There is a lesson here for every other player in the telecom space: If you cannot promote service features and monetization you must inevitably be a player in a commodity market. Nortel will likely try to sell off additional business elements, and may even refocus on the enterprise, but unless it can become more strategic, it is unlikely to regain stability, much less stature. We are offering an audio brief on this as part of our new information product series; see New free information product from CIMI Corp.]]>
The guys at the greatest risk, in fact, are the darlings of the last couple of years—the over-the-top players. Many of these are still struggling to define any revenue model at all, and with advertising slipping and VCs demanding break-even performance, a lot of startups will die, and public companies will slump, shrink, be acquired, or disappear. In a race to the bottom, the guy with the lowest internal rate of return always wins because he can keep investing past his competitors’ pain point.
The issue is whether the telcos can take advantage of their opportunity. The recent interest in service mashups by Cisco and Alcatel-Lucent has the potential to allow the network operator to take control of the partnership with the OTT guys while the latter are down and out. Will they seize on that opportunity? That, according to our research, depends on how well the vendors (particularly the two we named) do to create the right ecosystem.]]>
The Obama camp has announced it will pursue a broad infrastructure-modernization and works program stimulus that could involve more than $600 billion and take two years. Over the weekend, the government decided to rescue CitiBank, removing the risk of a major bank failure from the market and signaling the end of the apparent policy of non-intervention that allowed speculators to hammer stocks without fear of being trapped by good news. The deal will involve U.S. guarantee of certain mortgage-backed assets, totaling over $300 billion and including some commercial mortgage-backed securities that appeared to be the new problem with Citi. The government will also get $7B in new preferred stock.
Many believe that the move was generated by Obama administration intervention, and in particular Geithner’s relationship with Paulson, and this was the strongest signal that there might not be a period of inaction between administrations. The auto industry, reluctant to agree to sweeping changes that Congress was likely to demand in return for a loan, is now lobbying for a loan program to automakers’ finance arms to spur demand again. The Fed is reviewing measures that would pump up the money supply via direct lending, and also lower long-term rates; these would presumably supplement the traditional rate cuts that are now nearly at an end as rates hit 1%. All this has made the markets happy; U.S. futures were higher this morning, Europe was strong and Asia mixed with Japan higher.]]>
The notion of reducing capacity growth and slowing the decline in revenue per bit has become more and more popular globally as providers throw up their hands on the issues of monetizing their networks. We have already noted here and in other publications that operators are universally at risk to squeeze in margins because traffic increases are not compensated by revenue increases with classical Internet pricing models.
We believe that unless service-layer improvements add revenue to the pot, spending on transport capacity will begin to slump as early as 2010.]]>
We have posted a special page that summarizes our view on the current economic crisis, a synopsis of what we have included in thereport. The table of contents and pricing matrix is available for download, and we have special packages that combine consulting with the report. Contact CIMI Corp. for more information.]]>
The decision is linked to a general view that SMS will become another all-you-can-eat service, and that like the Internet, there is a threat to operators in that they might then become simply a passive conduit for another’s business model. That would create investment without return.
We believe this particular item will be readily missed in coverage of the provider space, but the significance in our view is very high. Operators are working to end the free ride because in these times they must, and that will spread to other areas.]]>