Video Adapter

Internet traffic growth could be $150 billion problem

A study predicts that the unbridled downloading of content will increase Internet and broadband access traffic to the point where serious slowdowns could occur by 2010, and an investment of nearly $150B would be required to fix the problem. The exact numbers and dates here may require some justification, but the overall problem cited is real. The challenge with the current Internet model is that there is no financial back-pressure against multiplying traffic, which also means that there is no incremental revenue associated with that traffic. The pure over-the-top model risks a separation of “return” from “investment” and that means that even if these numbers are true there may be little or no incentive for the operators to spend the kind of dollars suggested. The suggestion that “something must be done” may be valid, but there has to be a commercial framework created that permits investment or nothing will be done.

MoCA help for FiOS FTTH?

Verizon has asked the Multimedia over Coax Alliance (MoCA) to work on raising the maximum broadband capacity of MoCA to 400 Mbps, a move that may signal Verizon’s interest in using MoCA to distribute video and broadband to multiple homes from a single remote. All operators, (even Verizon whose territory is dense and valuable) will find a significant portion of households non-economical for FTTH, and changes to MoCA to provide headroom would allow Verizon to use cable to increase the cost efficiency of its FiOS delivery where subscriber density and/or ARPU are lower.

AT&T to buy EchoStar to bolster U-verse?

AT&T is reported to be preparing to make an offer for EchoStar, the DBS company with which it partners for its Homezone service. We believe this to be a clear indication that AT&T recognizes that it cannot make U-verse available for a large population of its customers and that they will instead have to rely on a satellite partnership for the broadcast program delivery, reserving IP for VoD. The challenge AT&T faces is that its relatively low demand density makes it difficult for AT&T to push fiber to the home, and without FTTH the mapping of broadcast channels to DSL delivery (U-verse) adds network complexity and cost at the metro level. The decision may induce Verizon to accelerate its own FTTH plans to reduce its reliance on satellite partnership.

Doubts about consumer demand for bandwidth

Research is casting doubt on the notion that consumer demand will explode bandwidth needs, a story promulgated by Cisco and others. Skeptics note that in mature markets where high speed is available, traffic grows at about 18% per year. We agree with the notion that traffic explosions are highly overrated, but we believe that some of the conclusions that the more conservative camp draw from their numbers are also off the mark. There is little doubt that the growth in Internet traffic alone will not drive bandwidth growth by much more than 20% per year in most markets, and will likely do less in many. There is also little doubt that consumers will increase their consumption of non-Internet (meaning content video) traffic through substitution of downloading or streaming video versus traditional TV viewing. The question not yet resolved is how these truths will balance over time. We also note that the current rate of revenue-per-bit decline is faster than the rate of traffic growth, which is what apparently leads some to the conclusion that providers should be encouraging more bits to be used. That’s not a reasonable assumption; commoditization of bit pricing is the problem even today.

Cable research misses the mark

Pyramid Research has released a report that indicates that cable companies enjoy more synergy in triple- and quad-play services and as a result, telcos are losing margin in their multi-tiered services. While we agree with some of this, we think it misses some key points. First, the best competitive strategy is to be moving from a low-margin, low-growth area to one of higher margins and growth. That’s what the telcos are doing with their video offerings. Second, cable companies started with high-capacity delivery in video, o it was logical that their infrastructure was able to manage lower-bandwidth service needs. However, the telco modernization of their plant threatens the cable companies’ ability to match data bandwidth and video, particularly VoD and FTTH broadband, and the recapitalization of the cable plant would be (as CableLabs itself has noted) very expensive. Finally, the internal rate of return for telcos is historically very low, making it easier for them to embark on low-ROI projects, while the cable guys have higher IRRs and less tolerance for poor returns. It is also interesting that cable is not a strong competitor elsewhere in the world. There are too many issues not covered here for us to be fully comfortable with the results.

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Pyramid Research

Comcast admits video loss to telcos

September 20 2007: Comcast management admits that both Verizon and AT&T are taking video customers from them, but questions whether the spend (for Verizon in particular) on video will earn a good return for shareholders. This thread of comment is a departure from the dismissive view Comcast has taken in the past. The reason is clear; both Verizon and AT&T are ramping up their services and have targets that could reduce Comcast profit significantly. One problem Comcast faces is that its internal rate of return, and thus its ROI expectations are higher than those of the telcos. Another problem is that losing customers in an established area means the profit from a given cable span is reduced for Comcast, making its service less financially attractive. The largest problem the telcos bring, though, is forced modernization by Comcast. There is no way to selectively upspeed cable plant; you have to make the change for the entire span. Any success by a telco in supporting any service that requires more bandwidth forces the cable companies to counter, and their counter forces them to invest, creating the very problem for Comcast that its executives speculate Verizon has–questionable return on capital.

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