Some of the changes in networking that are looming on the horizon may start a lot closer to the couch if you read the right hints from current trends. The battle between Google and Apple for TV position may be driving some other players to change their plans. For example, Verizon has been offering more streaming-media-friendliness in FiOS and there are now indications that it may also be planning to push a Hulu- or Netflix-like offering outside its territory. It may be that we’re seeing the entertainment video space at the beginning of a period of major change, but that’s not necessarily going to mean a victory for IPTV or streaming media.
All of this starts with the fact that wireline is seriously non-profitable already and likely to get worse. Operators face the stark choice of a major plan revamp to shorten the loops radically or replace them with fiber, something that some operators could do in a pinch but that others simply can’t contemplate. Verizon’s cable deal suggests that it may have a middle-ground approach, which is to cede customers it can’t afford to upgrade to fiber. The FCC’s regulations this year—neutrality and perhaps more important Connect America put operators in a pinch to improve broadband when copper and DSL are likely to be stretched. So our change starts with pipe issues.
Then there’s the Google and Apple stuff. Operators are doubly injured, from their perspective, by the launching of what are effectively Internet TV broadcasters. They carry traffic with no incremental compensation and their own media opportunities are undermined. Streaming will not likely match the content of traditional linear TV for a decade or more, but it will tap off premium channel subscriptions, extra rooms, etc, not to mention the more price-sensitive tier.
So the reaction of operators is simple, at least in plan. First you develop your own media properties into something that you can leverage outside your own footprint, essentially disintermediating other LECs. That gives you a plausible revenue stream with lower capex. Second, you deploy premium loop, meaning fiber, where you can justify it and then you do a partnership with cable companies, actually hoping that this partnership will give you a retail markup on their services and convince marginal customers of yours to flee to them.
The obvious question here is whether all of this creates a sustainable broadband market. I’ve noted for some time that DSL was not competitive with CATV cable for multi-service delivery. U-verse is a dumb idea that eventually has to fall on capacity versus cost problems. At this point, I don’t think common carriers can refresh their plan with cable any more than with fiber, even though the pass cost for CATV is less. Thus, what we are surely going to see is that operators will actively try to flee serving the bottom of the DSL customer list and make up the revenue loss in mobile or out-of-area streaming. Focus on streaming only exacerbates the capacity problems and low revenue per bit of Internet broadband, and that could discourage plant upgrading, which would lead to greater congestion.
The point I’m making here is that the problems of the online ecosystem are real; they’re already impacting very basic business decisions that will govern how the Internet works in the future. Regulations can’t compel businesses to lose money; they’ll just fold up. Connect America can’t subsidize everything; there can be no contributions into the program if nobody can offer service without subsidization by the same program you expect them to contribute to. Will carriers pull loops out of the ground? No, but what’s surely going to happen is that more unprofitable areas will be sold off to other players who are small enough to qualify for RUS subsidies. That again builds up the pool of carriers who take rather than contribute. In short, this isn’t a good thing we’re seeing.