Month: December 2013

I mentioned yesterday that the cable industry was regulated differently from telcos, and one of the differences is that cable is “capped” on maximum subscribers per provider.  Many would like to see that regulation lifted to support M&A more broadly.  In the telco space, there’s also an effort for regulatory change underway, this one linked to the transition of telephony to IP.

The new FCC Chairman (Wheeler) gave a speech on “The IP Transition: Starting Now” in mid-November.  On the surface, the issue may seem very simple; telephony has been based on time-division multiplexing technology that makes little or no sense in an age when the same consumer is being supplied with Internet access that could serve to carry voice at a very low marginal cost.  The problem is that the FCC has long taken the position that it regulates services and not technologies, and so even taking up “IP” rather than “voice” or “the Internet” is a stretch for the body.  That raises the question of where it might stretch to, and how it might impact the market.

Circuit-switching is different from packet-switching (which is what IP is) in a couple of ways significant in a regulatory sense.  One is that a circuit is a dedicated path between a provisioned pair of endpoints—one being a central-office switch and the other being your local access loop.  That means that there’s no ambiguity as to where a given call originates.  In packet switching, a path is determined ad hoc by the address of the endpoints, and a packet voice user can get a different address depending on when and how they connect.  It is more difficult to pinpoint the exact location of a call, and this is what creates some of the E911 issues.  When you decide to use Skype or Google Voice you are sternly told that you don’t have local exchange voice services and 911 service, and you can’t port a landline number to such a VoIP service because there’s a fear consumers might lose 911 without knowing it.

Another thing that’s different in packet voice is that the resources for plain old telephone service (POTS, as it’s known) are dedicated once the signaling phase of the call completes and the connection is made.  With packet voice, packets continually vie for attention in the network, and unless the network has QoS capability the traffic is passed best-efforts, which means call quality can be variable.  Many who have commented to the FCC on the IP transition don’t like that variability; they want their POTS.  But the big question here is whether the legislation requiring priority calling for first-responders in emergencies can be accommodated.

A more general challenge is that operators were declared to be monopolies in POTS and were forced (in the US by the Telecom Act of 1996, and by similar “privatization” regulations elsewhere) to unbundle the elements of their voice plant—a plant built under regulated monopoly protection.  Other companies now lease loops and build their own services on top, and these fear that the decision to eliminate POTS would eventually eliminate the unbundling regulations that they depend on.

The FCC’s efforts will have to address the four issues of public safety, universal access, competition, and consumer protection (as one commissioner delineated them).  It’s likely that they will take some decisive steps to modernize how regulations impact the IP transition, but it’s also true that the FCC (as all Federal Commissions) is effectively a court of fact and not a legislative body.  They act within the law, which means that they can exercise discretion or drive change only where the law permits.  I think the FCC has the latitude to do what they think best here, but Congress can always step in and we all know how that can mess things up!

If we assume that there is an FCC policy shift that drives change, the result would likely be an evolution toward the notion that IP access is the new POTS dial tone.  Universal service then means IP access, and it could be provided by copper, copper/fiber hybrids, FTTH, or 3G/4G depending on the situation and cost.  The Internet and voice services, and likely other services as well, become “true services” on top of IP access.  To provide for separation and QoS differences as needed by the services, we’d likely see more SDN principles deploy.  It’s not that SDN is the only way to support IP voice (obviously it’s not because we have it now and almost never use SDN for any part of it), but that a massive new QoS application would justify a massive shift in technology, which is essential to validate SDN on a large scale.

NFV could also be a beneficiary of a VoIP shift, though I do want to point out that cloud-hosted functionality for shared technology elements like those in VoIP don’t necessarily require any form of NFV to deploy.  What is likely to be true is that the notion of IP access carrying multiple services would encourage the evolution of more and more of those services, and hosting the functionality is the logical path to take.  Where that hosting is more single-user and dynamic in nature, NFV principles could be critical.

The normal process of creating regulatory change starts with a Notice of Inquiry, followed by a draft Order and a final Order.  The FCC launched the process last year, and Wheeler says that the goal now is to have a draft Order ready to present to the Commissioners in January.  That could mean that the final order would be published next year.  It’s very possible that it would be appealed (to the Federal Appeals Courts and even the Supreme Court) but the courts generally try to defer to the FCC in technical matters; as long as they follow the letter of the law.  This might mean that there would be a regulatory stimulus behind the IP voice transition, and that means vendors need to be thinking about how it would impact them—and how it could be exploited.

“Cable” has always been seen as different from “telecom”.  The industry is regulated differently, it’s primary profit sources are different, it has very different infrastructure, and it’s OSS/BSS/NMS tools and strategies are also different.  Most insiders in the SDN world say that cable operators are less interested in SDN than telcos, and virtually everyone says they’re less interested in NFV.  Finally, there are signs that cable and telco are converging in some ways and diverging in others.

Everyone knows that “cable” used to mean “cable TV” because that was the original profit model for the providers, just as POTS voice was the original profit driver for the telcos.  The broadcast-tuned delivery infrastructure (CATV cable, from which the name of the industry comes) proved a more cost-effective platform for broadband delivery than copper-loop DSL, and cable took an early lead in broadband.  Most industry sources would tell you that the cable “pass cost”, meaning the cost to run infrastructure past a potential subscriber, was about 60% that of telcos, and the potentials service revenue (because of TV) was much higher.  This made cable an early Wall Street darling.

Less so now.  Cable’s pass-cost advantage is diminishing as DSL technology improves, telcos turn to deeper fiber (including FTTH), and opex overwhelms capex in terms of contribution to total cost of the plant.  Insiders in the cable space admit that the industry has done much less than the telcos to create an automated plant, and they’ve fought a decades-long battle with a bad customer service image for (at least in part) this reason.

Things are changing on the revenue side too.  Networks charge TV providers more for programming, cost of original programming is rising, and VoD in any form is creating a lot of confusion on the advertising front.  Internet video is generating between 2% and 4% as much per-view revenue as channelized TV does, and yet the combination of increased use of mobile devices and the general not-at-home lifestyle of a big chunk of the video market has shifted focus to Internet or on-demand delivery.

I’ve worked with the cable industry for a couple decades, and I think it’s fair to say that 1) virtually every player in the industry is looking at how to change its cost and profit models to best fit the current market and 2) hasn’t gotten too far with the transformation so far.

The biggest issue cable faces is mobility.  It’s not just that mobile services are almost exclusively the venue of telcos, but rather that with the WiFi capability of virtually every smartphone and tablet, cable actually has a way of getting into the mobile space without becoming a mobile operator.  They seem somewhat paralyzed by that choice, and that’s hurting them.  Telcos have just as good a shot at becoming a provider of WiFi as cable companies do, and most of the telcos have been exploring offering hotspot support for 3G/4G offload for ten years or more.  The cable guys are just getting started.

Mobility is an area that hits cable right in their most vulnerable spot, which is operations.  I can remember days not so long ago when cable techs would tell horror stories about going to remote vaults to find a spiders’ nest of cables and systems and no record of how things were connected or even if they were working.  Things have improved recently, but in our survey of network operators almost 90% of telcos said they had “satisfactory” or “very satisfactory” operations systems in place where only 28% of cable companies made that claim.  Less than 4% of telcos rated their operations software as “unsatisfactory” and almost 40% of cable companies did.

If you don’t like your operations tools, you’d likely be a candidate for a next-gen OSS/BSS system, right?  Well, the cable companies do think that they need those tools but they admit that they aren’t pushing the button on next-gen operations quite yet.  One reason they give is that OSS/BSS tools and even standards activities are biased toward the traditional telco space, in no small part because the focus of telco investment today is 3G/4G mobile service, which few cable operators are directly involved with.  Another reason is that cable companies lack the technology-optimization culture that has helped the telcos along.  Remember, telcos were worrying about what the optimum structure of a lineman’s tool belt was as cable guys were trying to get their contracted installer resources to actually show up on a call.

My view is that the NFV stuff will be the watershed for cable and operations.  CableLabs, the R&D arm of the industry, is a member of the ETSI ISG but the big operators are not directly represented there.  Some in the industry believe that they’ve ceded too much to CableLabs and are now reluctant to make operations and technology a differentiator because it is a shared activity.  One big cable operator said “If you want a signpost that says cable is taking NFV seriously, look for one of the big players to join the ISG directly.”  That’s not happened yet.

It likely will happen in 2014, in my view.  The push by Google, Amazon, and Apple into what’s effectively VoD creates a major challenge for cable operators.  If they don’t have any real network assets of their own to address the mobile user, they can’t really differentiate themselves from this group except by offering things like sports programming on mobile devices.  The satellite guys have been attacking that particular option for some time, which means cable is at risk for being squeezed.  Cable is also late in supporting home control and other cloud-based consumer applications.  And what makes all of this NFV material?  Well, you need modern operations to be competitive in the space.

NFV could give cable an opportunity to build and deploy a new network model that pulls through a new operations model.  Being underinvested in OSS/BSS is a liability for them today, but it becomes an asset if a massive change in OSS/BSS strategy opens up.  NFV might open one up, and so cable might be on the cusp of recognizing it should be an NFV leader.