The Netflix results suggest that OTT video is a big factor in broadband’s future. If that’s true, then what does it mean for the industry as a whole? Linear TV was at one point the credible profit engine for wireline broadband. What happens to that sector if the engine breaks down? What happens to vendors? How do the players reduce their risks of major damage? Difficult questions, uneasy answers, and a lot of uncertainty seem certain.
The industry’s problem is the classic one of a feedback loop. Online advertising has hit TV advertising, and in particular advertising associated with smartphones and mobile sites. This reduces the budget for shows, which limits the quality of material and the audience it can pull in. Combine that with the fact that mobile video tends to favor on-demand viewing over real-time streaming, and you have a formula for negative feedback. It’s obvious, particularly with AT&T’s renewed commitment to DirecTV Now and Netflix’s quarter, that this is impacting at-home TV viewing too. Time-shift viewing invites on-demand alternatives, and that’s where we’re headed.
AT&T it, in my view, going to be the determinant in this story, because the company seems focused both on mobile services and on its streaming offering. If AT&T drives DirecTV Now as aggressively as it seems, including offering the cheapest skinny bundle anyone has at $15, then it’s hard to see how Verizon could avoid a major commitment to streaming. But what exactly would that shift mean for the industry?
Verizon has the highest demand density of any US operator; about seven times that of AT&T because of its smaller footprint and larger population density. As a result, Verizon could expect to earn more for each mile of fiber deployed, because it would pass more opportunity dollars. So does Verizon decide to make what’s been a TV war into a broadband Internet war?
Demand density is a key to the whole issue here in the US, as it is in the rest of the world. Roughly speaking, “demand density” is the opportunity for network services, measured per square mile of area. If you have a lot of economic power concentrated in a small area, you have high demand density. Of course, the converse is also true. For video, though, the complicating factor is that if there’s a lot of population concentration in cities, you end up with over-the-air video potential. Cable TV is hot in the US because most rural/suburban people can’t get good reception with an antenna. The additional channels are a value for some, but the main over-the-air stations represent the live viewing market.
Live viewing has been the defense against streaming until recently, when broadband Internet speeds and metro/caching infrastructure made “live” on-demand practical. This is what frames the choice for Verizon. If you have a streaming service, you’re untied from specific delivery infrastructure and specific service geographies. Anywhere with broadband will do. Why not just pump up your Internet, field a streaming service, and take AT&T on?
The problem with that, even for Verizon with its higher demand density, is cable. AT&T showed that you can’t really field a competitive linear TV offering using DSL, so they acquired DirecTV. Verizon’s high demand density means they could deploy fiber more broadly, but they’ve said from the first that FiOS had its limits in terms of target geographies, and they’ve nearly stopped expanding it. CATV cable has a much higher intrinsic speed potential than DSL, so jumping into a “how-high-can-you-go” came with broadband speed could put Verizon back in the FiOS game even where it’s not profitable enough.
There are two possible solutions to the dilemma both Verizon and AT&T face. The first is to write off wireline plant modernization and focus entirely on mobile customers, and the second is to adopt the 5G hybridization with fiber-to-the-node (FTTN) to potentially cut the cost of multi-megabit broadband to the home by more than 70%. That would allow either operator to cut prices and still improve wireline profits.
Fundamental to the first approach is the notion that not only is mobile where the money is, mobile will inevitably kill wireline broadband and mobile TV will inevitably kill linear TV. If those points aren’t true, then focusing entirely on mobile will kill off wireline revenue with nothing left to compensate for it. Some operators argue privately that’s OK, because wireline profit is doomed anyway and so it’s better to leap into the stream now than wait till a flood sweeps you away.
Mobile is already highly competitive, and would a shift to a mobile-and-streaming strategy not simply make it more competitive? That would inevitably erode mobile-service profit margins, which could well kill mobile’s advantage in profitability, leaving operators with nothing if they’ve already ceded wireline. With wireline gone and mobile marginal, telcos could well end up fatally disadvantaged competitively.
Guess who the winner would then be? The big problem with a mobile-only approach is cable. They have a lower pass cost for customers for both Internet broadband and linear TV, and that means that they can stay in the business even if the telcos decide to bail. If they did, they can use their wireline/CATV base against the telcos’ mobile-only strategy. CATV standards are improving cable broadband all the time, too, which means that even if the industry went to full streaming of video, cable providers could be in a good position.
Cable could also mess up mobile, too. Comcast and Charter are pairing up to create a new operations platform for MVNO services. That could be used to support an expanded set of mobile partnerships (beyond Verizon, the current one), which would weaken Verizon’s position should they try for a mobile-only strategy. It could also be used to prepare for network slicing under 5G, though it’s far from clear that’s going to advance quickly enough to matter in the current competitive dynamic.
And then there’s content. If everything else is going south, content is the one haven that’s secure whether you have linear TV or streaming. The merger between Comcast and NBCU is in all practical senses a mirror of the proposed merger between AT&T and TW, but the former has already gone through and the latter is held up. If we believe that linear TV is going south, then we have to believe that some content relationship is essential for any ISP that’s relied on video in the past. For AT&T and regulators, the question is whether DirecTV itself, as a satellite TV property, is enough.
Streaming video is the big consumer of mobile and wireline bandwidth, so operators would have to confront streaming through increased access bandwidth and total capacity. However, all of this would be highly metro-focused since video tends to be cached in metro enclaves and access networks connect users to that metro video pool. The operators then see a two-part investment—more metro video pool capacity (cache and transport) and more radio network capacity. Where mobile competition is the focus (Europe, for example) that translates into direct pressure to upgrade cell sites to 5G, though it’s not clear whether 5G Core would be similarly boosted. Where linear TV is being replaced by streaming for wireline services, the focus would be limited to 5G/FTTH hybrids.
Vendors will find the focus important, for several reasons. First, any erosion in full 5G support would tend to work against the 5G infrastructure players like Ericsson, Huawei, and Nokia. That’s because open 5G RAN is a goal for operators globally, and if you pull 5G NR out of the 5G picture to promote it independently, you’re left with 5G-over-4G non-stand-alone (NSA), which isn’t the kind of huge integrated pie that the mobile specialists can easily dominate. Second, metro networks are better candidates for SDN rather than massive routers, and they also lend themselves to the hosted-router-software white-box solutions (as AT&T’s white-box-in-cell-sites decision shows).
You can see the many dimensions of uncertainty here, I’m sure. Geography matters, as well as competitive dynamic for the operators, the pace of 5G adoption, the pace of streaming adoption in replacing linear TV, demand density, and perhaps most of all the rate of adoption of open-box, open-OS technology in devices…it’s a mess. I can’t model all the variables at this point, but what seems to be true is that three factors dominate. One, which I’ve blogged about before recently, is the open-box trend, the second is 5G adoption, and the third is the displacement of linear TV. Operators have to budget capital expansion, and if they’re under profit pressure from streaming, they are much more likely to push hard for cheap, open, solutions. They are also, in the US at least, more likely to adopt less-than-5G, non-stand-alone, solutions. That ends up putting pressure on vendors across the board.