Our culture is replete with references to the importance of the path that money and value follow in commercial exchanges. “Follow the money” and “Show me the money” are two examples. As I pointed out last week in a blog, there are really two payment models in the world of Internet and tech today—the direct payment approach where consumers of a product or service pay for it, and the indirect approach where third-party players with a desire to gain access to consumers pay for consumer products/services in order to influence consumer behavior in their favor. I also suggested that the indirect model, which we see most often in the form of ad sponsorship, was under pressure.
Numbers for anything are difficult to come by these days, but sources of advertising spending put the 2021 numbers at somewhere between $580 and $680 billion. Growth numbers also vary, but my own data has shown that the critical number, which is ad spend as a portion of GDP, has stayed very close to constant for a decade, and has decreased in some years. The key point is that the rate of ad spending growth (if any) isn’t sufficient to fund our entire online experience. In fact, it’s not enough to continue to fund everything we’re used to having “free with ads”.
In network TV, we now have about 18 minutes of commercials per hour, which means that almost a third of a broadcast show is dedicated to commercials, something research shows is an all-time high. Nobody expects it to go lower, and the reason is that online advertising has taken a larger share of ad budgets, which as I’ve noted are largely static over time. The reason is that online advertising is more easily targeted, which advertisers like because they can spend less to reach their real prospects. Networks have to compensate for the shift by offering more minutes for the same dollars.
What we can see in content, meaning video, is a shift from a purely ad-sponsored model to a subscription model. Amazon Prime Video, Netflix, Hulu, YouTube TV, and other services are treated like cable TV because the content producers (like the networks) charge for their material and the streaming providers have to pay. Even the networks are under profit pressure, so they’re moving toward offering their content via streaming services. Over time, many on the network side expect that every network will have their own streaming offering, and will gradually put more pressure on “aggregator” services like Hulu and YouTube TV. Many of the streaming players are already becoming content producers to compensate for this pressure.
The point here is that we’re shifting from an indirect-pay model to a pay model for more and more things, and the reason is that there’s not enough indirect payment available to cover both all the stuff we want and profit growth for the current recipients of the payments. This will continue to impact content services, and eventually impact social media and perhaps even the Internet itself.
Remember the “follow the money” adage? Well, wherever the trail leads, one truth emerges, which is that the more players who expect to touch the money/value flow, the less money there is per player. Right now, “networks” or content creators are partnering with aggregators because they have to, because the public wants to “watch TV” and not have to deal with between ten and fifty separate content sources to do it. However, people are getting used to direct relationships with content sources, and as they do, the value proposition for aggregators gets thinner.
The biggest factor in weaning people away from the “watching TV” approach is the erosion in “live” viewing. Other than sports and news, people are generally accepting of on-demand content, because social forces have made scheduled viewing inconvenient, and limited creation of new shows has forced viewers to seek other material to watch. New players to the content game, like Amazon, have tended to release an entire season for streaming at one time, while networks have cited costs and COVID as reasons for reducing their number of shows. Less live TV means more people learning to do without it.
We could be heading for a combination of content subscription fees (the Netflix model and the goal of networks like Disney/ABC, Comcast/NBCU and Peacock, Viacom’s Paramount, and CBS’ streaming offerings) and pay per view. We already have “sports networks” (the ESPN series) and “news networks”, but individual networks bid on sports and offer local news and weather. Aggregators like Hulu and YouTube TV may end up being the source of “live” news and weather at the local level, and some sports, particularly high-school and college sports. More and more of the other stuff may flee to network-specific streaming services.
Social media offers the ultimate in ad targeting, so we can expect it to retain value for advertisers even in the long term. More and more ad dollars fleeing to social media will in fact drive the shift away from ad dependence in other services, like video content. However, social-media companies will still need to think about revenue and profit growth, and these companies will either have to start creating unique content or start selling products. We can already see a bit of both today.
The metaverse may be the biggest beneficiary of a shift by OTT giants to a direct pay model. It’s not difficult to see how the metaverse could create many avenues for direct revenue generation, including the obvious move to charge for “membership”. To shift a platform that’s currently ad-sponsored to a direct-pay model would surely arouse user wrath, but a new concept like the metaverse could easily become a pay-for. I expect that Meta itself is leaning toward this approach.
What about the impact on the Internet and telecom? Focus on content delivery means caching in metro locations, which tends to focus traffic from the metro outward to the user. Core transport is less important without settlement, because without a revenue source associated with peering there’s no incentive to build out the core. The telcos and cable companies are cast increasingly into a pure access role because they’re not particularly interested in deploying caching or metro hosting.
There are regulatory barriers to QoS-specific Internet services, which means that to the extent that the Internet is the dialtone of the 21st Century, operators have little chance of gaining revenue by selling premium handling. In theory, they could sell QoS for business services, but both operators and businesses tell me that’s going to be a heavy lift, for two reasons.
The first reason is that the focus of business IT has been cloud-enhanced user interfaces to support web access to customer and partner portals. This mission explicitly involves the Internet, not business data services, and in my most recent surveys of both operators and enterprises, its priority is broadly (almost universally) acknowledged.
The second reason is that first mission’s impact on business networking. Companies are learning that employee access to applications can be provided through the same facilities as are being enhanced to support customer/partner access. Combine this with the growing use of SD-WAN to support thin sites and the virus lockdowns and WFH, and you get what some operators and enterprises are already seeing as a flight from more expensive VPN services toward SD-WAN and the Internet. Given that, premium QoS on VPNs is hardly likely to be a good option.
Direct pay will not open an opportunity for Internet QoS, and in fact is likely to focus the market more on metro caching than on networking. The Internet, at the access level, will get better without premium handling because the market for content depends on reasonable delivery quality. Thus, the only real driver of premium handling would be edge computing and its association with latency-sensitive applications, meaning IoT. As I’ve pointed out earlier this week, the operators may have booted their opportunity at the edge through a combination of carrier cloud hesitancy and a potential onrush in community network interest, epitomized in Amazon’s Sidewalk enhancements.
There is still, in theory, time for operators to get their act together and take a position in the services that could lift them above the commodity access morass. Not much time, though, and I don’t think operators themselves are capable of the transformation. Vendors, or at least a vendor, will have to step up and be sensible. That may be a vain hope too, based on past behavior, and we may see 2022 as the Year the Operators Became Plastic-Pipe Plumbers.