If we had to pick the parameters of a really big rumor in networking it would be hard to top the one that started circulating Monday afternoon. Verizon, says the rumor, may buy Netflix! Here’s a telco, one with FTTH and telco TV, picking up an OTT video player! Is this the beginning of the Great Era of All-Internet-Everything? Well, you can probably guess that while I’m not ruling out the rumor, I’m skeptical about the interpretation.
I’ve been blogging for a couple of days now about the issues with wireline services in general, and Verizon’s business shifts in particular. The summation of my position is that only TV viewing can justify a loop, that DSL can’t support TV viewing all that well, and that Verizon’s deal with the cable consortium for spectrum in return for resale rights may indicate that Verizon itself is thinking about exiting the DSL business. Instead they’d focus on FiOS where they’ve already deployed it, let the copper plant rust in place and try to shift its users to remarketed CATV.
OK, you can see how this latest story might play into that view. Look at Friday’s blog: 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. How do you suppose Netflix would fit into that model? This is what I’ve been worried about. If broadband ROI falls and OTT opportunity rises, then operators start thinking “Hey, I could be a contender if I were an OTT!” I don’t think Verizon plans to exit the physical part of the network, but it darn sure sounds like they plan to exit some of it, and to confound their Great Rival AT&T by selling Netflix over AT&T pipes. Of course this rumor would have to be real, first, and would have to end up in a deal that passed regulatory muster second. Both might not happen.
If you give me credit for predicting this one, then perhaps you’ll indulge me on my view of the evolution of “networking”. We are at the end of the push-bits-for-a-profit period. We are at the beginning of the “fulfill user desires directly for a profit” period. Thus, what vendors produce that fulfills the latter is what will keep their lights on. I’m not saying that the network isn’t an essential pipe for delivering stuff, but I am saying that you can’t be in the delivery business while others are fulfilling the retail demand. If the rumor is true, that’s the message loud and (hopefully) clear. The profit in network equipment has to be created by creating a more affirmative link between the network and the source of profit. Carrying the water (or bits) isn’t enough. The vendors have to climb the stack up to where profits are generated, which is hard. They also have to link their successes in the service-layer space with their network technology so they can move the big iron and generate revenues. Service layers are differentiators but they’re not, for the box players of today, replacements for the old transport/connectivity market.