Internet video: broadband service provider threat or opportunity?

Michael Kennedy, Network Strategy PartnersBroadband service providers are taking a hard look at Internet video and trying to determine if it is a threat or opportunity. It is a threat if it drives up broadband usage while media companies and content distributors capture all of the value-added revenue.  It also is a threat if it is used to bypass service providers' walled-garden TV services--subscription-based TV offerings. On the other hand, Internet video presents the opportunity to create two-sided business models where subscribers and media companies both contribute value-added revenue to the broadband service provider.

Internet video takes many forms. The simplest form is a low resolution small format image that is commonplace on almost all websites today. The next step up is video streaming or downloading sites offered by a wide range of media outlets with content ranging from user generated content at low resolution--YouTube--to TV and movie clips, previews and trailers at somewhat higher resolution. At the high end, consumer electronics companies offer a wide range of devices that permit viewing of feature length movies in HDTV on large screen TVs. As with the early Internet, the business models supporting Internet video range from well established models, like pay-per-view, to wishful thinking.

Broadband service providers cannot ignore Internet video. It is a big success. The Nielsen Company reports that 70 percent of global Internet users watch Internet video. Twenty two percent of global Internet users either own or have a definite interest in buying a television with an Internet connection in the next year. This is not a zero sum game where time spent watching Internet video takes the place of time spent watching traditional TV. In the U.S. over the last year hours spent watching TV in the home increased 1.3 percent, Timeshifted TV increased 14.7 percent, and video on the Internet increased 5.9 percent. Americans on average spend 168 hours per month watching traditional TV versus three hours per month watching Internet video.

Internet video strategyNielsen also has observed what it calls the best screen strategy. Viewers will watch the best screen that is available. More than half of global Internet users watch Internet video in the workplace. This is presumably because employers do not provide TV sets on desktops, but they do provide PCs. Prime time for Internet video is noon to 6:00 pm while it is 8:00 pm to 11:00 pm for TV in the home. More than half of U.S. TV households now have a high-definition television and receive HD signals delivered by broadcast, cable, satellite or fiber. Internet video depends upon the underlying download data rate of the subscriber's broadband service.  The FCC estimates that the U.S. median actual--versus the advertised maximum--data rate is 3 Mbps. HDTV requires at least a 5 Mbps download data rate, so Internet video is of poorer quality than the broadcast and walled-garden services. Also, 3D TVs are now on the market, and early implementations require 38 Mbps of bandwidth. So when viewers return home they switch from Internet video to their home TV. What is the best screen is of course subjective. Teens may well view the best screen as the PC or iPad in their room versus the home TV in the family room that their parents watch.

Internet video strategyThe business case for improving broadband data rates so as to offer a more attractive Internet video experience is a tough one. While the information content and bandwidth requirements of video are thousands of times greater than that of voice or text messages, the consumer's willingness to pay for video content is only marginally greater.

New edge routers that incorporate DPI and broadband policy management capabilities offer broadband service providers a tool to improve the subscriber's viewing experience without making massive investments in additional bandwidth. They can improve the quality of Internet video by providing QoS and bandwidth enhancements on a per-view or on-demand basis to individual broadband subscribers. This capability can be used to produce value-added revenue in many ways from simply providing a better viewing experience that enhances the service provider's competitive position, charging the subscriber on a per view basis for better quality, charging content providers to deliver better quality, or creating a walled-garden video offering that uses Internet video service delivery which could include revenue contributions from subscribers, content providers, and from advertisers.

I believe that the recent joint statements from Verizon and Google concerning the need for differentiated online services and Comcast's move to obtain a controlling interest in NBC Universal are motivated by the business challenge of profitably providing Internet video while simultaneously protecting traditional markets. Network neutrality advocates become very uneasy when giant companies talk about working together as it could inhibit market development.  However, the Nielsen data seems to suggest that they should have no fear because we seem to have an unlimited desire to watch video.

Michael Kennedy is a regular FierceTelecom columnist and is the co-founder and Managing Partner of Network Strategy Partners, LLC (NSP) consultants to the networking industry. He can be reached at [email protected]