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The Most Depressing And/Or Inspirational Thing You'll Read Today

Mitch Wagner
3/11/2014
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SAN FRANCISCO -- OFC 2014 -- For communications service providers, the opening plenary here Tuesday was either a rousing call to action or a gloomy signal to close up shop and go into the sports memorabilia business.

Gary Smith, Ciena Corp. (NYSE: CIEN) president and CEO, got things started on an upbeat note. "The network matters again," he declared. As the Internet has grown, content providers have gotten most of the value, with the network relegated to invisible infrastructure. That's changing as the quality of the network connection becomes a vital part of the user's overall experience.

Ciena also had product news out of OFC. (See OFC: Ciena Smartens Up Photonic Layer.)

Winners in the new model will have to change how they look at networking. Instead of building infrastructure and anticipating that users will come, providers will have to assess user needs and then build the network to meet them. And vendors will need to learn to interoperate in an open fashion, because no single vendor can do everything, Smith said.

That's hard work, but anybody who does the work is going to be fabulously successful, right?

Hard work? Who needs it?(Source: Celestine Chua)
Hard work? Who needs it?
(Source: Celestine Chua)

Not so fast.

David Clark, senior research scientist at MIT Computer Science and Artificial Intelligence Laboratory, followed Smith. He described how demand on the network is increasing, but service providers don't have a business model that allows them to expand network capacity to meet demand.

Traffic on the network is exploding, driven by Netflix and other video streaming services, Clark said. "Video is so big that everything else we do fits into the interstices of video." (See Netflix: The Internet's US Traffic King and Netflix to Spend Big, Strike Cable Deals in 2014 .)

And video is likely to remain the main driver for broadband demand. The Internet of Things won't increase network saturation. "The Internet of Things is coming, but things don't have much to say." For example, a sensor on his home furnace reports outages -- once a year. And vehicle-to-vehicle automotive communications will involve relatively little information and be highly localized.

So video is driving huge demands for bandwidth, but consumers are paying the same amount for service, and Netflix and other video providers aren't paying significant amounts to consumer networks. (See Comcast-Netflix Peering Deal: A Game-Changer?)

So the revenue to fuel future growth isn't coming from anywhere.

"I pay my provider about $45 each month, whether or not they upgrade," Clark wrote on one of his slides. "So the ROI [return on investment] on an upgrade is zero." (Most depressing telco bumper sticker ever.)

Revenue for Internet service comes from consumer payments and advertising. And advertising isn't that big a deal -- advertising spend is $36 per household in the US, $10 in southern Europe, and less in the developing world.

"The consumer is your friend," Clark concluded. "The consumer is your only friend."

And yet the consumer is a poor friend to service providers. Rates aren't going up, and new users aren't signing on either. Wireline broadband access in the US is nearly saturated; just about everybody who wants Internet access is already signed up for broadband. (Europe has a different business model, with infrastructure and retail components unbundled.)

After concluding his description of the wintry business climate for service providers, Clark turned the stage over to Robert W. Tkach, director of advanced photonics research for Alcatel-Lucent Bell Labs. Tkach described the engineering outlook for future network growth. Summing up: The network is nearing saturation, and there are some promising channels for innovation, but nothing is guaranteed.

"We're very close to what we can wring out of single-mode fiber," Tkach said. Space Division Multiplexing (SDM) and multi-core fiber are likely candidates for future growth. (See A1, Coriant Trial Space Division Multiplexing.)

Or maybe the solution to the coming bandwidth shortage isn't fiber at all. "Maybe it's something happening at some other conference."

In conclusion, network providers face increasing demand for bandwidth -- without a business model to fund construction of the infrastructure needed to meet that demand. And even if the business model materializes, the technology to achieve the necessary capacity increase isn't there yet.

Is that depressing or inspirational? If you just look at the obstacles, you'll get pretty discouraged. But if you think of the situation as a technical and business problem that needs to be solved, well, the companies that solve that problem stand to make a killing. And that'll cheer you right up, won't it?

It's better than selling sports memorabilia.

— Mitch Wagner, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profileFollow me on Facebook, West Coast Bureau Chief, Light Reading. Got a tip about SDN or NFV? Send it to mwagner@lightreading.com.

Want to learn more about this topic? Check out the agenda for The Big Telecom Event (BTE), which will take place June 17-18 at the Sheraton Chicago Hotel and Towers. The event combines the educational power of interactive conference sessions devised and hosted by Heavy Reading's experienced industry analysts with multi-vendor interoperability and proof-of-concept networking and application showcases. For more on the event, the topics, and the stellar service provider speaker lineup, see Telecommunication Luminaries to Discuss the Hottest Industry Trends at Light Reading's Big Telecom Event in June.

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Mitch Wagner
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Mitch Wagner,
User Rank: Lightning
3/13/2014 | 6:32:00 PM
Re: Same old song
Carol Wilson - "Hmmm, I had to admit, I've never seen "government" and "solution" used in the same sentence where the current telecom dilemma is concerned."

I know, weird, right? But a broken regulatory system seems to be part of the problem, so fixing those regulations needs to be part of the solution. 
Mitch Wagner
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Mitch Wagner,
User Rank: Lightning
3/13/2014 | 6:30:55 PM
Re: Same old song
brookseven - I may have been unclear in my point. I'm not arguing that people are unwilling to spend more on Internet. Quite the opposite: Americans at least have demostrated great willingness to spend more and more on entertainment and communciations options. Most homes had a single landline in the mid-20th century, TV was free, and Internet service, when it was introduced in the 90s, was $20/mo.

All of this seems quaint today. 

Moreover, people are willing to classify some of these new options as necessities rather than luxuries. What middle-class person would do without their smartphone or home broadband connection?

The one thing that hasn't changed is time -- or attention, in Internet business jargon. Every new entertainment and communications platform needs to compete with all the others for consumer attention. 
brookseven
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brookseven,
User Rank: Light Sabre
3/13/2014 | 12:21:49 AM
Re: Same old song
Yes Mitch - And Gas was $0.25 cents a gallon when those things were true.  So multiply that number by inflation since 1965 and get your true number.

seven

 
Mitch Wagner
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Mitch Wagner,
User Rank: Lightning
3/12/2014 | 11:41:10 PM
Re: Same old song
It's not just that consumers have spent all they can on entertainment. Indeed, people always seem to be willing to spend more. TV used to be free and Internet cost $20/mo.

But new entertainment channels need to compete with all the existing ways people have to spend their time. You can increase your income, bit your day will never be longer than 24 hours.
brookseven
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brookseven,
User Rank: Light Sabre
3/12/2014 | 2:41:56 PM
Re: Same old song
Even within large carriers, there is not complete consensus around any opinion.  For example, if you read the boards and news feed here you will find that carriers are betting 100% on Revenue Gain and 100% on Cost Reduction.

The reality is that neither is true.  I would argue that none of the initiatives that have all that traction are confimed by carriers until you see large deployment.  What is going on is trying different ideas that might change things.  Emphasis on the MIGHT.  If a technology or a plan doesn't pan out, they move onto the next one.

I would say that the actual problem is jealousy and emotion.  Carriers have already found a way of upping mobile revenue by putting in bandwidth caps.  On the wireline side, it is pretty clear that the consumer has already spent 100% of his entertainment/communications dollars and now we are talking about how we partition those dollars and who gets them.  Nobody wants a "Fair" distribution of the money, they want their unfair share and will advocate to get it.

One challenge for the carriers is that they have crushed the ability for their vendors to truly innovate by emptying their margins.  On top of that, people forget that the US network was built on the architectures set by BellLabs, with BellCore doing detailed specifications, upon equipment built by Lucent.

The current model has a lot more chaos and that is both good and bad.

If content is so great, why not invest in Content if you are Verizon and not in buying more network companies?  It hasn't worked in the past but maybe it will now. Netflix has a Market Cap of $26B or so, which is a boatload less than is being paid for TWC.

seven

 
Bo Gowan
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Bo Gowan,
User Rank: Lightning
3/12/2014 | 2:35:58 PM
Re: Same old song
I didn't think the point of any of the three sessions was that price hikes were needed or inevitable.  My takeaway was more around SPs adding more value to the end user through new network services, and the incentives network operators have in spending on technology (David's "technology is something you buy, a service is something you sell" quote was an excellent one). 

Earning more through offering something more than a nailed-up connection is the path, not just hiking prices because there is no other choice.  I think the market has already determined that bandwidth prices generally don't go up, they go down – and the riddle to solve for SPs is how to add services and value that slow that down.
kq4ym
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kq4ym,
User Rank: Light Sabre
3/12/2014 | 11:03:51 AM
Re: Same old song
Of course, each presenter is going to take a different slant on the problems seen, naturally looking for sympathy or more funding to help solve the indicated problem forcast. It's interesting to see the advertising breakdown for the variouis countries. With an advertising model more finelly  tuned maybe the funds can come from increasing that end, and keeping consumer pricing low?
DOShea
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DOShea,
User Rank: Blogger
3/12/2014 | 10:48:39 AM
Re: Same old song
I agree--in all three of these presentations, I can hear indirect arguments for why prices should always be increasing.
Jessie Morrow
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Jessie Morrow,
User Rank: Lightning
3/12/2014 | 10:30:05 AM
Re: Same old song
Aside from the pronouncements of the Jeremiahs at the podium to what extent do we have actual bandwidth breaking down in this country? Examples, anecdotal or otherwise please.

Or are consumers being softened up for a spike in rates.
Carol Wilson
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Carol Wilson,
User Rank: Blogger
3/11/2014 | 11:16:27 PM
Re: Same old song
Hmmm, I had to admit, I've never seen "government" and "solution" used in the same sentence where the current telecom dilemma is concerned. 
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