Level 3: Video Will Drive Optical Spending

DALLAS -- Optical Expo 2007 -- Video is changing advertising models and driving capacity spending among carriers, Level 3 Communications Inc. (NYSE: LVLT)'s Bill Wohnoutka said in a keynote at Light Reading's Optical Expo yesterday.

Wohnoutka, who is the VP of business development for Level 3's content markets group, sees this trend firsthand. And he says the Internet is consuming more of our time as an entertainment medium and as an information medium.

"It is beginning to erode our TV viewing. Eyeballs that advertisers want to reach are migrating from TV to Internet," Wohnoutka said.

Advertisers are starting to take notice. About 15 percent of ad spending goes to the Internet today. But, while advertisers still use the Internet as a broadcast medium like TV or radio, Wohnoutka believes that in the future the Internet will allow advertisers to employ more targeted advertising with lower CPM (cost per impression).

At the same time, the technologies driving bandwidth growth on the Internet are rapidly evolving. "In 2006, we all decided that video on the Internet was a place to attract eyeballs."

But the days of short-form, low-quality video on sites like YouTube Inc. are being eclipsed by standard-definition and high-def video content from companies like ABC.

Noting that video makes up about 75 percent of all billable traffic passing through Level 3's network, Wohnoutka says, "What we're seeing emerge is an increase in the quality of content and quality of delivery."

In part, that's because it's still much cheaper to deliver content over the Internet than through other media, Wohnoutka notes:"Network delivery costs for video are below that of mail rental, mail delivery, and store rental."

That is driving carriers like Level 3 to massively increase capacity in their networks. In the past year, for instance, Level 3 has increased the number of 10-Gbit/s links between New York and Washington from 109 to 199. From Los Angeles to San Jose, that number has increased even more, from 68 10-Gbit/s links to 146 during the same time period.

But Wohnoutka believes today's bandwidth demands "pale in comparison to problems we'll have to solve as user demand for video on the Internet increases."

How service providers will deal with those problems is still up in the air. But while banking on IP continuing to grow exponentially, Level 3 is also banking on market-based technical improvements that will continue to lower costs.

"We're looking for an increase in unit demand that is about 2.3 times the unit cost," Wohnoutka says.

But in the future, he believes, it may be software that helps improve network performance more than the hardware deployed. One example is peer-to-peer technology, which Wohnoutka says carriers could use "to give a cost advantage to all parts of the network. It may hold the key for the next wave of cost improvements."

— Ryan Lawler, Reporter, Light Reading

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