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Video Is the Internet

Column
Column
Column
4/21/2005

About three years ago, midway through the telecom-crash period, I attended a Goldman Sachs communications conference at the Biltmore Hotel in Santa Barbara, Calif.

Yes, it was one of those conferences that are now virtually defunct – complete with fine dining, exotic drinks, Reed Hundt, and executives from Qwest. The crash had already started, but there was still enough foam left in the cappuccino mug to get frenetic hedge fund managers, analysts, and telecom executives pontificating on how the industry would come roaring back and they were going to make their next few millions.

Post-bubble margaritas
Like most early post-bubble conferences, most of what was discussed at the time was irrelevant – or just completely wrong. (A Qwest executive explained at lunch how Qwest was just fine.) But the idea was to identify the next growth opportunities.

Well, at least one person got it right. At an end-of-the-day session at this conference, Ethernet entrepreneur and Polaris Venture partner Bob Metcalfe was speaking. It was a casual affair, in a well-appointed conference room off a sun-splashed California courtyard. They were serving margaritas, and there were many takers.

Metcalfe, himself sipping a margarita, stood in front of a simple white posterboard and gave a very distinct talk (no PowerPoint, just some simple drawings on a white paper). It could pretty much be summed up like this: “The future of the Internet is video.”

Yes, it seems simple. But at the time, 2002, it was quite a leap.

I think that the evidence is now mounting to prove Metcalfe was right: The future of the Internet is video. But let me suggest turning the phrase around: “The future of video is the Internet.”

What do I mean by that? Fundamentally, video content formation and distribution is migrating slowly but surely toward the Internet model. In the future, the distribution of video will be facilitated and managed by an IP-based architecture and will often take place, quite simply, on the Internet (or private, IP-based networks). An entirely new video content creation and distribution system is evolving based on IP.


The Internet’s impact on video, in short, is just getting started. This is not to say that all traditional cable and broadcast networks will fail to make the transition. But they will either adapt to an IP-based model – otherwise known as IPTV – or die a slow death. The same is likely for telecom carriers, cable providers, and equipment makers.

Cable copy-cats
The fundamental mistake comes when folks combine “video” and “network” but fail to build in the open IP part. Some very large players –- including many cable companies and some incumbent telcos, most notably Verizon –- are building video networks based on overlay models that aren’t based on IP. In particular, I find it fascinating that for its FTTP rollout, Verizon has favored an RF video overlay network rather than pure, packet-based IP (see Who Makes What: Telco Video).

Hints have been dropped that the RF model, or the "copy cable" model, may also have reverberations on the regulation front. A Verizon spokesman points out that the company is pursuing video networks on two fronts – both the RF broadcast approach and an IP-based approach. Also, as demonstrated by yesterday's announcement with Motorola, it's clear the service provider is hedging its bets on which technology to use for FTTP (see Moto Gets a Piece of Verizon FTTP). It will be interesting to see whether it shifts strategy in the coming months. Just this week, at the National Association of Broadcasters (NAB) conference in Las Vegas, Verizon CEO Ivan Seidenberg said that broadcast franchising regulation is the key to success in video (see Verizon Attacks Video's 'Biggest Barrier').

Verizon rival SBC, on the other hand, sees an RF overlay model as more of a risk to regulation, and it has declared its own IPTV systems exempt from cable TV franchising regulations (see Verizon Sets TV Precedent and Your New Cable Company)

The key to next-generation video will not come in manipulating the existing broadcast models, it will come in developing new, lightly regulated, packet-based video networks – and merging them with the Internet. In the Internet world in general, the regulatory burden is far less onerous. The FCC, so far, appears to be having a lighter touch on IP-based networks; let’s hope it takes the same approach with IP video.

I’m not the only one watching this. Kermit Ross, principal at Millenium Marketing, noticed the same thing about the Seidenberg speech. “I think there’s something going on with Verizon backing off of FTTP,” says Ross. “I think that Seidenberg is setting up some excuses to slow it down.”

But here’s a better question: How is Verizon – or any other telecom carrier, for that matter – going to beat the cable companies with an offering that does little more than mimic the broadcast cable model? The answer is, it won’t.

I don’t think this is lost on the industry. Even John Abel, vice president of the United States Telecom Association (USTA), sees a clear need for a new, IP-based video model for incumbent telecom providers. And I don’t think it’s a coincidence that the USTA has hired the former vice president of marketing for the NAB. In fact, in speaking, Abel seems skeptical of the video capabilities of his own constituency (the USTA lobbies primarily for incumbent telecom operators). In a speech at Light Reading’s recent Telecom Investment Conference, Abel was particularly glum on the prospects for RBOCs getting the video thing right (see LR's TIC: Get Me Video).

Introducing: Video+
What next-generation video providers need is a new video system, not a copy of the existing digital cable system. They need flexible, packet-based video to provide both cached content and video on demand, viewer choice, and access to IP-based content providers that are springing up all over the Internet. For the purposes of argument, let’s call this video+Internet, or video+.

What's so different about video+? First of all, it needs to ignore the linear programming model, in which broadcasters decide what you want to watch, and when.

With video+, you select whatever you want to watch and watch it when you want it. It would have the intelligence to store, download, or play thousands of programs, rather than being pumped via "channels." How to do this? Using the appropriate storage and software intelligence, you could have access to an intelligent PVR device – a sort of Tivo on steroids – that is fully integrated with the network and controls everything you watch.

Morgenthaler venture capitalist Drew Lanza has pointed out that you may not even need large amounts of bandwidth for good video quality, as it could be cached and stored faster than real-time when you are not using it. This is driven by the price of storage declining more quickly than the price of network bandwidth (see Fiber's Sticky Wicket). This makes a lot of sense.

What else do the service providers need? They need new content and applications. Video+ needs to offer more than what the cable companies have. Think of all the specialized vertical content that cable networks made possible. MTV. ESPN. CourtTV (well, there’s something for everybody). Now take to the Internet, and multiply it by the thousands. Imagine accessing Internet video databases that can be ordered and cached on your PVR – or transferred to a sort of video iPod, or ViPod (surely Apple is working on this?). When video is married to the Internet, that’s what you’ll get. The Scuba Diving Channel becomes a possibility. Or, better yet, Light Reading TV, which is launching on this site next month.

The possibilities with Internet-based video+ are endless, and in some respects, already available. You can now get around the entire broadcast industry to watch most Major League Baseball games over the Internet, via MLB.com. As another example, there is access to new independent and foreign content on the Internet. At our lunch table at our Telecom Investment Conference, a gentleman from Holland was watching a Dutch news program on his tablet PC, over a WLAN connection. Everybody at the table was awed by this. It’s the future.

Sadly, such visions are short in coming from most of the incumbent telecom providers – or even MSOs. Given financial constraints and their cultural roots, this isn’t surprising. They're plumbers, not content guys. Moving to an entirely new video model contains substantial risk, and it will cost a lot of money. But you have to ask this question: Will the telcos really compete with cable companies by simply offering the same thing?

I don’t think so. I think there’s a whole new video game to win, and it requires new thinking. The winners will likely make a lot of money, but they won't do it by copying the cable system.

So far, it doesn’t look as if the answer is coming from either the telecom incumbents or the MSOs. It’s going to take a new push, with an integrated video delivery system that is married to the Internet, to succeed.

— R. Scott Raynovich, US Editor+, Light Reading

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optodoofus
optodoofus
12/5/2012 | 3:18:18 AM
re: Video Is the Internet
While the video+ model laid out here is compelling, it does not address the fundamental question of who is going to pay for all this content. The much-disparaged linear viewing model of current broadcast video has allowed the entertainment industry to use advertising dollars to pay for creation and distribution of the vast amount of content. The rise of TiVo has revealed the first cracks in this model (does anyone with TiVO NOT skip through the commercials?). With the video+ model, there is no way to incorporate advertising in a mandatory yet user-friendly way. And if advertising is not going to support the content industry, then what is? Micropayments per episode? Higher monthly fees to cover not just the transmission service but also the content subsidies?

This is the primary reason why SBC is not diverging from the existing broadcast model. Even though they are using IP as the underlying transport technology, they are taking great pains to point out that they are not looking to change the current broadcast TV paradigm (at least not yet). When I first considered IPTV, I was excited by the propsect of someone offering a true a la carte video service. I have hundreds of channels of sattelite TV, and I watch just a handful of them. Why not just charge me for the channels that I actually watch instead of forcing me to pay for the whole bundle. If I don't watch ESPN, then don't make me pay for it. Now that would be worth switching providers for. But, alas, no one appears ready to get creative yet.
Scott Raynovich
Scott Raynovich
12/5/2012 | 3:18:18 AM
re: Video Is the Internet
I think there are any number of ways the business model works -- micropayments, subscriptions, advertising. It doesn't really matter. All of them can work -- and the right service could use all of them.

If you build an attractive service you will find a way to make money because it will have huge numbers of subscribers. Look at Apple, folks were fretting about the business model of iPod and they are now blowing away the numbers, have market share in digital music, and it has revitalized the entire company.
OldPOTS
OldPOTS
12/5/2012 | 3:18:16 AM
re: Video Is the Internet
While I agree that the telcos and MSO must think outside the box if they want to have any revenue instead of delivering me too comodity products. There will be no margins in this.

However, I recently saw an application to add AIN of a phone call over the TV picture using the Set-top-box. Marketeers and Hackers will be next by adding Adds and Spams without much trouble.

Think of those numerous Supper Bowl Spam-Adds you'll get.
That means I don't care how well you protect the content with IPTV CA and DRM when I can advertise over it for free.

USTA is running adds in my area that customers don't care how TV is delivered only that the delivery methods; cable, satellite and telcos DSL/FTTU should be treated equally. So tell your represenatives.

Great marketing, but I contend that those overlaying adds/spams will change their sub's minds quickly as this can be done over any IPTV or video service.

I found this info about home devices (outside the box) from Motive while investigating an Alcatel Partnership Press Release;
http://www.motive.com/newseven...
Press Release

But Alcatel (and I assume SBC) only sees limited use of Motive for me too applications;
http://biz.yahoo.com/bw/050421...
Alcatel and Motive Join Forces to Meet Triple Play Digital Home Management Challenge


I am still an Analog sub on cable, in spite of their numerous attempts to slam me to 'digital'. I just want reasonably priced and hassle free TV USTA.


OldPOTS
dave@dwdmr.com
[email protected]
12/5/2012 | 3:18:15 AM
re: Video Is the Internet
Video will always be touted as the killer app that will suck up all the excess bandwidth, create demand for more, and commence the long sought after build out of the Internet that will once again make everyone some $$'s. It's a mirage.

Outside of Porn no service has been delivered that people are prepared to pay enough for so that all partys to the transaction can make a profit.

The whole iPOD argument is rediculous as you could certaibly have picked 10's of other product categorys that failed misearably. Why choose the one that worked.

That is like saying that because the WSJ has been sucessful selling their online edition on a subscription basis that all other newspapers should or can. Guess what they would love to but can't. And their content is both desired and paid for on a daily basis but not when the Internet is the distribution mechanism.

People have a mentaility that $20 is all you pay for the Internet and everything else is free. Trying to change that cultural bias is a huge undertaking.

jepovic
jepovic
12/5/2012 | 3:18:14 AM
re: Video Is the Internet
Will linear programming continue to be viable, with the advent of TiVo?

Paying for the content makes more sense. After all, you are interested in watching Superbowl, Friends or whatever, not NBC or CBS.

You may buy a single issue or buy a subscription for a series. Like with magazines, the possibility to make cheap copies will set a roof on the price, but most people will be more lazy than cheap.
optodoofus
optodoofus
12/5/2012 | 3:18:12 AM
re: Video Is the Internet
Scott,

I don't believe that Apple sunk billions of dollars in developing and marketing the iPod. If the iPod had become another Newton, Apple would have shrugged and moved on. I don't think SBC has that as an option. Sure, they're a cash flow machine, but wasting that kind of coin will be a nightmare if their video dreams do not work out.

> If you build an attractive service you will
> find a way to make money because it will have
> huge numbers of subscribers. Look at Apple,
> folks were fretting about the business model of
> iPod and they are now blowing away the numbers,
> have market share in digital music, and it has
> revitalized the entire company.
dljvjbsl
dljvjbsl
12/5/2012 | 3:18:12 AM
re: Video Is the Internet

Paying for the content makes more sense. After all, you are interested in watching Superbowl, Friends or whatever, not NBC or CBS.

You may buy a single issue or buy a subscription for a series


I have heard this analysis before. It has a couple of mysteries for me.

The first is what was found with cable. The economics only makes sense with channel bundling. The price that would be required to pay for niche channels if they were sold indivudually would make them unaffordable. They are only viable if they are sold in bundle so that they can share their potential markets.

Secondly, how much bandwidth is going to be consumed in any event. The issue is content. Already digital cable is the land of reuns. We have motorcycle fabrication shows that are repeated endlessly. If someone decides to download American Chopper and watch it at home, this would remove months of programing (and related ad revenue) from the Discovery Channel.

There just is not enough content being produces to create the need for a large amount of bandwidth. The content would be loaded onto regional video servers and consumers would download it to local storage. The amount of bandwidth consumed would be trivial.

The same can be said about major sporting events such as the Super Bowl. Sending this out over an IP backbone would be pointless. It is a broadcast service with masses of people wtching the same content.
rjmcmahon
rjmcmahon
12/5/2012 | 3:18:11 AM
re: Video Is the Internet
The first is what was found with cable. The economics only makes sense with channel bundling. The price that would be required to pay for niche channels if they were sold indivudually would make them unaffordable. They are only viable if they are sold in bundle so that they can share their potential markets.

I was wondering if somebody was going to mention the FCC's a la carte report. It's a sham, written by incumbents to protect their position.

And who cares anyway? The right thing to do is to provide a la carte programming even it is perceived as being "more expensive." Why? Because it moves the editorial process closer to the consumer/citizen.

The best analogy I can think of is books. A la carte works there. It will work with multimedia as well.
rjmcmahon
rjmcmahon
12/5/2012 | 3:18:11 AM
re: Video Is the Internet
Look at Apple, folks were fretting about the business model of iPod and they are now blowing away the numbers, have market share in digital music, and it has revitalized the entire company.

I think I heard somewhere that Steve Jobs negotiated a revenue share agreement with the music industry, and the music industry gets a cut of the IPOD device revenue, i.e. the songs are being subsidized by the gadgets. Do you know if this is correct?
rjmcmahon
rjmcmahon
12/5/2012 | 3:18:11 AM
re: Video Is the Internet
People have a mentaility that $20 is all you pay for the Internet and everything else is free. Trying to change that cultural bias is a huge undertaking.

I think this is worth repeating. It applies to so much more than the internet. Too many people get everything for free and never pay their fair share. Or worse, figure out how to game the system so they can take even more. Rich and poor alike. (ever notice the portion a student really pays for an education at an elite university?)

I think this training of handouts (and inheritance is a handout) inhibits people from understanding wealth. And if we don't understand what is wealth, it is impossible to create it.

PS. The killer app is the freedom to communicate. What's that worth to a society?
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