Verizon Fires Up Digital Media 'Factory'

The analyst attitude
The move does enable Verizon to inject itself higher into the video value chain at a time when the success of over-the-top video threatens pay-TV distribution such a Verizon's FiOS TV, says Heavy Reading Senior Analyst Adi Kishore.

"OTT applications and services could potentially threaten service provider revenues, so it's important that they look for ways to create new revenue generating services," Kishore says. "Expanding their service footprint up the media distribution value chain is a good way to do that. Caching and content delivery allows Verizon to use their network assets while launching a new service and leverage its scale to compete aggressively on price. The transcoding and video preparation capability is a natural incremental component."

Kishore thinks, however, that Verizon will be challenged to compete in a space already dominated by global content delivery network (CDN) players, even with the unique attributes and scale of VDMS.

"Most content 'retailers' are already distributing their content using third-party or in-house content preparation tools for transcoding etc., and working with CDNs for delivery, so Verizon has to pull customers away from these relationships," Kishore says.

Vince Vittore, Yankee Group Research Inc. analyst, believes Verizon is taking a big step forward because many content companies will be thrilled by the opportunity to totally delegate the responsibility for keeping up with the latest in consumer devices and the formats needed to support them. But he admits that the uniqueness of Verizon's value proposition may actual hamper its success.

"They are doing something unique -- it's a market of one," Vittore says.

Both analysts think there will be major challenges for Verizon to sell its media distribution story. Kishore sees Akamai Technologies Inc. (Nasdaq: AKAM)'s global reach as a tough act to follow, especially since the VDMS push is initially much stronger in the U.S. than in Europe and Asia.

Verizon plans to have "double-digit" edge nodes built out this year in the U.S. with a handful ready in Europe and Asia beginning in 2012.

In the U.S., Vittore warns, major operators such as Comcast Corp. (Nasdaq: CMCSA, CMCSK) might see Verizon as too great a competitor strategically, even if the VDMS solution makes sense operationally.

IDC Analyst Melanie Posey points out, however, that Verizon might not need to land a Comcast deal at all, if it wins over the content creators, such as HBO, that could be eager to reach consumers directly.

"Verizon would have had to build this for itself," Posey says. "It makes sense that they decided to then make it a wholesale offer."

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