Is Video a Telco Killer, or the Telco Killer App?

The growing end user demand for video is currently driving telco networks, and in several cases, amounts to more than 80% of total fixed and mobile broadband traffic. In fact, one could say that telcos are running video delivery networks today, with YouTube, Netflix, and telco IPTV being the most popular traffic-generating services. In the past, telcos tried to optimize streaming video running through their network with content optimization engines positioned at the core network edge, but content owners and the Internet community eventually switched to encrypted video, which rendered these obsolete. In fact, telcos witnessed over-the-top (OTT) encrypted video going from a single-digit percentage to a high double-digit percentage (of their total data traffic) within a year, and encrypted traffic now contributes more than 50% of total traffic for many telco networks. At the same time, there are contradicting telco and vendor strategies for video, an unusual occurrence in the telco industry, highlighting that video is a still contested business.

Video drives telco networks and traffic, but the same cannot immediately be said for revenues and profits. The strongest argument to video as a business driver is that big OTT video users, on applications such as YouTube, Netflix, BBC iPlayer, or Yokou, demand higher broadband performance. This has been a double-edged sword for providers: on the one hand, it required significant capital expenses (CAPEX) to build increased broadband capacity; on the other hand, it enabled them to increase average revenue per user (ARPU) through higher-performance broadband packages, varying somewhat based on regulatory and competitive environments.

Therefore, at the moment, most telcos—especially in the case of OTT encrypted video—act as the pipe that delivers video, rather than deliver video as a service. Several telcos are offering IPTV services which are quite profitable, but in many cases, are bundled with connectivity and are not the main component of a subscription. So, the question is, will video ever be a revenue driver, or merely the driver for telco network traffic?

Telco vendor strategies are also mixed in terms of involvement. For example, Huawei and ZTE stated that video will be a key priority for them, with Huawei going as far as to claim that telco video is a US$1 trillion opportunity in both consumer and enterprise markets. Nokia has a more linear and moderate approach, while Ericsson recently announced it is looking for “strategic options” for its media business, meaning that it may offload it to a third party. Which vendor is right? Can they thrive by selling video-related equipment to telcos, or do they just benefit from the rise of video indirectly, in turn driving capacity requirements and network equipment sales? 

Good video packages can certainly be a strong part of telco IPTV while a plethora of new related applications are now being assessed, including virtual reality (VR), 360° video, teleconference, tactile Internet, and several vertical-specific applications. There are two questions regarding this area: do telcos have a role to play in these new application areas, or will OTT and vertical-specific players move faster to capture the nascent market long before telcos react? Also, in the IPTV domain, there is a contrast: in content-heavy, developed markets, telcos may already offer IPTV services and are looking at expanding their own content holdings to be relevant on a national and exclusive sale. In the U.S., AT&T aims to merge with Time Warner Cable while Verizon acquired Yahoo, and cable company Comcast owns NBC Universal content holdings. These types of deals are natural for the U.S. market, where content ownership is a way to further drive telco revenues. Similar deals are likely to happen on a much smaller scale in the rest of the world, where content is not perceived as valuable as in the U.S. market. In developing markets, vendors may have the opportunity to sell telco IPTV equipment and professional services, but telcos first need to deploy an adequate footprint of broadband connectivity on which these video services will run. Then there’s also the question of mixing vendors for broadband equipment and video, meaning that there may be limited opportunities for IPTV core network equipment outside the existing broadband deployments of a specific vendor. From a technical standpoint, operators are moving from heavily provisioned broadcast IPTV networks to lighter protocols borrowed from the OTT to decrease capital equipment costs, including more of a caching architecture and support for adaptive-bitrate to overcome last-mile (and mobile network) congestion.

OTT and encrypted third-party video will likely remain the largest share of telco traffic for the foreseeable future, creating more challenges than opportunities. Vendors can certainly sell more capacity to address this end-user demand, but access-driven business models are far less lucrative for the whole value chain. ABI Research expects video to saturate telco networks with encrypted traffic ending up taking more than 80% of total traffic. Telcos may not be able to monetize this, but they will certainly need to build networks to maintain a positive user experience. There will be an inflection point when telcos will realize they are building networks to deliver third-party traffic, but 5G and NFV may reduce the cost structure of the networks and present new opportunities for them to monetize video directly. However, in the short term, video is more likely to be a major challenge rather than an opportunity.