Cloud, video and IoT applications will drive investment in broadband, but how can operators increase revenues and serve customers directly?
The overwhelming theme of this year’s Huawei Ultra Broadband Forum (UBBF) in Madrid is that increased demand and new applications for video, cloud and the Internet of Things (IoT) will stimulate development of ultra broadband.
These services will need high bandwidth and low latency networks to reach end users, creating opportunity for communications providers to offer enhanced connectivity. But the big question for telcos is can they offer some of these services themselves and increase revenues?
Cloud providers like Amazon and video on demand services like Netflix need broadband networks to deliver their platforms and end users need a good connection to access what they are paying for.
Greater demand for broadband is good news for telcos, but for many this is the limit of how they can monetise OTT services. Coupled with the fact that some applications, such as VoIP, are actively harming revenue sheets, the desire to gain a greater slice of the pie is obvious.
What types of service?
As various speakers informed the UBBF, the challenge is two-fold. Telcos must create services that can actively challenge OTT players and must modernise and restructure networks built for audio and web traffic so they are service-neutral.
Mark Newman of Ovum observed that telcos have had difficulty rolling out new services in the past because they lacked focus or had ambitions that outstretched their capabilities – digital payments and security were two such areas. But video and the IoT are areas offering genuine promise.
Mark Winther, vice president of analyst firm IDC, says communications providers have three options to monetise OTT services.
The first is to offer a ‘smart pipe’ that provides features beyond simple access – for example a telco could offer customers the chance to pay for Netflix via their monthly bill rather than their credict card.
The second is a revenue share agreement whereby the telco receives cash in exchange for guaranteeing performance. However this is likely to be contentious. Netflix currently pays a number of ISPs in the US a premium to maintain service levels and many governments around the world are introducing regulations safeguarding the principles of net neutrality.
Finally, telcos could launch their own OTT services. This is a model many are doing, especially in video. Some are launching own-branded services while others, such as BT, have bought exclusive content rights – in this case live Premier League football.
But creating your own service is difficult. And in the case of video, it’s expensive. BT has spent billions of pounds in acquiring premium sports rights, setting up production facilities and upgrading its IT systems. It says the boost to its broadband business has justified the investment, but for others it’s not so easy.
Mihai Crasneanu, CEO of content provider Grey Juice Labs, said Netflix has enjoyed such success because it is a focused business with no other distractions, such as broadband. He said Netflix was able to secure some of the most popular shows and films in each territory and then invest in original content to keep people coming back.
He added that in 2015, Netflix will spend an estimated $3.3 billion (£2.41bn) on original shows – more than the BBC and Sky when sport is excluded.
Crasneanu said that in a broadband business, the video service would have to compete with other divisions for investment and that carriers would seek to introduce a “linear” experience with an “allergy” to investing in content.
“Content has to be all or nothing,” he explained, adding that telco executives adopt a “wait and see” approach rather than backing their new product. “For a telco, VoD is a fraction of revenue.”
“It’s an interesting model and we’re seeing more operators go into this. But everyone is doing it,” added Winther. “Any brand in the media space is doing this.”
Cloud is even harder to break into. A telco could create a cloud service and stress the importance to customers of total network ownership, but the market is still dominated by major players.
“That’s a great story and it’s been pretty successful for the phone companies, but they’re not growing at market rates,” added Winther. “The market is dominated by the big players. These are the companies that are capturing the growth in cloud services so you have to question what the opportunity is.”
But owning the network does offer advantages. While Netflix and other providers only have data showing what users do on their services, telcos can see everything. This, Winther argues could be used to provide analytics to third parties or to bundle other services together.
Other advantages include the aforementioned integrated billing, content aggregation and multi-device strategy.
The latter of these plays into the hands of Internet of Things – an area many operators are placing their bets on.
“This is a new business and we want new revenues,” said Ignacio Martin, marketing and partnerships´director of Smart Home at Telefonica “Every new business we have we can get more revenue and potential increase of the loyalty of our customers.”
The industry appears to have identified at least two key growth areas and there is an appetite to innovate, but there is also a wider acknowledgement that networks of the future will have to support rapid rollout and support services that haven’t even been conceived yet.
Gabriella Styf Sjoma, vice president of engineering at Telecom Italia, says at present her company launches a handful of services every year and each takes 12-18 months to launch. She says this is too long and the amount of resources that must be allocated make such projects too expensive.
“I believe in failing fast and failing cheap,” she said, adding that in their perfect world she would be able to launch 500 services a year and decommission 450.
“That’s what I need to be competitive in this market,” she continued, explaining she had no idea what types of services would be rolled out. “My role is to architect networks for the unknown.
“Some [IoT] devices will require a lot of bandwidth, others require almost no bandwidth. How do I build a network to prepare for that?”
The vision of the future network outlined at UBBF is a simplified structure, one that removes the layers of legacy networks, places the data centre at the core and allows for simplified management and updates using software defined networking (SDN) and network function virtualisation (NFV) technologies. In short, telcos need to decouple the network from services.
But overall there was a mood of cooperation. Both service providers and network operators realise theirs is a symbiotic relationship.
“I think we’ve moved beyond the zero sum argument between content providers and access providers,” said Mike Blanche, manager for telecoms strategic partnerships at Google, adding that without telco’s local relationship with customers there would be no business for either side of the equation. “We’re developing [4K and 360 video]t o help drive demand for ultra broadband.”
“We need to understand the other part of our industry,” said Peter Lagergren, director of IP and Transmission at TeliaSonera. “We do that really well, but we also need to understand the other part of our industry.
“We can’t do everything but we want to know what’s happening. We’ve done some TV but we’ve also done partnerships, like with Spotify, to see how we can get the service as [optimal] as possible on the network.”
“We should be happy we have OTT, because if we didn’t who would consume our services?” added Gabriella. “We should be happy to collaborate. We spend too much time trying to defend our business.”
What do you know about fibre broadband? Try our quiz!