Tuesday, March 15, 2011

Cord Cutting Explained: Telcos, MSOs and the Existential Crisis - A Conversation with Roy Peterkofsky, Skytide

What is cord cutting? The term cord cutting is commonly used to describe the trend of consumers who cancel their cable and satellite television subscriptions and "cut the cord" in favor of receiving their television programming from Over-the-Top Television (OTT) solutions available through the Internet. While this is a growing trend fueled in part from the wide availability of content from Netflix, Hulu, YouTube and millions of other video sites, there is an existential crisis facing the telcos (telephone companies) and cable companies, also known as MSOs (Multiple System Operators), that could threaten the continued growth of the next generation television industry.

I spoke with my friends at Skytide, an Oakland, California-based company specializing in performance analytics for large scale content delivery and digital media providers, to get an inside perspective on the current situation. According to Roy Peterkofsky, Skytide's VP of Product Management, this issue came bubbling to the headlines in the mainstream press with the news that Netflix accounts for 20 percent of network traffic at peak times in the U.S. along with the feud between Comcast and Level 3, which is all about the impact of that amount of traffic on the ISPs (Internet Service Providers).

Peterkofsky pointed out that in the Comcast vs. Level 3 feud, Comcast is wearing its ISP hat and not its hat as a cable paid TV operator. Comcast claims that it's being swamped by all the traffic coming from Level 3, the ISP that serves as the backbone of Netfix's content delivery. Level 3 says that Comcast is charging unfair fees for the right to send data to its subscribers. As video consumption continues to grow at astonishing rates that could occupy 90 percent of all Internet traffic by 2014 – that's a lot of traffic getting dumped on the ISPs of the world and is generally uncompensated traffic.

More evidence of this issue was seen even today, as AT&T announced a broadband cap of 150 GB per month for its DSL subscribers and 250 for U-Verse subscribers, which are similar caps made by Comcast and Charter back in 2009.

Telcos, MSOs and the Existential Crisis

Peterkofsky noted that if you look at the historical context of the companies that are ISPs, which tend to be the telephone company and the cable company, you really start to see what a huge existential crisis this may turn out to be. He explained that once upon a time you had only one line that came to the house and that was your telephone line. Back then the telcos once held a monopoly because the telephone was a necessity. Consumers were locked in either through a governmental or regulatory monopoly and the telcos could upsell them on other services like long distance plans, voice mail, call waiting and Internet access.

At some point this other line got hooked up to your house, which was the cable line, but it was no big deal to the telcos because cable was only for video entertainment and never in a million years did the telcos think they would ever have anything to do with video entertainment. Peterkofsky said, that was before deregulation, competitive access, cable companies offering the triple-play which included the Internet and VoIP (Voice over Internet Protocol) telephone services and before mobile phones and people thinking they didn't need a landline anymore. It was obvious that the the core revenue source of telcos was under attack.

Peterkofsky clarified:
"You hear the term cord cutting thrown around a lot lately, but it's generally used in relation to cable companies, and it cant be taken literally. Because it usually talks about people who are going to stop paying the pay TV subscription but they would still keep the cable line typically as their ISP in order to bring in the OTT video services that allow them to no longer want their pay TV service. So it's not literally cutting the cord. But if you look at the situations that the telcos are facing, you could take the term cord cutting quite literally. Because a lot of people just have no need for the telephone company anymore and they could completely sever that relationship; and once the telco loses that customer relationship they lose that ability to upsell you on more and more services – that's their whole growth model completely out the window."
Peterkofsky said that some telcos have started to offer IPTV services over their networks to regain some of that revenue turning the tables on the cable industry that was once the nemesis of the telcos, and now finds itself under fire from two directions – the IPTV services and the OTT video services that lead to what is typically referred to as cord cutting. So, in many ways the telcos and MSOs are in the same boat dealing with loss of revenues from subscribers canceling their services and the uncompensated cost of delivering OTT video content which continues to rise.

"What you have there is a cost-revenue squeeze, and that is why I call it an existential crisis."

A disruptive solution

So, what can they do about it?

Peterkofsky pointed out two options:
  1. find a way to make it compensated 
  2. reduce the impact of it as a cost driver. 

He described that the second option is one that many network operators have figured out that they could through something called, transparent proxy or reverse caching, where an ISP will use caching on its servers to de-duplicate traffic traversing their network.

One example of this could be any popular movie available from Netflix's Instant streaming catalog that may have originally come from a CDN can be stored locally on the near end of the ISP network closer to the end user, and all other requests are served from that same cached file, rather than making another file request or thousands of requests to the CDN serving up the original content.

So buying a few servers to cached with is a great way for ISPs to reduce their network costs and much more cost effective then building out their networks by laying more fiber lines. But if this approach becomes more widespread and on a greater scale, Peterkofsky said, "you might start to see some interesting second order effects."

Effects which Peterkofsky said, can become highly disruptive for the CDN industry. Since the ISPs can use local caching to reduce the amount of traffic traversing over the Akamai, Limelight or other CDN's network, they can disrupt the revenue models between the content owners and CDNs, which are structured primarily on the amount of content delivered over the network. So if you're a content owner, Peterkofsky said, "you're either paying a whole lot of money for a whole lot of nothing, or you may just not be paying."

A classic case of disintermediation

Peterkofsky maintained that the ISPs decide to get into the CDN business they offer a couple of key advantages over the incumbents in the space. One is a cost advantage because they own the underlying network, not the Akamai and Limelights of the world that lease their bandwidth from network owners and tack on their own margin.

According to Peterkofsky:
"This is classic disintermediation. This is cutting out the middle man. Network owner providing the CDN services themselves."

ISPs also have a serious quality advantage over CDNs because ISPs own the connection or "last mile" all the way to your house and can provide better Quality of Service (QoS) through deeper caching. This becomes more important when you're talking about online video taking the place of conventional cable and satellite TV because QoS directly affects viewer engagement.

Overall, Peterkofsky thinks that the cost and quality advantages that ISPs have over CDNs will drive a lot of these network services providers to running their own CDNs through an invisible CDN through transparent caching, a commercial CDN or internal CDN to support their own IPTV services or if they're a MSO, their own TV Everywhere services.

On the consumer side, Peterkofsky doesn't believe that getting consumers to pay for the added content delivery costs will work either. Comcast is trying to push the cost back in the other direction toward the content owners but at some point it will circle back to consumers, but it won't fly. However, as Peterkofsky pointed out, with the music and video industry consumers will pay for content if it's convenient and inexpensive. But if it becomes too inconvenient or expensive for consumers they will either find ways to get content for free, or cancel their subscription.

Peterkofsky concluded that:
"The real solution is things that take cost out of the system by clever applications of technology."
As cord cutting continues to be a growing trend among consumers, it's likely that more ISPs move into the CDN business in 2011 and big changes in the space are expected in 2012.

About Skytide
Skytide is a privately held, venture-backed company founded in 2004 and headquartered in Oakland, California. Customers include Accenture subsidiary, Origin Digital; British Telecom; Cisco; Clear Channel Communications; Comcast subsidary, thePlaform; MTV Networks and Qwest. Skytide enables leading content delivery and digital media providers, like British Telecom and MTV Networks, to precisely measure and optimize the performance of their streaming video businesses. Its out-of-the-box reporting & analytics applications are built on top of Skytide's patented platform architecture, which devours massive amounts of highly diverse data and quickly turns it into actionable insights.
  • Skytide Insight for Content Delivery Networks uses server-side log data to provide CDNs and IP video networks — and their customers and business partners — with deep insight into streaming media performance.
  • Skytide Insight for Video Players uses client-side log data captured directly from the video player, enabling a detailed understanding of quality of service (QoS) and viewer engagement metrics.