DSL Prime: Apple Video = IPTV Crisis

Content offered over open networks will be cheaper and superior to content available over closed networks. Offerings from Amazon, Apple, and Google will use different delivery mechanisms to achieve a lower cost. The TelcoTV model is fragile, perhaps broken.

by Dave Burstein of DSL Prime and Future of TV [September 13, 2006]

"You have no privacy. Get over it."
—Scott McNealy of Sun. Say it ain't so, Larry

Larry Babbio should have resigned from the Hewlett-Packard board as soon as he learned they were making business policy by phone-phreaking. The President of Verizon should be setting an example on issues like privacy. "We must maintain the confidentiality of every customer's telephone calling and other account information" promises SBC … (continued at end)

Amazon's DVD quality video service, with Apple coming Tuesday, will destroy many marketing plans and badly designed carrier networks. The Babylon 5 Pilot I downloaded today looked great, with resolution and color depth that was a pleasure. The 93 minute show was a gigabyte and a half file WMP encoded at 2.5 megabits, with another 400 megabyte file for smaller players. On a Time Warner cable modem, it came over in 59 minutes at nearly 5 megabits per second. The speed was rock solid, and tests at other times suggest that speed is pretty consistent. On AT&T's standard $30 DSL system at 1.5 megabits it would have taken over three hours. Years ago at a DSL Forum meeting, Kevin Kahn asked why anyone would want more than 1.5 meg. The answer: more people watch television than read books. The third Internet is fast enough to watch. I was wrong thinking it would come soon, but it's here now.

Traffic will increase, although not necessarily faster than Moore's Law brings down costs. That's a problem for companies trying to run edge routers beyond their natural life. Fortunately, Cisco, Alcatel, Juniper, Redback and the component makers supporting them are bringing the prices down quickly. In North America and most other markets, costs of traffic/routing have actually been going down to date. Companies working with obsolete gear may see a slowdown. The fantasies of bandwidth exhaustion are wildly improbable on a properly maintained network, but capex below depreciation could create problems. The actual cost of carrying the traffic is less than 10 percent of the DSL price in almost all cases, so even an unlikely step function—50 percent increase—still is far less than the marketing budget. I wouldn't be surprised if bandwidth costs continue dropping, given the edge router price wars.

On the other side, Amazon should be paying about $0.20 to $0.30 for the server and bandwidth, I calculate in the article below I was saving for a Future of TV.net issue. I brought it forward to quickly fill out an issue to give clarity on the Hewlett-Packard story. Didn't sleep much, but should be awake and ready for VON Boston. Good luck to the DSL Forum meeting the next week in Athens. Perhaps they'll inspire progress in Greece, currently behind Malaysia in broadband takeup.

William Jefferson, Democratic Congressman, is due to be indicted for bribery in Nigerian broadband scandal. The Nigerian Vice-President might be impeached. This is an incredible story, with two guilty pleas already, a dictator's sons with hundreds of million dollars windfalls, $100,000 to the bank staffer working on the loan, and one hundred million people in an oil rich country with essentially no broadband. The President just privatized NITEL to a company he partly owns. I'd miss my plane to VON if I tried to finish the article. I really wanted to get it in because a Democrat is in the middle of it. I'm really tough on Ashcroft below, and I wanted to show Democrats can be crooks as well.

Amazon, Apple Video Will Change the Rules
Bandwidth and video encoding rates rising; margins disappearing
Apple and Amazon are now offering thousands of movies. True DVD quality, which really makes a difference. Much better than Bit Torrent standards. Better user interfaces than Microsoft or any carrier. Soon to be followed by Comcast, France Telecom, and many more. Works surprisingly well. Painfully overpriced, with all the money going to Hollywood.

Some likely consequences:
Apple and Amazon will lose money because Hollywood is demanding all the profits. They need the product line to sell other goods, including video iPods, so they'll accept losses.

The TelcoTV financial model is fragile, perhaps broken. Hollywood will squeeze, and with more buyers leave next to nothing for the operators. Apple and Amazon will accept that, keeping prices and margins down. Video at AT&T was considered a loss leader for five years or more already. Losing even 10 percent and more to over the top competition push real profits out towards infinity. Andrew Odlyzko predicted this at Fast Net 18 months ago, but few have heard him yet.

Customers will demand more speed, and Amazon's site reports cable is 2 to 4 times faster than DSL. Time Warner cable worked for me today—solid five megabit download for an hour. That's good for FIOS, where speeds will go to 50 and 100 Mbps within the year. It could be good for DSL, because people will buy more expensive service, or it could be a disaster because higher speed cable modems win most customers.

50:1 contention ratios need to be lowered. Until now, in North America DSL traffic growth has been very slow. Equipment costs have gone down faster than traffic went up, so the total cost has been dropping. That may even off, and in Japan and Korea may be slightly on the other side of a cost curve. Anyone predicting a hockey stick uptick almost certainly has made a mistake modeling traffic or costs. Or a lobbyist being untruthful.

AT&T is particularly vulnerable, especially if they continue capping Lightspeed at a low 6 Mbps. Everyone including Chris Rice is talking about raising the speeds, but Randall is afraid to go to Wall Street explaining his capex needs to go up $2 billion a year. That's enough to force a dividend cut and might even prevent him from succeeding Ed. They have a couple of good years perhaps, with the price increases they are getting in local service, long distance, and even wireless. I don't pick stocks, but the AT&T/Verizon relative prices are out of whack. Are Verizon's operational problems really that bad?

Open set top and home network architectures being a crucial edge against cable. Joe Ambeault of Verizon says the roadmap for their whole home DVR will allow watching video over watch video over the net as well as Verizon's programming. Mike Robuck has the story. Thomson and Amino are ready if Verizon is serious. This is a breakthrough if Verizon follows through, and the only way I know to deliver on Seidenberg's call to "get cable out of the house." Seidenberg might as well cannibalize his money losing video offering anyway. He tells me the profits are in voice and data. Verizon in Washington doesn't act like it, but FIOS is architected to be an open system. AT&T in DC swears they will be open too, and "won't degrade", but have under built their network.

Copyright 2006 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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