ANALYSIS & OPINION

Can SDN offer carriers a way to make money from Netflix?

Robert Roe goes over the top, in his second analysis of some of the themes to emerge from OFC 2014

While the 12,700 visitors to OFC 2014 milled around the high-tech displays by the 550 exhibitors, the minds of some of the industry leaders were fixed firmly on the films that the American public likes to watch. Or, more precisely, the way in which the American public likes to watch its films.

Netflix alone is responsible for more than 30 per cent of peak internet traffic on North American networks. But it is only one of a growing number of ‘over the top’ (OTT) service providers – companies who cut the system operators out of any involvement in the control or distribution of the content. The network operator is responsible only for transporting the IP packets but even though it may be aware of the contents of the packets, it is neither responsible for, nor able to control, the viewing abilities, copyrights, or other redistribution of the content.

The growth of OTT services is causing a huge demand for bandwidth that puts considerable pressure on the networks, and so the ISPs and network providers are left wondering how they can reduce their costs or improve their revenues to reflect the burden put on the networks.

In a plenary session at OFC 2014, Gary Smith, president and chief executive officer for Ciena, looked to past over-capacity as an explanation for the imbalance of revenue sharing. He reminded his listeners that a glut in capacity around 2003 had created the opportunity for OTT providers to establish themselves. Smith said: ‘If you recall, at that time [2003] we had a capacity glut that, we were told by very smart economists and business people, it would take our whole lifetime to actually use. So we had over-built the first coming of the internet if you will, without any real business models, and we had built enormous amounts of capacity be it submarine, terrestrial, metro -- just way more capacity than we really needed.’

Smith continued: ‘What that really facilitated, in my opinion, is the elasticity and demand that enabled real business models to be developed for the internet. The content providers took that opportunity. The likes of Google, the likes of Amazon, the likes of Facebook -- they took that business dynamic, this oversupply of capacity, this abundance of capacity at seemingly low cost -- and they created the business models that we see today.’

The challenge of cloud computing is already pre-occupying the industry, as outlined in the first discussion of OFC ‘How can telecoms companies adapt to a changing market?’. So it ws perhaps no surprise to find Dana Cooperson, VP and Practice Leader for the telecoms analysts Ovum, posing the question, during a press luncheon hosted by the OFC organisers: ‘Are service providers at a disadvantage to digital media players?’

Although the obvious response might appear to be a resounding ‘Yes’, Randy Nicklas CTO of Windstream Communications was more measured in his assessment. Windstream provides both voice and data network communications and is headquartered in the US state of Arkansas. Nicklas’s view was:  ‘I don’t think that it is a disadvantage, more of a challenge.’ Part of the challenge is inherent in the differences between the two types of companies. Network providers have already made heavy capital investments in their infrastructure. Nicklas contrasted the two business models: ‘We’re not the greenfield of an over-the-top something.  They just have to write a bunch of software.’

On the one hand, the point is that the network remains the foundation stone for all these services. ‘You’ve still got to get the bits in and out,’ said Nicklas. ‘The network is still important to deliver those services; it is often a constraint on what can be done and the rate at which things can be done. So are we at a disadvantage to them? No I don’t feel that way.

On the other, the problem is that for the network to continue to be maintained, let alone expand, network providers need to invest in capacity ahead of the actual demand for services -- otherwise the network will become a bottleneck for innovation, leading to a situation that is the opposite of what happened in 2003 according to Smith.

Nicklas continued: ‘If we don’t pay attention to what over-the-top people are doing, and how people are using the networks, then we don’t necessarily get to participate to the extent that we might. It would be a self-inflicted disadvantage.’

Smith added: ‘I don’t think one player has got all the answers to all of this and, to echo Randy’s [Nicklas] point, it is going to take an ecosystem to develop amongst all of the various and players to be able to address these issues -- because they are varied. When you have got the situation where you have got a large installed base, and the situation where you have got a greenfield, you have gaps in the maturity of the development of the market.’

New applications made possible by software-defined networking (SDN) will give the carriers analytic information about network usage, which in turn could give network operators better tools with which to analyse both the extent to which they are providing OTT services across the network, and how they can take advantage of this usage in order to add value to their own services.

Ciena has been working on ‘Multi-Layer Carrier SDN Applications’, which according to the company ‘is key to the next wave of value creation for service providers’ by bringing ‘network programmability together with powerful new software intelligence capabilities to help monetise and optimise network assets in dynamic service environments.’ It clearly believes that the technology will offer carriers a way to make a decent return from the services being offered over their networks: ‘SDN enables increased revenues through analytics-based dynamic pricing for on-demand services.’

Far from the OFC in San Francisco, and not mentioned explicitly at the event, a decision by the US appeals court may change the relationship between operators and the OTT providers as much as any technological developments. The court threw out federal rules requiring broadband providers to treat all Internet traffic equally, thus opening up the possibility that  network operators could start charging the most bandwidth hungry OTT providers for fast service across the network.

The rules that were originally adopted in 2010 by the US Federal Communications Commission (FCC) state that companies such as Verizon must treat all content on their networks equally. However, the situation is now changed in favour of differential pricing: ‘Given that the Commission has chosen to classify broadband providers in a manner that exempts them from treatment as common carriers, the Communications Act expressly prohibits the commission from nonetheless regulating them as such,’ said the judge, David Tatel. The FCC has said that it is likely to appeal against the ruling.

The combination of new technology and the court’s ruling in favour of the network operators means that Americans may well end up paying just a little bit more to watch those films from the comfort of their own homes.

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