The continued growth in video on demand (VOD) delivered over the internet is inevitable as consumers increasingly expect to control their viewing. As watching video over the internet becomes mainstream, consumers are getting more demanding. Until recently, viewers on PCs would forgive nbuffering mid-video, or occasional lack of service availability, recognising that the service was delivered on a ‘best efforts’ basis. However, as more online video services are launched and internet VOD moves to the TV, audiences will increasingly expect internet VOD to match the reliability of broadcast TV. This perspective builds on our work with infrastructure providers, broadcasters and regulators, to examine the ability of the UK’s broadband networks to deliver VOD with the quality of service (QoS) required to satisfy consumers. We consider what Internet Service Providers (ISPs) and content/application providers need to do to adapt their technical and business models to meet future consumer demands, and the role of future net neutrality legislation in shaping this market. By Chris Cowan, partner, and Kim Chua, manager, of Value Partners London.

1. PERSPECTIVE
Internet VOD: meeting consumer demands
The continued growth in video on demand (VOD) delivered over the internet is
Chris Cowan inevitable as consumers increasingly expect to control their viewing. As watching video
Director over the internet becomes mainstream, consumers are getting more demanding.
Until recently, viewers on PCs would forgive buffering mid-video, or occasional lack
Kim Chua of service availability, recognising that the service was delivered on a ‘best efforts’
Manager basis. However, as more online video services are launched and internet VOD moves
to the TV, audiences will increasingly expect internet VOD to match the reliability of
broadcast TV. This perspective builds on our work with infrastructure providers, broadcasters and regulators, to examine
the ability of the UK’s broadband networks to deliver VOD with the quality of service (QoS) required to satisfy consumers.
We consider what Internet Service Providers (ISPs) and content/application providers need to do to adapt their technical
and business models to meet future consumer demands, and the role of future net neutrality legislation in shaping this
market.1
Can today’s network infrastructure cope with delivering VOD?
VOD is the most technically challenging of all services to deliver with guaranteed QoS. Today, to stream
standard definition (SD) video without interruptions requires a consistent speed of circa 1.5 Mbps for the
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duration of the video . This is more demanding than other applications such as surfing and email, which are
bursty and less time critical; or internet telephony which requires lower bandwidth. Over time, improvements
in compression, buffering, and use of progressive download technologies will reduce the speeds required
and allow for short fluctuations in speed during streaming – however, internet VOD is likely to remain the
most extreme test of the network infrastructure’s ability to deliver consumers guaranteed QoS services.
We have focused on assessing today’s copper network rather than the Next Generation Network (NGN) as
even with planned fibre build, this will be the infrastructure used by the majority of users over the next 2 – 4
years. With uncertainty about the commercial model for NGN deployment, content/application providers
and ISPs are likely to have to work within the constraints of a copper network for many years to come.
Consumers’ experience of the quality and reliability of a VOD service is constrained at multiple points in the
delivery infrastructure. Whilst all elements are critical to deliver VOD, the key areas of control for ISPs are the
middle and last mile of the current copper network.
Six stages of the delivery infrastructure
Service provider Peering connection Middle mile Last mile ‘Last nine yard’
End user device
servers with ISPs connectivity connectivity connectivity
Core
Local
exchange
The ‘pinch points’
• Insufficient • Limited investment • Insufficient • Long distance from • In home wiring • Processing power of
bandwidth in CDN bandwidth the exchange • Wireless router device
• Design and • Insufficient • IP stream • Bandwidth location • Browser capabilities
architecture of site bandwidth constraint • Interference from • Installed software
other devices e.g. javascript
Controlled by …
• Service provider • Service provider / • ISP • ISP • Consumer • Consumer
CDN / ISP
1Related publications: Harnessing the Value of VOD, July 2009, examines the likely effect of VOD on viewing patterns, advertising spend and business models;
Broadband Infrastructure: The Service and Application Providers View, March 2010, highlights industry appetite for guaranteed QoS but raises concerns about
whether this would be achievable. They are to be found in the Ideas section of Value Partners corporate website (www.valuepartners.com)
2Based on BBC iPlayer encoding rates at time of publication
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2. PERSPECTIVE
At one level, the last mile is not a constraint for the majority of internet homes. We estimate that, currently,
circa 70% of UK DSL broadband homes are situated sufficiently close to their local exchange that signal
degradation along the copper line does not compromise their ability to receive internet of sufficient speed
to stream video. Over the next few years, we expect that as compression reduces the speed required to
deliver SD video, and infrastructure upgrades increase the speeds achievable by these homes, over 95% of
homes will be able to receive SD-quality internet VOD.
However, in parallel to this trend, the growth in multiple simultaneous internet users within each home will
increase the pressure on the last mile. Whilst the last mile may be able to deliver a single stream of internet
VOD, if other users within the home are occupying bandwidth (e.g. using services in the cloud or requesting
different VOD programmes) some households will find that last mile bandwidth is insufficient to deliver all
these services concurrently.
It is the middle mile, or backhaul, that in recent years has been the biggest problem for high speed services.
At this stage in the network, traffic is aggregated from multiple homes at a given exchange, and delivered
to and from the core network. Therefore, as more homes stream video during peak evening hours, there will
be increased pressure on the capacity of the middle mile. Clearly, restrictions in backhaul capacity as traffic
across ISP networks increases will adversely affect the customer experience.
While the backhaul has historically been the bottleneck, new wholesale backhaul technology based on
Ethernet standards has begun to relieve this bottleneck. Ethernet connections are highly scalable, and this
has been reflected in wholesale backhaul pricing - ISPs are now able to upgrade their backhaul capacity
tenfold, for just double the price.
Backhaul capacity pricing, April 2010
BES product Rental price per year, Rental price per year,
2010 per Mbps
100 Mbps £1,738 £17.38 Tenfold increase in capacity
for double the price – unit
1,000 Mbps £3,764 £3.76 cost reduces by 78%
10,000 Mbps £12,875 £1.28
Note: Based on BES non daisy chained pipes, mid April 2010
Source: BT Openreach price list
The extent to which ISPs are able to benefit from the scalability of Ethernet connections depends on the
size, location and growth of their customer base, and their network configuration and architecture. ISPs
providing broadband primarily using local loop unbundling (LLU) stand to benefit the most. However,
ISPs providing broadband mainly through bitstream products (e.g. IP Stream), face continued rises in their
cost base from incremental traffic as current wholesale charging structures do not pass on the benefits of
Ethernet scalability. Replacement wholesale products do exist for bitstream operators, however take up to
date has been limited.
This has had a knock-on effect on the broadband packages available to consumers. Consumers in urban
areas which tend to have a range of ISPs using LLU will generally benefit from higher actual broadband
speeds – hence a better video streaming experience, and more competitive pricing – than consumers in
rural areas which tend to be served by ISPs using bitstream products.
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3. PERSPECTIVE
The opportunity for content and application providers
Most video content providers aim to deliver the most attractive content proposition reliably to the maximum
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number of consumers . With personalisation and differences in user interface driving loyalty, users are likely to
default to a small number of favourite sites. VOD content providers such as BBC iPlayer, YouTube, Seesaw, and
Lovefilm will compete for users based not only on content but also on picture quality and service reliability.
Furthermore, as internet VOD moves to the TV, reliability becomes more important as TV VOD needs to match
the experience of broadcast TV, PVRs and DVDs.
To date, there has been much discussion around the shaping of internet traffic by retail ISPs, in particular
the throttling of highly bandwidth intensive video streaming traffic, or even traffic from specific sites, during
peak times. Content providers are concerned that these practices can result in consumers being unable to
access certain video streaming services during peak times. In the extreme, these practices could mean that
retail ISPs become gatekeepers by blocking access to, or degrading the customer experience of online video
services to such an extent that they become unviable.
Retail ISPs are now considering how to develop traffic prioritisation technologies to enable them to guarantee
the reliable and consistent delivery of streams of data over their network. This is likely to combine intelligent
caching with deep packet inspection to prioritise selected traffic and ensure that it is delivered seamlessly
through the network, i.e. delivery with guaranteed QoS. The development of this technology opens up
new opportunities for content providers to provide their customers with reliable, consistent, high quality
video services which can be a true substitute to broadcast TV, PVRs and DVDs. Some content providers are
beginning to have conversations with retail ISPs about paying a fee to enhance their customer experience by
delivering their content to their customer base with guaranteed QoS.
However, a shift to paying for content delivery has business model implications for content providers.
Excessive charges imposed by retail ISPs could severely compromise the embryonic business model for
internet VOD: the VOD advertising market remains nascent and consumers remain reluctant to pay for all but
the most premium content online (e.g. sports, movies, premium series). Existing broadcasters are particularly
challenged as they face cannibalisation of viewing from linear broadcast channels which have long term,
fixed distribution costs, to VOD viewing, with variable and evolving distribution costs.
A potential middle road is emerging. Content providers currently pay for access to the internet, generally
through Content Delivery Network (CDN) providers, who manage the distribution of content through peering
arrangements with retail ISPs. As peering involves mutual exchange of traffic, no payment exchanges hands.
An alternative could be for content providers to form direct relationships with the main retail ISPs to cache
their video content deeper in the retail ISPs’ networks. If this were at comparable commercial cost to using
a CDN provider, this could bring content closer to the consumer, improve network efficiency, and improve
QoS – with minimal incremental cost to the content provider.
This approach is not without challenges. Content providers would have to develop the capability to negotiate
and manage multiple retail ISP relationships. In addition retail ISPs would have to be willing to deal directly
with a large number of content providers. The role of intermediaries such as CDN providers is likely to
remain, to aggregate and manage traffic for smaller content providers who lack the capability or influence to
negotiate with retail ISPs, and to manage delivery of content from large content providers into smaller retail
ISPs with whom it is uneconomic for content providers to deal direct.
3Some, primarily public funded, service providers such as the NHS and BBC have it in their remit to maximise reach
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4. PERSPECTIVE
The opportunity for retail ISPs
Retail ISPs know that they are critical to delivering uninterrupted VOD streamed over the internet. They
control the majority of the delivery infrastructure. With the right investment in network infrastructure (e.g.
backhaul, CDNs), use of intelligent network management and traffic prioritisation techniques, and appropriate
partnerships across the value chain, retail ISPs will be able to provide guaranteed QoS solutions to consumers
and content providers. Furthermore, the nature of retail ISPs’ relationships with their customers means they
are best placed to work with customers to trouble-shoot any pinch points within the customers home (the
last nine yards and issues with end user devices).
Most retail ISPs in the UK see the increased demands on their network from bandwidth intensive services,
such as VOD, as a market opportunity as well as a technical challenge. Whilst delivering services, such as
guaranteed QoS, will require investment in networks and capabilities, retail ISPs see the demand for
guaranteed QoS as their chance to avoid the trap of selling commoditised broadband services by marketing
and selling value-added content delivery services. Offering guaranteed QoS could enable them to develop
new business models, creating new revenue streams by charging consumers and/or content providers for
guaranteed reliable delivery of video content. At the very minimum, offering consumers guaranteed QoS
could become a point of differentiation from other retail ISPs and help maintain or grow market share. This
would advantage larger retail ISPs who directly manage and control their delivery infrastructure. Smaller
retail ISPs – with less control over their network – will have to consider what they would need to do to be able
to offer QoS propositions.
Some ISPs are seeking to take the market opportunity opened up by guaranteed QoS technologies one step
further, by moving into triple-play, offering customers a bundle of pay TV, broadband and telephony. This
would help them extend their relationship with customers, grow ARPUs and reduce churn particularly to
existing triple play operators. From a technical perspective, controlling the content proposition and delivery
infrastructure end-to-end – from content server to set top box – reduces the complexity involved in offering
consumers VOD with guaranteed QoS. However, from a commercial perspective, this would entail major
investment to develop the pay TV capabilities required to offer an attractive pay proposition and secure the
appropriate content rights.
Net neutrality
In its purest form, net neutrality is the equal treatment of all traffic in a network, so that consumers can have
non-discriminatory access to all content, services and applications. However, it is now widely recognised that
ISPs need to manage the traffic on their network to optimise network performance. The debate currently
centres around defining the acceptable level of network management.
Regulation around net neutrality will play an important role in defining the future relationship between
content/application providers and retail ISPs. The EU has recently signalled a strong pro-net neutrality stance,
with Neelie Kroes (EU Telecoms commissioner) indicating that she would be concerned about telecoms
operators charging content providers to deliver high bandwidth content to internet users. Ofcom is taking a
keen interest in this issue and is likely to clarify its position on net neutrality in the coming months.
To what extent should net neutrality regulation influence the commercial relationships between content/
application providers and ISPs – for example, should retail ISPs be able to charge content/application
providers for prioritised content delivery? On one hand, this could disadvantage smaller new entrants: retail
ISPs need to ensure good delivery of large and popular services such as BBC iPlayer to retain subscribers, and
such services would have a stronger negotiating position about any payments for guaranteed QoS. Smaller
new entrants, however, risk very poor delivery of their video services if they do not pay, and also lack the scale
to negotiate favourable content delivery rates.
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5. PERSPECTIVE
If paid-for guaranteed QoS services results in poorer service quality for ‘free’ traffic, could this compromise the
‘open’ nature of the internet, disadvantage smaller players and stifle industry innovation? On the other hand,
charging for content delivery helps ISPs to justify investment in developing the guaranteed QoS propositions
which are required to provide customers with the level of reliability in video services which they demand.
Would preventing ISPs from charging for guaranteed QoS disincentivise technical innovation and ultimately
handicap content providers from giving customers the quality video streaming service they demand?
Arguments for and against ISPs charging content/application providers for QoS
Arguments for
• Incentivises investment in network
infrastructure
• Accelerates development of necessary
technology to deliver guaranteed QoS Arguments against
• Disadvantages smaller players / new
entrants
• Potentially stifles industry innovation
When and how will this play out?
There is clear consumer demand for VOD. However, business models are nascent and their viability on a
standalone basis is as yet unproven. Furthermore, delivery of VOD services over the open internet is
technically complex and generally involves multiple stakeholders controlling different parts of the delivery
infrastructure.
To deliver a guaranteed consumer experience requires collaboration between content/application providers
and ISPs. The future development of the internet VOD market depends on the outcome of negotiations
between content providers and ISPs around the division of responsibilities and sharing of value. Successful
negotiations are key to making guaranteed QoS internet VOD available to all consumers on all platforms – a
breakdown in negotiations could mean that such services are only available to subscribers whose operators
own and control all parts of the delivery infrastructure – i.e. Sky, Virgin, BT and any future triple play ISP
offering pay TV / VOD services.
Ofcom and the European Commission’s position on net neutrality will significantly influence market
developments. Regulators will need to weigh up the importance of retaining the open internet model which
has given rise to the birth of a new industry and fostered continued business innovation, against the risk
of undermining future commercial models which could deliver the quality of service which consumers are
demanding.
Looking beyond internet VOD, successful models would result in a step-change in the reliability and hence
attractiveness of other new services such as thin client cloud computing for enterprises, online collaboration
tools and VOIP. This will also set a precedent for models of traffic management on mobile networks where
capacity constraints will be even greater.
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6. PERSPECTIVE
About Value Partners
As one of the largest TMT Founded in 1993, Value Partners is a For more information on the issues
practices worldwide, Value global management consulting raised in this note please contact
Partners works across all sectors firm that works with multinational chris.cowan@valuepartners.com,
of the telecommunications corporations and high-potential kim.chua@valuepartners.com
and the digital marketplace, entrepreneurial businesses or one of our offices below.
with a particular expertise to identify and pursue value
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