Monetizing Mobile Video: MNOs Get Back in the Value Chain

Transcription

1 Monetizing Mobile Video: MNOs Get Back in the Value Chain Brian Partridge, Vice President, Video Consumption Market Dynamics: Mobile Taking Off The world has gone mobile, and this trend is fundamentally shifting where and when users consume their favorite video content. In the U.S., smartphones are nearing 70 percent market penetration and Yankee Group forecasts 92 percent penetration by Tablets lag smartphones but new product innovations such as the ipad mini and Kindle Fire HD are moving penetration to the 20 percent range, and we expect that to grow to over 40 percent by To meet the need for anytime, anywhere access now demanded by device owners and thereby maximize eyeball reach content owners and aggregators have invested in the cloud delivery platforms required to make an ocean of video content accessible across myriad device types that bring with them excellent video processing, screen resolution and storage capacity. At this moment, popular video streaming services from companies such as Netflix, YouTube, Vudu, BBC, Hulu, Amazon and HBO are delivered unmanaged with besteffort-only characteristics that flow over the top (OTT) of mobile broadband networks, with no related revenues going to mobile network operators (MNOs) beyond standard all you can eat or tiered consumer data plans. For content owners, the underlying business models that support their mobile content distribution include ad-supported free, subscription or on-demand. But the winds are starting to change and we predict some gradual yet fundamental shifts in the symbiotic relationships between OTT content providers and MNOs. Table of Contents June 2013 Video Consumption Market Dynamics: Mobile Taking Off 1 Broken Value Chain Threatens Health of the Entire Mobile Video Ecosystem 3 The Business Case for Video QoE: Content Monetization Strategies 5 Mobile Video Monetization Requires MNOs To Take Multiple Steps 8 Solution Profile: Avvasi 9 Conclusions 9 Consider the following data points: New business models linking content owners and CSPs pave the way for video. For example, ESPN is reportedly in the process of aligning with a Tier 1 North American operator (largely speculated to be Verizon) to offer toll-free mobile access to customers, indicating a new business model relationship among content owners and service providers. In addition, Sprint recently announced a content, advertising and retail partnership with Time, Inc., and unlimited WhatsApp is offered as part of 1G data plan from Saudi Arabia s Mobily. Video consumption on smart devices is trending way up. According to Yankee Group s 2013 US Consumer Survey, March, 45 percent of U.S. mobile phone owners watch video at least once a week. This usage is almost double the 25 percent that were doing the same just two years ago. Tablet owners watch even more video on their devices; a staggering 63 percent of them are watching videos at least once per week (see Exhibit 1 on the next page). This custom publication has been sponsored by Avvasi.

2 OTT players are taking first steps toward paying for content delivery via MNOs. In early 2013, the French MNO Orange made public commentary that it had reached a balance of forces with Google and was making the company pay for the traffic it sends from servers to users over the Orange network. This game-changing revelation comes when French MNOs and ISPs are lobbying regulators to force Google to contribute more to the cost of their network. Mobile advertising is starting to show life. Just as it is on the desktop PC, video continues to be a bright spot in a generally murky picture for advertising on mobile. That s reflected in the much higher prices mobile publishers can command for mobile video ads, compared to standard mobile formats such as banners. emarketer estimates mobile video will account for $520 million in ad spending in the U.S. this year, or 13 percent of the digital video ad market. Consumers are willing to pay for quality. Forty-three percent of respondents to Yankee Group s Consumer Survey say they are less likely to sacrifice quality in favor of better pricing. Mobile video streaming is the largest mobile broadband traffic generator. According to Cisco s latest Visual Networking Index (VNI), mobile video will grow at a CAGR of 75 percent between 2012 and 2017, the highest growth rate of any mobile application category in the forecast. Of the 11.2 exabytes per month crossing the mobile network by 2017, 7.4 exabytes or 66.5 percent of traffic will be due to video. Exhibit 1: Video Watching Device Frequency Source: Yankee Group s 2013 US Consumer Survey, March How often do you watch video on your... (by video, we mean anything from TV, film, YouTube clips, etc.)? 6% 13% 4% 11% 10% 68% 28% 36% 8% 10% 13% 22% TV (live TV) At least once a day At least once a week Tablet Mobile phone At least once a month Less frequently than once a month Page 2

3 Mobile Video Popularity Requires MNOs To Become VSPs So what does our love for mobile video actually mean for MNOs? Whether they like it or not, they are becoming de-facto video service providers (VSPs). To meet consumers seemingly insatiable demand for broadband data services, many MNOs have invested or plan to invest billions of dollars in 4G next-generation mobile broadband networks predominately in different flavors of LTE. The uptick in demand for mobile broadband services has come at a fortuitous time as legacy voice and messaging revenues are trending down or are flat. Initially, mobile broadband demand was driven by general Web browsing, and social networking, but now traffic volumes are driven by streaming OTT video. It s not up for debate video is the killer application for mobile broadband data usage. What remains in question is whether OTT video threatens to kill the mobile network providers themselves. It s safe to say that today mobile broadband data revenues are to a degree offsetting the revenue challenges facing MNOs by adding new revenues as their existing cash cow services voice and SMS gradually decline. The net result has led to the current situation: flat service revenues underpinned with exponentially increasing network traffic load, predominately driven by OTT video services. This transition from voice and SMS to data services has broken the network operator business model of the past, where a linear relationship existed between traffic tonnage and revenue. According to Cisco s VNI 2013, streaming video represents approximately 50 percent of mobile data traffic today, with projected growth of 75 percent per year. This illustrates the massive challenge for network operators. As we see it, the MNO business model for broadband data services will reach its breaking point. Some in the industry believe that data plans alone should provide enough revenue to support the business transformation from voice to data service provider, but this is shortsighted thinking and will ultimately lead down the path of poor customer experience. The writing on the wall tells a different story: Current trajectories are not sustainable and cracks are already starting to form. As evidence, we present the case of the French ISP Free. Free has been managing video traffic on a best-effort basis, and as more and more subscribers flowed to their network, watching YouTube or any kind of video has become virtually impossible, creating an outcry among its users. In addition, it allegedly installed ad-blocking software on its routers, something it later ended after government intervention. The French regulator ARCEP believes that these symptoms are a result of under-investment in infrastructure and commercial tensions between ISPs and Web video providers. French consumer association UFC has called on the government to define quality of access rules, in part by allowing the competition regulator to build a quality of service observatory. In the U.S., the FCC is also exploring monitoring options that expand to quality of experience (QoE) beyond pure speed. Lastly, because of subscriber saturation and in conjunction with the launch of 4G LTE networks, MNO revenue and profitability strategies have shifted from customer acquisition to retention and service differentiation. As a result of video predominance, subscribers are increasingly selecting their service and content providers based on their video experience. The investments necessary to meet the customer demands will not be recouped by the current revenue structure and pricing models. Broken Value Chain Threatens Health of the Entire Mobile Video Ecosystem While MNOs receive revenue in the form of all-you-caneat or, increasingly, tiered and shared data subscriptions, they do not participate in revenues accrued to the content provider in the form of subscriptions, on-demand and/or advertising delivery. Upstream, the OTT service providers find themselves under pressure to deliver an excellent experience to their users but have traditionally attempted to do so without control of last-mile QoE. Instead, they have relied on traditional content delivery networks (CDNs) such as Akamai or Limelight, which depend on caching infrastructure deployed at network peering points but lack sufficient network capabilities to deliver mobile content with guaranteed QoE at low cost. The largest content owners, e.g., Netflix and Google, have taken the step of building their own dedicated CDNs to better control QoE and manage delivery costs. Naturally, OTT traffic growth pressures MNOs while the network capacity crunch negatively affects OTT video QoE. As QoE goes south, the risks of churn and negative brand impact go up for network operators and content owners alike. If network owners are disincentivized to improve their video delivery capabilities due to poor financial returns on network investment, QoE will suffer even more. Ultimately, consumers lose when poor QoE negatively impacts their satisfaction. Poor end-to-end QoE directly threatens the business of OTT video producers, aggregators, MNOs and advertisers. If each actor in the value chain is not fairly compensated for its role in service delivery, the whole value chain is at risk. In short, the OTT video value chain is broken and must be fixed to establish a path to win-win business models that reward the entire digital media ecosystem (see Exhibit 2 on the next page) and provide an outstanding user experience for consumers. Page 3

4 Exhibit 2: A Broken Value Chain Source: Yankee Group, Viewership Any Content Any Time Anywhere Any Device 1. Quality of Experience Good User Experience Compelling Content Competitive Pricing Device Diversity 4. Monetization Ad & Subscription Revenue On Demand 3. Infrastructure Impact Increased Traffic Decreased QoE 5. Capacity Investment Video QoE Improvement and Network Capacity Funded by Video Service and Ad Revenue The Mobile OTT Video Opportunity: Advertising Follows Eyeballs; Subscribers Will Pay for Quality For a sustainable business model in the long term, the entire ecosystem of service providers, content providers, aggregators and advertisers must work together to ensure end-to-end QoE that consumers are willing to pay for. Revenue sharing must be sustainable and fairly allocated; otherwise the market will be hindered by lack of capacity to deliver acceptable QoE. The good news is that the broadcast video business model provides a reasonable approximation of a workable model, but it will take active participation among all participants and new investment from MNOs to succeed. In the early days of broadcast, it was the producers who were profiting from content. As the industry matured, an end-to-end ecosystem evolved whereby not only the producers but also the satellite and cable providers (and eventually CSPs) were able to claim a share of the revenue generated. Today, when a customer subscribes to a valueadded service (such as a movie package), everyone in the value chain gets a cut of the pie. It s important to remember that for-fee services set an expectation of quality. The broadcast industry found a reasonable balance between cost, revenue sharing and customer satisfaction, and while the technology is different, the model for the OTT ecosystem today should likely be the same. We are at the beginning of a necessary evolution comparable to the shift from print to online media, when we saw advertising revenue move from print to the Web. A similar shift can be expected during the transition and augmentation of content from traditional broadcast to OTT. Yankee Group survey data show that consumers have demonstrated a willingness to pay for quality content and experience across their smart devices (see Exhibit 3 on the next page). Network owners can greatly improve QoE if they have the right tools; they need viable network architectures and business models that enable them to get an equitable share of the value they create. Offering increased reach/access and availability over their mobile network is the first step toward entering the value chain. MNOs for their part must ensure that the access QoE is worth paying for. The current shift presents players in the mobile landscape with a significant opportunity to monetize delivery capabilities and subscriber insights, provided they can develop an architecture that enables them to do so profitably. Page 4

5 Exhibit 3: Users Are Willing To Pay for Service Quality Source: Yankee Group s 2013 US Consumer Survey, March On a scale of 1 to 10, how strongly do you agree with the following statements? I will sacrifice network service quality for a cheaper price (n=2,399) 23% 26% 17% 26% High (10, 9, 8) High-medium (7, 6) Low-medium (5, 4) Low (3, 2, 1) NA 8% The Business Case for Video QoE: Content Monetization Strategies We are still in the early stages of the OTT content delivery business evolution. As this business evolves, there are several potential monetization strategies that can add new revenues to the income statements of MNOs. A profitable video service will necessitate control and management of video QoE. As QoE becomes the key performance indicator (KPI) of mobile networks, MNOs will need to not only measure but to actively manage it. Within the mobile video ecosystem, Yankee Group observes the following models in play today: 1. Multiscreen end-to-end video service model. This is the most popular monetization strategy at work today as it s the one employed by network operators delivering a quad play of services that extend IPTV services to additional screens and support them with their own internal CDN. This model is popular with operators such as Verizon, AT&T, BT, Telefónica Spain and Orange France. 2. Content aggregation and partnership model. This model is still developing but will be most appropriate for CSPs that have not yet chosen to deploy a paid video content service. The anticipated model includes a relationship between content aggregator and service provider where the service provider provides QoE service-level agreements (SLAs) for the OTT content aggregator in return for payment and may be supported by joint marketing. This model is most appropriate for wireless ISPs and fixed/converged operators that haven t deployed IPTV yet. The partnership between TeliaSonera and Spotify to bring streaming music to TeliaSonera customers across a variety of devices including PCs, mobile phones and ultimately the television is a good example of this trend in action. 2a. Subscriber QoE plan. This type of model anticipates that subscribers will be willing to pay for a premium OTT video service with QoE SLAs. This model is most appropriate for service providers that want to avoid the costs of running a video service but still want to offer a valuable service to their subscribers and monetize mobile OTT content. Page 5

6 3. OTT advertising model. The last model is the end-game we envision, where service providers can monetize OTT content in a combination of the above ways and ultimately set up a two-sided business model with ad networks as well. Here the operator s role is to provide QoE SLAs for digital advertisers that are willing to pay for QoE of mobile video services. Consumers have shown a growing level of comfort with viewing advertisements in exchange for digital goods and services including content (see Exhibit 4). Exhibit 4: Device Owners Are Familiar With and Comfortable Engaging in Advertising for Digital Content Source: Yankee Group, 2013 Have You Engaged With Online Advertising? Yes - 63% No - 35% What Is Your Comfort Level in Engaging With Online Advertising in Return for Coins, Credits, Points or Content? 20% 9% 22% 21% 28% 1 Very uncomfortable Very comfortable Note: Responses are ranked on a scale of 1 to 5, with 1 representing very uncomfortable and 5 representing very comfortable. To further build on the models above, Yankee Group predicts a world where MNOs work directly with content owners to create content-specific data access packages for example, an MNO might offer users unlimited Netflix streaming for a fee or through a revenue-sharing agreement with Netflix. The Wall Street Journal reported in May 2013 that ESPN was in talks with a Tier 1 operator to offer toll-free or zero-rated access to ESPN content; that operator is widely speculated to be Verizon. During the same month, Sprint announced a multifaceted content deal with Time, Inc., that encompasses content, advertising and retail stores. In his Q shareholder letter, Netflix CEO Reed Hastings alluded to the possibility of working collaboratively with partners for delivery services. Vodafone Ghana is offering free browsing on Facebook for existing customers via its Streamer Internet bundle. Unlike any other offer in Ghana, Vodafone s free Facebook browsing gives Internet users full access to Facebook to upload and download pictures, chat and share information with no additional data charges. Content providers are motivated to act, as they cannot risk the negative brand impact associated with lagging video and poor quality. They will find willing partners in mobile operators. Netflix and others spend significant amounts to optimize their own content libraries by paying external CDNs or using their own to optimize streams for specific device types, but these steps only take them so far. Without partnerships, content owners will find themselves pitted against the service providers that are now implementing bandwidth caps for both fixed and mobile services. Page 6

7 A successful monetization strategy will bring together service providers, content providers and advertisers that recognize the challenges and opportunities OTT video presents. Members of this ecosystem must be committed to an open architecture for video service delivery that includes standards-based measurement of video quality and open interoperability between all facets of video traffic management including traffic analytics, B/OSS management, policy and charging rules function (PCRF) and CDNs. The current network elements participating in mobile video delivery are inadequate to help MNOs resolve the stated problems. Intelligent GGSN and Evolved Packet Core implement more and more network analytics to account for data traffic but are focusing their efforts on the transport layer. As a result, video is treated just like the other data payload, resulting in a counting of protocols, bytes, network speed, etc., without measuring the important parameters that impact video quality such as device type, screen size, frame per second, encoding rate, codec, etc. Additionally, they are unable to detect whether a video has been played to the subscriber s satisfaction or whether there has been buffering, jerkiness or other artifacts that impacted the user s experience. Deep Packet Inspection (DPI) engines and PCRF are equally unable to detect and measure video quality. Even the video optimization (VO) engines that have recently made an appearance are unable to accurately determine QoE. Reliable, high-quality video traffic management is the first step to QoE-differentiated subscription revenue, which will set the stage for content monetization and, ultimately, ad revenue. Exhibit 5 shows a simple monetization framework for a premium, enhanced and basic service. Exhibit 5: Video Monetization Framework Source: Yankee Group, 2013 Subscriber Tiers Congestion (Busy Period) Video QoE Devices Price Premium Enhanced Basic Peak Excellent Smartphones, Tablets, PCs Off peak As above As above Peak Off peak Good Excellent Smartphones, Tablets Smartphones, Tablets, PCs Peak Fair Smartphones Off peak Good Smartphones, Tablets, PCs $$$ $$ $ Unfortunately, there are not yet industry-wide accepted QoE scoring methods for mobile video. Most video QoE tools have been created for broadcast networks and professional video applications and do not accurately represent the unique challenges of mobile OTT video delivery. Existing technologies for delivering video traffic revolve around discriminating and measuring packets, speed and size with no or an inadequate notion of QoE. New usage patterns are emerging, and the lines between traditional television and OTT video services are blurring and driving new consumer expectations for reliable, high-quality video from not only satellite and cable providers but from their mobile operators as well. Furthermore, consumers are demanding more personalized on-demand content on multiple devices, in addition to and in some cases as a replacement for traditional broadcast content. Page 7

8 Mobile Video Monetization Requires MNOs To Take Multiple Steps MNOs that are actively seeking a profitable position in the OTT video ecosystem must invest in the proper organization, processes and infrastructure tools to accurately measure, plan and improve their OTT video services before the first stream can be monetized. This process involves three steps that interrelate and create a continuous loop: 1. Measure Learn about OTT video traffic trends on the network such as the most popular sites, devices, content, video quality profiles, peak viewing times, viewing locations, etc. Measure OTT video QoE to determine how the network performs for video streaming by sites, devices, content, video quality profiles, peak viewing times, viewing locations, etc. Measure the effectiveness of existing network and video delivery infrastructure (including optimization) and determine gaps. 2. Plan/Improve Intelligently plan network capacity upgrades for video (location, time, subscribers). Determine pricing models based on video QoE policies. Improve the network to deliver optimal video quality given existing capacity. Determine the business case for improving quality and capacity. Determine pricing plans to justify the business case. 3. Monetize Establish relationships with content aggregators, device vendors and advertisers. Measurement, planning and improvement are the necessary steps on the path to monetization. Step 1 gives you the intelligence to determine the who, what, where and how of OTT services being consumed over the network. Only with that knowledge can a service provider take the next step of planning the improvements necessary to take full advantage of its position as a last-mile QoE enabler. Video traffic, unlike voice and messaging, is unpredictable. As longterm voice and messaging specialists, MNOs have learned to predict how their network will respond to service usage and therefore inform capacity planning. In contrast, mobile video traffic patterns can vary greatly based on parameters such as quality, signal strength, encoding and destination device capabilities. Network planning for video requires different technologies and tools that take into account not just the overall traffic, but a specific subscriber s habits, devices and tolerance to quality versus cost. As the mobile video ecosystem matures, Yankee Group believes the correlation between external, customer-facing measurements and internal KPIs represent the next logical step on the path to becoming operational excellence as VSPs. For example, MNOs can establish levels of correlation between external events such as churn and internal events such as bill accuracy, probability of overage charges from customer usage pattern changes and number of dropped calls in a given time period due to customer density at a cell site. To the extent that this analysis can establish (or at least suggest) that changes in internal measures drive external events, we can begin to see the customer experience more fully, and it is through this lens that transformation can begin to deliver both competitive differentiation and reduced cost. Yankee Group believes that similar intelligence is required to connect the dots between customer experiences with OTT video and items such as churn and satisfaction. It is the visibility into these events that facilitates the correlation between internal MNO actions and external customer reactions. Choose a monetization business model aligned with revenue and value-creating objectives. Repeat the loop to continuously improve. Page 8

9 Solution Profile: Avvasi Avvasi, which was founded in 2008 with headquarters in Waterloo, Ontario, provides video quality of service monitoring and management tools for mobile and broadband ISPs globally, including VimpelCom and Wind. Its solutions enable QoE-driven measurement, improvement and monetization of the OTT video experience to help MNOs and ISPs become profitable VSPs. At the core of Avvasi s solution is a highly scalable, real-time measurement platform that monitors video QoE. Much like mean opinion score (MOS), this measurement reflects the subscriber s perceived experience with video content. The Avvasi solution breaks down video traffic by device, source, content, media format, media duration and network topology. The platform, called Q-SRV, is a traffic management solution that puts QoE at the center of the decision-making process for the management and monetization of video traffic in mobile networks. Avvasi provides QoE measurements for a diverse ecosystem of OTT protocols and codecs and produces a representation of a user s video QoE in real time. The platform breaks down the complexities of video service delivery and provides the necessary foundation for a video service delivery architecture. QoE management evaluates the video quality of all requested video sessions in the network and compares it to a selected policy defined by the service provider. If the quality is higher than the specified threshold, Q-SRV adjusts the video s quality to ensure it can be delivered by the network resources currently available. If the video quality is below the specified threshold, the video passes through the system unchanged. QoE management maximizes the overall video experience for individual high-quality video sessions, as well as improves the aggregate experience for everyone. This has the added benefit of conserving network resources, allowing more consumers to enjoy consistent video services and potentially lower costs for metered usage. Subscribers with high OTT video consumption can continue their current behavior without saturating network resources, and they will be less likely to block other subscribers from consuming OTT video. Normalizing OTT video also results in lower overall bandwidth usage, helping providers free up space for new subscribers, lower capex and introduce premium services. Conclusions It is difficult to overstate consumer demand for OTT mobile video services accessed through smart devices. Video is the dominant network traffic type at the heart of new usage patterns and heightened customer expectations; today it accounts for 50 percent of all traffic, and it s on a trajectory to reach the 70 percent mark in a few years. The growing popularity of OTT video also provides an incentive to service providers that can begin to offer advanced media CDN services to cloud-based broadcasters, helping improve QoE while generating much-needed revenues to offset network investment costs. This dynamic provides an important first step in fixing the broken OTT value chain. Page 9

10 Consumer frustration grows as a result of constrained bandwidth, stalling playback and poor video fidelity. This problem is exacerbated in the mobile space due to scarce shared resources and myriad mitigating factors affecting QoE. The growing gap between bandwidth demand and revenue growth is no secret and needs to be addressed to drive overall ecosystem viability in the long term. The initial steps toward harmonization between OTT content owners, advertisers and MNOs have been taken, but there is still much to do. MNOs need to build a plan to increase their chances for success as VSPs. The steps can be taken in a linear or parallel fashion, but they require new infrastructure investment to first accurately measure true video QoE. Only then will MNOs be in a position to get into a favorable monetization stance. This year has seen a flurry of new business model activity between content owners and MNOs, which is a positive development for the viability of new video monetization possibilities. Considering video purely in terms of data volume growth ignores the fact that video is a service that requires an excellent experience. It s hard to imagine consumers funding traffic optimization, but they are willing to pay for a better experience and will surely have affinity for the providers that can consistently deliver it. About the Author Brian Partridge Vice President Entering his eighth year with Yankee Group, Brian Partridge is a vice president of research and an active contributor to Yankee Group s connected devices and mobile broadband research agenda. Partridge is also responsible for overall management of Yankee Group s affiliate program and custom research practice. Partridge s current research agenda includes the battleground for the top of the M2M services value chain, M2M service delivery architectures and business model innovations. Partridge is also focused on nextgeneration network architectures such as IMS/VoLTE and content delivery networks. HEADQUARTERS Corporate One Liberty Square 6th Floor Boston, Massachusetts phone fax European 30 Artillery Lane London E17LS United Kingdom phone fax Copyright Yankee 451 Group, LLC. Yankee Group published this content for the sole use of Yankee Group subscribers. It may not be duplicated, reproduced or retransmitted in whole or in part without the express permission of Yankee Group, One Liberty Square, 6 th Floor, Boston, MA All rights reserved. All opinions and estimates herein constitute our judgment as of this date and are subject to change without notice.