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The Internet has been disrupting the telecoms industry business model for more a decade. In 2005, Didier Lombard, then CEO of France Telecom, fretted that unregulated players like Skype, Google, Yahoo, AOL, and MSN would “capture all the value of the networks without any authorisation.”

Twelve years on, Mr. Lombard’s predictions are starting to come true. In particular, video has fuelled explosive growth in network traffic while greatly increasing operators’ costs, even as OTT players capture a disproportionate share of revenue.

Little of that revenue goes to carriers. Online learning platforms such as Coursera and let consumers take video-based classes from top universities. User-generated video such as YouTube is already and will swell even further as people begin preferring video messaging over text.

All of this is good for the consumer, the university, and the OTT providers. To the carriers that supply the pipe, however, it drives up costs at a time when revenue is flat or declining.

These trends have been gathering momentum for more than a decade. But now, three new developments are converging to form a “perfect video storm.” An exceptionally powerful and potentially destructive force, this combination of elements will drive demand for video even further, while increasing the already considerable competitive and financial pressures under which carriers operate.

The globalisation of cord cutting is first element of the approaching storm. Long seen primarily as a US trend, cord cutting is now spreading worldwide, driven by the worldwide expansion of Netflix and Amazon, both of which went global last year. Today Netflix is available in 190 countries and Amazon in 200. S&P Global Market Intelligence, a research outfit, surveyed households in eight countries last year and found that cord cutting among households with Internet access ranged from 7% in France to 15% in China.
The international expansion of Netflix and Amazon, plus the emergence of other OTT players, sets the stage for cord-cutting numbers to grow. Many operators have launched video services to help monetise video traffic, and cord cutting pose a direct threat to their revenue streams. That threat, formerly confined mainly to North America, is now global.

The second element of the storm is the widespread adoption of ultra–high definition 4K video. While industry observers predict that video will soon be transformed by virtual and augmented reality, the 4K revolution is already well underway. Last year, a global survey of 475 video service providers, including telcos, found that 41% of operators plan to launch ultra–high definition (UHD) video services this year or next, while 78% of content producers will have content available by 2018. Huawei estimates that, as of last August, there were nearly 10m 4K/UHD users worldwide. Ovum, a consultancy, predicts that half of all families with TVs will use 4K TV by 2020.

Since 4K video has four times the pixel count of regular high-definition TV, and requires four times the bandwidth, this trend will have serious implications for the network. Operators will need to invest in additional network capacity to handle the projected traffic growth. In addition, some operators will need to decode 4K video streams with new set-top boxes – after content, the second-highest cost for operators offering video services.

The storm’s third element is the withering away of legacy software as corporate IT migrates to the Cloud. Telcos, like other big companies, run their business on large enterprise software systems. Having spent millions of dollars on them, they want to maximise the return on their investment.

But where innovation is concerned, these legacy systems are like an anchor tossed over the side of a moving boat: they slow things down. Enterprise software systems get upgraded in cycles of about 18 months, far too long to respond adroitly to the rapidly evolving marketplace. By contrast, operators that leverage Cloud-based systems can introduce new features in weeks rather than months. They also find that operational costs drop while service quality improves. From a technical and a business standpoint, migration to a Cloud-based system makes sense.

To weather the coming storm, operators worldwide are placing home-based entertainment and other digital services at the centre of their offerings; next-generation video services and home security solutions are two of the most popular (and profitable). In addition, some operators work with governments to provide Cloud data centres for safe cities, supplying tools for communications and monitoring to government agencies that manage emergencies, as well as public health and safety matters. And the Internet of Things will open up thousands of new business opportunities for carriers.

To take full advantage of these opportunities, operators must move beyond the carrier utility mindset. This means building a network agile enough to handle unexpected spikes in traffic, and creating a flexible platform that allows services to be launched without 18 months of planning. It also means finding find reliable partners who support them with products and services. In this way, operators can not only survive the coming storm, they can harness its power to achieve profitable business growth.

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