A Content Delivery Strategy Service Report from Arcus Advisors, LLC

Quality Of Service The Monetization Of Latency

June 2013

Four Basic Networking Services

Network operators of all types across the globe sell

four basic services to consumers, businesses, and

content publishers. They are:

CONNECTIVITY

This is the most basic

deliverable, a data link between

different networks, hosts or

users.

BANDWIDTH

The evolution of most

applications, web sites and

media is that they grow in size.

To address requirements,

network operators have built

increasingly larger pipes to end-users, businesses, and

content publishers.

For example, the history of consumer bandwidth

services is:

1. Dial-up at 28.8K

2. Low-speed broadband (<10Mbps)

3. High-speed broadband (<100Mbps)

4. Gigabit

DEFIN IT IONS

CONTENT DELIVERY

Preparation

Transformation of data for

display or use by devices

and networks

Acceleration

Delivery of latency-

sensitive data to meet the

expectations of users and

technical requirements of

the traffic

Security

Limiting availability of

data to approved users,

devices, networks, and

geographies

Quality of Experience

A user’s perception of

delivery

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LATENCY

User expectations and the

technical requirements of

streaming and downloaded

media, financial transactions,

applications, and web sites often

require that data is delivered nearly instantaneously.

The absolute lowest latency delivery would be from a

consumer device directly. Caching on STBs, smart

TVs, phones or tablets will provide the quickest

delivery.

The next lowest latency delivery is provided by last-

mile network operators (ISP) as they have

infrastructure in homes, neighbors, central offices, etc.

Long-term, in the race to monetize latency,

ISPs have a strategic and facilities-based

advantage.

Some network operators are evaluating new content

delivery business models that include a lowest-

latency service marketed to other network operators

and content publishers directly. This effort is often

combined with compute and storage for a larger cloud

strategy.

ADVANCED SERVICES

As most network services are

eventually and often dramatically

commoditized, most network

operators attempt to differentiate by

offering new, more complex, and costly services.

CDNs Prov ide A l l Fou r Ne twork

Serv ices

Connectivity

A CDN provides

connectivity for its

customers to the entire

Internet through its

peering and transit

relationships.

Bandwidth

CDNs currently account

for 50% of total Internet

traffic.

Latency

The placement of content

caches close to users is the

common method for

creating low-latency

delivery. Other methods

include peer-to-peer and

TCP optimization.

Advanced Services

Value-added services such

as security, transcoding,

and digital rights

management are common

examples.

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Monetizing Latency To Consumer

Countless academic studies and successful business models across the globe and through

the ages illustrate the economic value of tiered service models with ‘time to deliver’ a key

distinction between tiers.

Several models exist for managing latency when delivering content. They are:

Best-effort. A server is set up anywhere in the

world and delivers data to anywhere in the world.

The expectation of users and technical requirements

are that content will ‘get there when it gets there.’

Email is an example of an application that is well

served by best-effort delivery. If it takes 1, 5 or 10

seconds for an email to arrive, then user expectations are typically met.

Better-Than-Best-Effort. CDNs and large content publishers take advantage of how

the congestion control algorithm in TCP functions and place caches as close to users as

possible. For most consumers, this model provides a sufficient

quality of experience.

There are many efforts, both academic and from industry, to tune

or adjust network protocols to more closely match the

requirements of content delivery. Examples include ‘UDP-based

transport for ABR streams’ and ‘TCP Relentless:’

Relentless Congestion Control can segregate traffic into different flows and can

send different congestion signals to each flow such that the network, and not the

end- system, controls capacity allocation.1

1 staff.psc.edu/mathis/relentless/drafts/draft-mathis-iccrg-relentless-XX.html

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Best-Of-Best-Effort. Companies such as Cedexis,

Conviva, and Renesys identify which data center, ISP,

cloud, CDN, or network route are an ideal mix of

delivery assets for clients.

This is a relatively new delivery model (e.g., less than

five years old). The ROI model is typically the value

of ‘recapturing’ lost user engagements (e.g.,

transactions completed, minutes of a video viewed,

web site delivered) is greater than the cost of

purchasing the company service or solution. The

model for Renesys is slightly different but amounts to the same thing: identifying the

ideal mix of assets.

Straight Line Deployments

Less a technology solution than literally following the old adage that the shortest

distance between two points is a straight line.

Networks operators such as Hibernia Atlantic and Lightower deploy submarine and

terrestrial fiber in a direct a path as possible to minimize network latency.

These CDNs are distinct in several ways:

1. Network footprint is focused on financial centers such as

New York City, Chicago, London, and Sao Paulo

2. Last-mile connections are to buildings and not ISPs2

3. CDN data centers are within a few milliseconds of stock

market data centers

Straight Line CDNs would not be appropriate for the

distribution of mass-market media like a Netflix. They

would, however, be an ideal mix of delivery assets for:

1. A ‘behind the firewall’ video chat and broadcast service for the financial industry

2. A content production network in media centers such as Los Angeles or Mumbai

2 Lightower has a 120-page long list of ‘on net’ buildings

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Guaranteed delivery. The challenge with

guaranteeing the delivery of content to consumers is the

unanswered question:

Who will pay for guaranteed delivery?

Consumers are price sensitive and react badly to price

increases on the Internet, especially for OTT services. Netflix’s attempted price hike of

US$6 in 2011 was met with overwhelming disapproval by customers, critics, and the

stock market. Ultimately, the company was forced to roll back the new pricing.

Content originators and publishers are similarly price sensitive. This is due in part to

being ‘trained’ by the content delivery market over many years to expect greater and

greater services levels as delivery costs continually decline.

Until someone is willing to pay for a guaranteed service level, it will remain a challenge

for ISPs to monetize their ability to provide the lowest-latency.

Future Opportunities For Monetizing Latency

Though there are currently significant headwinds to new latency monetization models,

there are several mid- to long-term market opportunities. Examples include:

MOBILE

The ability to scale capacity and performance in wireless networks is

inferior when compared to fixed networks. This is due to technology,

environmental, and regulatory issues. Because bandwidth can not easily

be added to a wireless last mile, delivery to mobile devices will eventually

include tiered-services for spectrum optimization and revenue

generation.

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Offering prioritized services in wireless networks has several models. They include:

Small cells. The long term trend of wireless

networks and mobile devices points to more

capacity being added closer and closer to where

people congregate or where deploying macro cells

does not make sense.

RAN caches. Small cells, local caches, and a lot of

software to tie it all together is a content delivery

network. An sample opportunity is the delivery of video to mobile devices in sports

stadium with 100,000+ people.

Wireless Backhaul. A popular type of network for carrying traffic to and from cell

sites is carrier Ethernet, which has ‘class of service’ identifiers and can be used to

prioritize traffic.3

BRING YOUR OWN DEVICE (BYOD)

Users with a single mobile device for work and personal use represent a hybrid market

opportunity. The delivery of consumer data could continue over existing best effort

networks while work content is delivered over the same physical networks, but with

better performance. Security in addition to lower latency is an ideal bundled offering for

the BYOD market.

CACHING + SOCIAL GRAPH

This is a very new market opportunity.

The first impact on the industry (i.e.,

revenues, market-share, traffic) is at

least 3 years out.

The benefit of the social graph is the insights it can provide into large groups of people,

what content they might like in common, and where the congregate.

3 metroethernetforum.org

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HOME OR DEVICE CACHES

This is a mid-term market opportunity with industry impact at least 3 years out.

Delivery from caches within a home or a device directly would theoretically provide the

lowest-latency service. Managing the complexity

of a multi-tier delivery network with potentially

millions of caches is the major headwind to this

delivery model.

Over time, however, STBs, gaming platforms, and

other devices with storage and compute resources could locally cache, repackage or

transcode content for tablets, smart phones, and other devices in the home.

QoS PEERING

Current efforts by a group of Tier 1 telcos to create a new, higher-

priority and end-to-end service by enabling DiffServ between

networks has not made much impact on the industry.

Developing the inter-carrier revenue models and the small size of

the market opportunity point to continued challenges for this model.

Perhaps not with DiffServ, but cooperative business models that network operators are

exploring could evolve into the federation of ISP cloud assets.

Market Evolution

The marketplace for lower-latency services will evolve over the next five years.

Time-Frame Low-Latency Market Opportunities

0-2 years Existing business models

3-5 years Wireless CDNs w/prioritized services

3+ years Guaranteed delivery to fixed-line users

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Recommendations

In the near-term (<2 years) not much will change. Akamai, Edgecast, Google, Level3,

Netflix’s OpenConnect, etc. will continue to operate with little change to existing

business models. Business and technology models for how latency is monetized will also

stay relatively unchanged.

Longer-term, however, the content delivery business and the Internet in general are at

several inflection points which, over many years, could remake the CDN business.

In order to be prepared for future market changes, CDN market participants need only

‘keep an eye’ on new latency monetization models.

1. Wireless operators should study the market oppportunities for tiered/low-latency

services

2. Fixed-line operators should study the technology and businesss models for selling

lowest-latency cloud services to CDNs, big content providers, etc.

3. Consumer electronic manufacturers should cooperate with network operators and

others to study in-device and in-home caches

4. Wireless hot spot operators, retail chains, malls, airports, sporting, music or religious

events, etc. should study offering lowest-latency caches

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Companies Mentioned

Broadpeak www.broadpeak.tv

Cedexis www.cedexis.com

Conviva www.conviva.com

Hibernia Atlantic www.hibernianetworks.com

Lightower www.lightower.com

Renesys www.renesys.com

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Contact Information

Scott Landman Founder & Manag ing Par tner

Arcus Adv isors , LLC

M: +1 703.297.5411

Skype: landmanscot t

s landman@arcusadv isors .com