June 17, 2008

by Charles Waltner

The world is binging on digital video and someone has to pay the tab.

That's the big issue facing the companies that run the Internet. While bandwidth demands—driven in large part by the ascent of online video and other digitized content—surges, the companies that own the Internet's pipes are hard-pressed to find the best ways to capitalize on this phenomenal growth.

In short, they are having to reinvent themselves. Simply selling basic Internet access, telephone service, or television subscriptions is not enough to pay for the necessary infrastructure investments. These companies now must provide all of these services—often coupled with mobile options—just to stay in the game. At the same time, these new hybrid network operators must also become nimble software developers capable of continuously rolling out inventive new offerings that compel customers to open their wallets. These changes have even inspired a new name for these companies: communications carriers.

Cisco Visual Networking Index Charts

Certainly, these days there are many opportunities for communications carriers. According to Cisco System's recently updated Visual Networking Index forecast, the widespread adoption of video for entertainment and communications will drive sustained, rapid increases of global Internet-based network traffic, generating a projected 46 percent compound annual growth rate.

In 2007, total Internet protocol (IP) traffic increased 55 percent and is expected to surge 63 percent this year. In 2012, Cisco predicts that all IP-based networks will transport more than 522 exabytes of communication traffic (Five exabytes equals a transcript of all words ever spoken). By 2012 all types of video traffic will account for nearly 90 percent of consumer IP communications and entertainment traffic. Cisco also estimates that mobile data traffic will roughly double each year over the next four years.

Given the increasing importance of IP-based networks as the primary means for all global communications, Cisco published its first Visual Networking Index in June last year. It now releases the forecast two times a year. As the world's leading maker of networking technology, Cisco established the forecast as a tool to help the company and its customers accurately plan for growth.

Paying the Bill

While some debate exists as to what the exact growth rate of Internet traffic will be, Cisco's estimate is lower or similar to what other leading industry experts project. Most forecasters agree that increases of global Internet-based traffic will be substantial and particularly steep during the next several years. While a rapidly expanding market is a good thing, service providers face some particularly vexing issues as the world's global communications infrastructure transitions to modern Internet technologies.

Certainly, the current and anticipated increases in overall traffic and the proliferation of new types of communications options are driving substantial investments by service providers throughout the world. In particular, video, which is leading IP traffic growth, is currently by far the least profitable of all traffic. This has left communications companies scrambling to develop new business models.

"Technology isn't really the issue," says Jeff Spagnola, Cisco's vice president of service provider marketing. "These companies face transformational change, from their business and revenue models to their organizational structure and employee skill set."

Spagnola says software is the key for communications carriers to quickly develop new offerings that ride on top of their broadband networks. It is these specialized services that can generate the additional revenue so crucial to their long-term health. "That's such a whole different way of thinking," Spagnola says. "They really are in the middle of getting their heads around that. They are realizing, 'Wow, we're in a software business now.'"

As part of this shifting focus, communications carriers are placing increasing emphasis on skills and resources for running computing data centers to support these software applications. Spagnola says this is a marked departure from their traditional businesses, which simply focused on offering basic connections, mainly for telephone service, business data, or cable TV.

Mastering Many Tasks

"These companies used to be good at one thing. Now all of a sudden there are so many forces coming down on them, they have to be like decathletes," Spagnola says. "They need to master many tasks to generate the kind of revenues necessary to keep up with the rapid changes taking place."

He says mobile services are proving to be one of the most profitable parts of the industry. "Cellular phone companies have been more adept at creating new services that drive consumer usage," he says.

Spagnola adds that new advanced advertising methods hold promise for steady revenues, though the industry is at the early stages of these efforts. He adds that home networking services also offer a potentially lucrative opportunity for communications carriers, but the industry is struggling to find ways to do this simply and cost-effectively

Spagnola says the picture for communications service providers varies, depending on the region. In "emerging markets" areas, such as in the Middle East, Latin America, and parts of Asia, communications carriers there are building state-of-the-art networks from scratch. Thanks to unique competitive and regulatory circumstances, carriers in these regions have more leeway in how they charge for services and pay for infrastructure investments.

In the United States, Japan, other Asian countries, and Western Europe the picture is different. Fierce competition means that service providers must carefully balance network upgrades with incoming revenues.

Though communications carriers who hesitate could be lost, Spagnola says some of Cisco's most progressive customers have also faced their fair share of challenges in this new world order of Internet-based communications.

"We've got some great customers out there that have gone after it aggressively, and it has sometimes been really tough," he says. "But now three or four years down the road they are poised to be very competitive. What's clear is that you have to have the stomach for dealing with new business models that don't quite play out they way they looked like on paper."

As communications companies work to reinvent themselves, the rapid development of video and other Internet-inspired options holds some other unknowns.

The hefty size of video files, for example, means that mass adoption is not necessary for overwhelming shifts in traffic patterns. This happened previously when relatively few Internet users generated very large surges from downloading and sharing music files. These unanticipated "flash crowds" and traffic surprises could put extraordinary pressure on networks, much like when electrical usage spikes during heat waves.

Though the future is full of new demands for the stewards of the Internet, Spagnola says communications carriers realize that the moment is upon them. "They aren't hunkering down," he says. "Their customers are clamoring for more. The need is there. They just have to figure out how to capitalize on this rare opportunity as the world transitions to the Age of the Internet."

Charles Waltner is a freelance writer in Piedmont, Calif.